One of the more irritating features of electoral politics is the disinformation that politicians spew with regard to their records and those of their opponents. President Barack Obama obviously intends to ride class warfare back into the White House this fall. One tactic of this class warfare strategy is to assert that private equity companies like Bain Capital that Mitt Romney headed back in the day destroyed jobs while enriching vulture capitalists. Unfortunately, recent economic research contradicts the president's claims that private equity firms destroy jobs.
For example, consider a 2010 National Bureau of Economic Research 2010 study, Private Equity and Economic Performance [PDF], by researchers from Columbia and Harvard Universities and the Swedish Institute for Financial Research. They report:
Industries where PE [private equity) funds have been active in the past five years grow more rapidly than other sectors, whether measured using total production, value added, or employment. In industries with PE investments, there are few significant differences between industries with a low and high level of PE activity….
PE industries appear to grow significantly faster in terms of labor costs and the number of employees. The annual growth rate of total labor cost is 0.5 to 1.4 percentage points greater for PE industries, and the number of employees grows at an annual rate that is 0.4 to 1.0 percentage points greater. These findings are particularly surprising, since a common concern is that PE investors act aggressively to reduce costs with little concern for employees. This concern is not necessarily inconsistent with our results. Despite initial
employment reductions at private equity-backed firms, the greater subsequent growth in total production … may lead to subsequent employment growth in the industry overall.
Considering the specifications with PE activity quartiles, industries with more PE activity appear to have more rapid growth of total labor costs, but the growth rate of the number of employees is fastest in industries with more moderate levels of PE activity. Regardless of the level of PE activity, however, the PE industries' growth rates of labor costs and employment always exceed the rates for non-PE industries.
When will the president and his advisors get it through their heads that in the long-run propping up badly managed companies is not the way to create more jobs?
