In 2008, President Obama ran on a platform of hope and “jobs, jobs, jobs.” Leave aside that he spent the first 2 years of his presidency creating a healthcare bill for which there was no popular consensus, and may well be declared unconstitutional, and he created no shovel ready jobs for the very reason that he can’t. As The Wall Street Journal put it on May 23:
“Voters remain deeply pessimistic about the nation’s future and uncertain of President Obama’s ability to set the economy on the right course…Mr. Obama is locked in a tight race with Mitt Romney.
The president tops the presumptive GOP presidential nominee, 47% to 43%, when Americans are asked their choice today for president, a lead little changed from last month and within the poll’s margin of error.
But the poll found much to stir concern within the burgeoning Obama re‑election campaign. Despite signs of economic recovery, nearly half of Americans said the country is at the start of a long‑term decline. Americans by a sizable plurality said Mr. Obama’s approach has worsened the nation’s budget deficit and health‑care problems, and increased its partisan divide.
After emerging last month as the all‑but‑certain Republican nominee, Mr. Romney is consolidating support among conservatives, the poll found, and much of the public is open to the idea that his business background would help him improve the economy.”
People have to invest in an economy in order to create jobs, and if you ask any businessman whether it be a retailer, a wholesaler, a manufacturer or an equity fund which invests in the private sector, no one will tell you that their objective is to create jobs; their objective is to create wealth through growth, the success of which will yield jobs. Growth creates jobs.
Thusly, recent attacks on Bain Capital for destroying jobs are nothing less than dishonest. Bain Capital invested its money where it saw a ground floor opportunity, including the steel industry, which was on its backside before Bain invested in it. While the industry, in general, could not be saved, Steel Dynamics Inc clearly benefited from Bain’s investment. Others such as GST Steel, in which Bain invested, failed and jobs were lost. Those losses were not attributable to Bain; they were attributable to various factors in the steel industry, including fierce competition from abroad. Let’s take a look, however, at Bain Capital’s record. Bain invested in Staples and Domino’s Pizza, among others. While Bain had some failures, it had many more successes. Jobs are lost and created in a capitalist society in which innovation also causes obsolescence. Workers with modern skills replace those with antiquated skills for which demand may have declined. Such creative destruction causes jobs both to be created and destroyed.
When a company downsizes, it’s easy to count the jobs lost, but it is not always easy to count the number of jobs created. Many of the jobs created by private equity funds come about as a result of other developments that accompany or follow the investments such as development of new products or services or plant modernization. The long and the short of it is that private equity funds, just like the hypothetical retailer that we mentioned above, are not job creators. The goal of any capitalist venture is not to create jobs but to maximize value for their shareholders and this is accomplished by growing the businesses in which these firms have invested. Commentator Steve Tobak states, “Companies exist to keep customers, grow their business, make profits and make money for shareholders. Well‑run companies that manage to do all that efficiently and grow over time tend to create more and more jobs. That in a nutshell is how it works.”
These days, especially during presidential campaigns, it is popular to challenge that basic construct which as Mr. Tobak says is “utopian nonsense.” Some people say that companies shouldn’t exist to win business, grow sales and increase profits and grow shareholder value, they should have more virtuous maxim. Well it is a good thing that American executives and business leaders do not listen to any of that nonsense, because if they did there would be no new jobs. Unemployment would rise with population growth, and we would lose more and more jobs to China and other nations over time. At the risk of repeating the same maxim, companies primarily use profits to expand market share and grow revenue. The cycle continues as long as growth is profitable. While growth can also be funded with debt, too much leverage, as private equity firms and everyone else has come to realize, can be a bad thing. If you are starting to see a parallel with our economy, you are starting to get the picture. America has too much debt and our cost of doing business is too high so our growth is too limited. There is no silver bullet or quick fix for the economy. When Mr. Obama promised to create jobs he was wrong because the only thing the President can really do is promote economic growth, which does not seem very high on Mr. Obama’s wish list.
Private equity firms are just investors. The contemporary glorification of the investor class is based on the idea that their money is what fuels the creation and growth of dynamic companies. In principle that is true. Investors are contributing new capital to a company if they buy newly issued shares of stock. If they buy shares in a secondary market, they are not contributing new capital, They are providing benefits to the economy but this has to do with the security’s pricing and market liquidity, which have only an indirect impact.
Andrew Metrick, of the Yale School of Management, writing in Commentary on the economics of private equity funds points out that worldwide, private equity funds manage approximately $1 trillion of capital. About two thirds of this capital is managed by buyout funds where leverage can multiply the investment size by three or four times base capital. Overall, private equity funds have played an increasingly important role as financial intermediaries in addition to their significant day‑to‑day involvement as board members and advisors. Nevertheless, relatively little is known about the industrial organization of the private equity sector, mostly due to data limitations. Successful private equity firms stay in business by raising a new Fund every three to five years. If the current Fund performs well, and the limited partners who invested in it interpret that performance as skill rather than luck, the investors demand for the new Fund will drive them to invest in a second one.
Chase Roberts, an analyst at Neuberger Berman, states that: “It would be ignorant to assume that the primary nature of private equity firms is to change the world. Let’s not use this notion to paint the industry with a negative image. Most businesses exist to, ultimately, make money, which is the most tangible measure of one’s successes and accomplishment. Value creation must occur to make money.”
Does President Obama understand this? He is, presumably, a very bright man, but it is not politically expedient for him to acknowledge the positive role of private capital. Instead, he is simply looking for a handle to attack his likely opponent in the fall election. This is not what we expect from a president. Mr. Obama was elected to promote job creation. The only basis for that is to stimulate investment in the economy. The only long-term jobs the government can create are public sector jobs and, to pardon a pun, many public sector jobs are a bane of the economy.
Hopefully, the voters will understand that better than does the current occupant of the White House.