" KALEIDOSCOPE by Reihan Salam
.....The really interesting part of Romney's resume isn't his time as governor. Rather, it's the 15 years he spent at Bain Capital, a private equity firm that specialized in buying large numbers of companies and whipping them into shape.
Romney's experience at Bain Capital has his left- wing critics salivating. They see it as a ripe opportunity to paint him as a wanton destroyer of jobs, who larded up perfectly healthy companies with debt to make a fast buck. Even his Republican rivals have taken shots at him for his years in private equity.
Like many private equity firms, Bain Capital invests in start-ups and in established firms. Start-ups tend not to be controversial.....after all, no existing jobs are at risk.......but Bain Capital actually specialized in Leveraged Buyouts of established firms, which have proven to be very controversial , indeed.
To understand Leveraged Buyouts, it helps to understand two different approaches to increasing productivity.
1. Increases in "Operational Efficiency" can be thought of as finding new and better ways to play a particular game.
2. Increases in " Allocative Efficiency " can be achieved by choosing the games you happen to be best at playing.
In the business world, investors are putting capital to work. At places like Bain Capital, brainy women and men crunch numbers to determine where they'll get the best return for their money.
In the 1980's a few rocket scientists decided that a large number of American companies were flabby, uncompetitive and needed a kick in the ass. Manufacturers based in Asia and Europe were tearing U.S firms to shreds.
The plan was to turn these companies around by buying them, booting out old management and doing a combination of things......getting out of some business lines and into new ones, firing the weakest or the most expensive employees and much else.....to turn them around. They generally paid for this by issuing large amounts of debt, which had a side effect: companies either had to make their debt payments or go under, which had a funny way of persuading management to concentrate on improving operational efficiency.
Call it heartless. call it inhumane. But it worked. Not every time, to be sure, but more often than not.
The authors of a fascinating paper entitled " Private Equity and Employment " used Census data to offer an apples-to-apples comparison of establishments and firms targeted by private equity investors for buyouts and a control group. They found that while private equity deals led to greater job losses at existing establishments, they led to big increases at new establishments owned by the same firms . The net result is that job losses were less than 1 percent of initial employment"
... Kind of like Studebaker transitioning from Conestoga Wagons to automobiles at the turn of the century. Lot's of wagon maker employees lost their jobs , but a lot more , better paid employees were hired at the car company.....
" Private equity accelerates " creative destruction"moving firms out of obsolescence and into the cutting edge. Jobs are destroyed in the process. But jobs are also created. When target firms can't increase operational efficiency, well, everything that can be sold off is and the money flows to some other business idea that will yield higher returns. Creative destruction can be extremely hard on workers and their families. Yet crippling this process leaves an economy riddled with weak inefficient companies that sure as heck won't create new jobs.
If nothing else, Mitt Romney's private equity experience taught him the importance of creative destruction. And that should count for a lot "
An excellent argument, IMHO , for a Romney administration. Mitt gets it. Nobody else running for office seems to. It is foolish to argue this point to some candidates like Rick Perry. They just don't have the intellectual gravitas to " get it " and would stare at you like a deer in the headlights if you explained it and suggested the American economy was like a flabby, uncompetitive business that needs a kick in the ass
Please check us out on Facebook and If you like what you see, please "Like" us. You can find us here.