Thursday, January 26, 2012

How Private Equity Firms Helped Save the Economy

Liz Peek at The Fiscal Times explains how private equity firms like Mitt Romney's Bain Capital actually helped save the American economy and make it stronger. Romney, of course is taking considerable heat for his involvement with Bain because part of what the company did was streamline the businesses it bought which made them more efficient but also put people out of work.

As Peek says, if Mitt Romney could articulate this story it would go a long way to helping him in his quest for the White House. Unfortunately for him, and perhaps for the country, Mr. Romney seems singularly unable or unwilling to defend himself by explaining to the public exactly what private equity firms actually do. His failure to do this is like George W. Bush redux.

Here's Peek's lede:
Eastman Kodak’s recent bankruptcy is a timely reminder of how sleepy managements can throw thousands out of work – and of the role private equity firms like Bain Capital have played in rescuing American companies. Kodak, the paternalistic giant, was blindsided by Fuji Photo decades ago and then by the rise of digital photography. The organizational structure was a mess.

At one time, while giant Canon was working with three different printer engines, Kodak was developing 66, so “silo-ed” was its operations. It is quite possible that outside investors like Bain Capital, with eyes uncluttered by past allegiances, could have saved Eastman Kodak – and at least some of the jobs that have been lost.

Mitt Romney’s campaign has failed to make that point. What was his campaign staff thinking? How could they be caught flat-footed by Newt Gingrich’s attacks on the candidate’s business career, his prime credential in the race to unseat President Obama? Supporters have been shocked that Romney has not countered criticisms of his experience at Bain Capital -- an appalling lapse that cost him South Carolina and has him now trailing in Florida. While others have spoken up for private equity investing, the campaign remains mute. Romney needs to tell the story that will resound with voters -- the story of America’s reboot.

During the ‘70s....upstart foreign competitors (mostly from Japan) were gobbling up market share. More alarming, the newly visible rivals were selling a better product. Quality control programs embraced by Japanese steel, auto and machinery producers meant a vast reduction in reject rates; they were not succeeding because of price alone. They delivered better value.

Some of our better managed companies (Caterpillar, Deere) rallied to this increased competition; others – including auto companies situated far from the California docks where Toyotas rolled off ships in the thousands -- didn’t have a clue. When OPEC sharply jacked up oil prices, the trickle of economical Toyotas and Hondas into the U.S. became a torrent. In 1965 the U.S. imported 25,538 cars from Japan. By 1975, that figure had soared to 695,573; a decade later, we imported 2.5 million automobiles from Japan – a 100-fold jump in 20 years. By contrast, sales of U.S.-made cars and trucks actually dropped between 1965 and 1985 – from 8.8 million to 8.2 million.

Similarly, Japanese steel producers clobbered U.S. manufacturers in the 1970s, producing cheaper and higher-quality products in modernized plants built after World War II. By the late 1970s our domestic industry was in trouble; five companies received $300 million in loan guarantees from the Carter administration. Later presidents tried to help the industry’s long decline by imposing import quotas (Reagan) and offering loan guarantees (Clinton) to no avail.
So how did firms like Bain change all this? Read Peek's account at the link. Why other candidates, specifically Newt Gingrich and the departed Rick Perry, both of whom claimed to be market conservatives, would criticize this sort of activity is difficult to understand. It makes them sound more like Occupy Wall Streeters:

Hungry Children and Hot Dogs

Perhaps the main objection to construction of the Keystone XL Pipeline as well as the use of "fracking" to extract natural gas from the Marcellus shale deposits is that these carry with them a risk of introducing pollutants into the landscape and the water supply. Of course, there is some potential for harm in any man-made project. Building skyscrapers results in the deaths of migratory birds. Building high speed rail lines fragments ecosystems. Building dams impedes the movement of migratory fish and changes the ecosystem of the river. The questions are how great are the risks, do the risks outweigh the potential benefits, and can the risks be minimized?

In the case of the Keystone pipeline the benefits seem so significant and the risks seem so low that a lot of people are stunned that the President has elected not to build it.

Construction of the pipeline will generate thousands of jobs and millions of dollars in revenue. It will cement our relationship with Canada. It will increase our energy resources and make us less dependent on foreign petroleum. It will deny a global advantage to China who will become the chief beneficiary of our refusal to accept Canadian oil. An American market will result in less pollution than if the oil is shipped to, and consumed by, the Chinese, and it will keep fuel costs down which keeps the cost of everything else down, thus presenting a boon to the American consumer, especially the poor.

None of this seems to matter, though, to our environmentalist friends who maintain that almost any risk of pollution outweighs whatever benefits accrue from the pipeline. Their goal is to do away with the use of fossil fuels altogether, and replace them with green energy like wind and solar. They oppose the pipeline and increasing the abundance of oil because it just delays the day of green energy nirvana. It's somewhat like a Christian believer in the eschaton refusing to pray for peace on earth because achieving it, however imperfectly, might delay the second coming.

The environmentalist is like a man walking down a city street who encounters a cluster of hungry children huddled together on the sidewalk near a hot dog stand. The shivering children ask the man if he would purchase for them some hot dogs so they can fill their bellies, to which request the man launches into a disquisition about how hot dogs contain carcinogens which could some day cause them to develop cancer, and how they contain fat which might some day clog their arteries, and the rolls are made of processed flour which provides no real nutrition anyway.

The children would be much better off, he pontificates airily, to eat green vegetables instead of hot dogs, and if they'll do that he'll buy the vegetables for them. "But there are no vegetable stands around here," the hungry children protest in dismay, "and we're too hungry to walk until we find one. The hot dogs are right here."

"Maybe so," replies the man, "but for your own future well-being, you must try to find a vegetable market. Hot dogs are not good for you." With that he pats them on the head and walks away, leaving the poor children still hungry and shivering in the cold.