What David Brooks Misses About Private Equity
David Brooks offers up a spirited defense of private equity today in the Times, and many of his points make perfect sense: In fact, many private equity firms don't set out to laden the firms they buy with debt and cash out before the company goes bankrupt. (Although some do set out with very much this goal, as Josh Kosman documents in his book, The Buyout of America.)
The more typical plan is to buy an underperforming company, make it more "efficient" and profitable, and then sell it for more money. Brooks thinks this model is unequivocally good and, even, that it has helped save American business:
Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient. Now we are apparently going to have a presidential election about whether this reform movement was a good thing.
But the part of the story that Brooks leaves out is that workers have been the big losers in this process, while management and shareholders have been huge winners. Some of the strategies for creating more efficiency have been just unbelievably pernicious for employees. For example, many companies avoid hiring workers full-time with benefits -- instead hiring them as temps, firing them after a certain period, and then hiring them again. Or companies avoid paying overtime through "just in time" scheduling practices that it make it difficult for workers to plan their lives, as Demos documented in a report last year.
Union busting has been another important strategy. As Amy Traub has written here, "analysis of union elections from 1999 to 2003 revealed that when workers attempted to organize a union, 96 percent of employers mounted a campaign against their effort. Three quarters of employers hired outside consultants."
Yet another strategy, of course, has been to pare back pension benefits and shift more healthcare costs to workers, or drop such coverage all together.
In short, a cornerstone of creating more efficiency has been to turn good jobs into bad jobs. That might be tolerable if so many bad jobs were created as to create a tight labor market that drove up the wages for these bad jobs, but this has not been the case. In theory, higher productivity might allow for companies to expand and hire more workers. In practice, greater efficiency often simply means a permanent need for fewer workers overall. Brooks himself notes that a study of private equity firms showed that the companies they take over and streamlined don't hire many new workers. "The overall effect on employment is modest."
If all these efficiency strategies were implemented soley as part of a life-and-death struggle of American companies to survive against foreign competition, that would be one thing. But many of these strategies were embraced by companies, such as retailers, who faced no foreign competition.
What Brooks seems to forget is that the story of capitalism, historically, has not just been about competition among nations for economic dominance. The story has also been about the competition between capital and labor. And some portion of what corporations have done in the past forty years has been aimed at prevailing in this latter battle. Private equity firms have tended to be on the side of capital in this battle, which is why attacking them is now fair game.
Partly as a result of the efficiency "reform movement" Brooks champions, the CBO reported last year that "average real after-tax household income grew by 275 percent between 1979 and 2007" for the top 1 percent, while for "60 percent of the population in the middle of the income scale. . . the growth in average real after-tax household income was just under 40 percent."
Of course, a variety of factors have driven inequality, but the ruthless focus on efficiency by corporations has certainly been an important factor. And it should be mentioned that executives supposedly so intent on squeezing all the bloat out of companies never squeezed so hard as to pare back their own compensation packages. On the contrary, the compensation bloat at the top of companies ballooned over the past forty years and huge new gaps emerged between the performance of executives and their pay -- most egregiously in the form of golden parachutes even when CEOs failed badly.