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Have Private Equity "Reformers" Spurred U.S. Productivity?

David Callahan

David Brooks is no economist and that shows in his recent column about private equity, in which he claims that private equity firms have pushed corporate America to get leaner and smarter. As Paul Krugman pointed out today, nothing of the sort happened -- because, in fact, productivity has not been higher since the advent of LBOs and private equity, starting in the 1980s.

Data from the Bureau of Labor Statistics confirms that claim. According to the BLS, labor productivity gains averaged 2.8 percent a year between 1949 and 1973 -- compared to 1.4 percent in the 1980s, the golden age of LBOs; 2.1 percent in the 1990s; and 2.5 percent in the Bush years. In other words, the supposedly complacent years of "welfare capitalism," when union power was at an all-time high and Wall Street sharkers were kept in check by heavy-handed regulation and tax rules, was when American workers were also most productive.

Perhaps the bigger problem with Brooks' idolatry of private equity, though, is that it's hard to know what, exactly, its role has been in influencing productivity. Workers can become more productive for a variety of reasons: Because their skills improve; because they utilize new technologies; because they are well-managed and highly motivated; or because they are forced to do more work than they did before.

For example, productivity gains in the 1990s and in early 2000s might be best explained by the advent of the Internet and other technologies that made workers more efficient -- just as many new technologies came on the scene in the postwar era. The recession of 2001 also led to cost cutting and restructuring that pushed workers to do more during the subsequent Bush years. 

As for the motives driving companies to boost productivity, having a Gordon Gekko breathing down your neck could certainly be one incentive. But owners might also just want to make more money for it's own sake; or logically utilize the latest labor-saving technologies; or see the benefits of improving management and human capital of their workers; or be responding to competition.

It's one thing to measure the impact of private equity firms on the companies they take over, as researchers have done. It's quite another to make big claims about  their broader impact on the economy, either positive or negative.