Posts Tagged ‘creative destruction’

How productivity creates jobs … and how gov’t stifles productivity.

July 17, 2012

Nice piece in today’s WSJ … here are snippets:

Punch line: Productivity — the ultimate engine of growth and better living standards — always  swims upstream against those that fight it. Unions, regulations and a bizarre tax code  lock in the status quo.

But, doesn’t productivity — getting more output with less inputs — destroy jobs?

Sure, but it creates way more than it destroys by creating technological avenues and lowering the cost of business

So how does productivity result in more employment?

Some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane’s aisle seat, ads next to Google search results.

Cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Think, eBay and Amazon.

Productivity  attracts capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services:

And, private investment does a better job of allocating capital than any elite economist or politician picking pork-barrel projects and relabeling them as “investments.”

Entire WSJ article is worth reading

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What do Mitt Romney and Steve Jobs have in common?

May 23, 2012

I love the irony when it’s revealed that a villain and a hero are found guilty (innocent?) of similar deeds.

Past couple of weeks, Team O has been pouncing on Mitt & Bain for the evil done by private equity firms.

And, for years, Steve Jobs has been revered for his magic at Apple.

Here’s an interesting snippet from an NRO article: Praise Private Equity

Just months before Romney’s career at Bain Capital became controversial, Americans mourned the death of Apple CEO Steve Jobs.

And yet when Jobs returned to Apple in 1997, Jobs returned as an angel of destruction. He fired over 3,000 employees, a move that helped swing Apple from a $1.05 billion annual loss to a $309 million profit.

He shut down Apple’s manufacturing facilities and outsourced almost every aspect of production.

He swung the axe pitilessly, since he was convinced that survival requires leanness.

And in the 14 years after Jobs returned, employment levels at Apple soared.

Apple’s manufacturing work force was eventually replaced by engineers, support staff, and — in a move that would have surprised many in 1997 — a vast army of retail employees.

The destruction was a prerequisite for the creation, and for the transformation of a wounded technology firm into one of the world’s most valuable public companies.

And, oh yeah, Apple is insanely profitable … and pays no Federal income taxes.

Jobs is good; Romney is bad.

Hmmm …

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Timing is everything …

January 18, 2012

Interesting op-ed in the WSJ over the weekend: The Truth About Bain and Jobs

The article’s punch line: Job creation and destruction are both relentless. The small difference between the two is what we call prosperity.

Painstaking research by economists Steven J. Davis and John Haltiwanger revealed a side of America’s dynamism that isn’t always pretty.

Between 1977 and 2005, years roughly overlapping Mr. Romney’s business career, some 15% of all jobs were destroyed every year, even as total jobs grew by an average of 2% a year.

Job creation and destruction are both relentless, the authors showed in paper after paper.

The small difference between the two is what we call prosperity.

Good point !

For me, a second point hit very close to home:

Nobody—not even those whose billions were earned in private equity  —envisioned the astounding rise in business values in the gilded ’80s and ’90s.

When Mr. Romney was asked by his boss to start Bain Capital in 1983, the Dow was at 1086.50.

When he left on Feb. 11, 1999 to run the Olympics, it was 9363.46.

His is not the only recent fortune owed partly to this accident of timing (Warren Buffett’s and many others come to mind).

Indeed, if we’re being honest, Mitt here is representative of a generation of professionals whose serendipity it was to have spent the 1970s on our education and then to be spit into the job market just as one of history’s great economic liftoffs was taking place.

But, when private-equity investors sniff a profit opportunity, they are probabusually one step ahead of everybody else.

Of course, I like the swipe at Warren Buffett who, in my opinion, is way over-rated.

But, the author reminds me that I owe a lot to timing, too.

As Grandma Homa used to say: “Sometimes it’s better to be lucky than to be smart.”

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Re: PE firms … some academic findings.

January 13, 2012

Punch line: Private Equity has found itself under the media spotlight the past couple of days, thanks to Newt’s shots at Romney.

At the risk of burdening the hysteria with facts, here are the results of some academic studies reported by Business Week

PEs most common strategy is simple: buy an undervalued company, usually with borrowed money to juice returns. Whip it into shape. And after five years or so, sell it back to the public, paying off the debt and keeping the profits.

Private equity firms genuinely unlock value through “strong incentives to management, strong oversight, and operational consulting.” They force bad managers and deadwood employees to look elsewhere for work.

The PEs also benefit from special tax breaks, including the “carried interest” rule that allows them to treat their profits as lightly taxed capital gains.

More specifically …

  • According to Preqin, a London-based data provider, 25 percent of the dollars going to private equity funds from 2009 to 2011 came from public pension funds. That included teachers in Texas, California, and New Jersey. A second big chunk of investment comes from college endowment funds
  • Studies show that private equity firms are excellent at generating returns for their investors … An analysis of 598 buyout funds that existed between 1984 and 2008 found that even after fees, their weighted-average returns to outside investors were 1.27 times the returns on the Standard & Poor’s 500-stock index over the same periods …
  • A Harvard Business School working paper looked at the employment patterns of 3,200 firms targeted by private equity from 1980 to 2005 … the study concludes that in comparison to the control group, the PE firms’ employment shrank “less than 1 percent” in the two years after a deal.

Ken’s Take: The emerging backlash against private equity will likely have some  unintended consequences.

Question: What if the PEs stop investing in failing companies because they get skewed if they either do the necessary restructuring (i.e. shutter plants and jettison deadwood employees) or fail to turn the failing firms around.

Answer: The failing firms fail and all jobs are lost … or the Feds step in and make taxpayers subsidize inefficient, non-economic businesses.

I’d rather have PEs take the risk with private capital …

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