Friday, July 27, 2012

Job Creators

Let's begin with the obvious: no firm hires more workers unless it needs more workers.  Businesses hire when there is enough additional demand for the firm's product to justify a larger workforce.  Needless to say, stagnant wages and high unemployment do not create much additional demand for most products.

Second, there must be no way management can squeeze more work out of the existing workforce.  In times of job insecurity, squeezing more work out of an employee is easy.  Workers will push themselves beyond all limits rather than risk being replaced by somebody more "productive."  Insecure workers will be more productive, whatever the impact on their physical and emotional health.

Yes, entrepreneurs create jobs.  A successful start-up needs workers, so new jobs are, indeed, "created."  Aside from workers, entrepreneurs need capital — and those who produce the most jobs require a lot of capital.  That's where venture capital firms come in.  Venture capitalists take real risks when they bankroll new, unproven businesses.  Sometimes they get good returns on their investments, and sometimes they just lose their money.

We should not confuse private equity firms with venture capital firms.  Private equity firms find existing businesses that appear to be undervalued, buy them up, and look for ways to make profits for the private equity partners.

Occasionally they might change some failed business practices, and improve efficiency.  Sometimes they can improve the "productivity" of the workforce — meaning that some workers become redundant.  Sometimes, it makes sense to dissolve a business because its assets, sold separately, are worth more than what the private equity firm paid for it.

Sometimes it's easiest just to load up a business with debt, declare bankruptcy, and collect large "management" fees for doing so.  The workers lose jobs, benefits, and pensions; lenders lose their investments;  private equity partners shrug their shoulders and fatten their offshore bank accounts.

It doesn't matter when Mitt Romney stopped actively managing Bain Capital.  The firm's objective never was to grow new business, much less "create" jobs.  Its objective was to further enrich its already rich principals — and it did that very well.

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