NRO: Paul Krugman on Private Equity Transactions

Paul Krugman on Private Equity Transactions

By Reihan Salam

National Review Online

December 9, 2011 11:56am

A close friend kindly pointed me to an eye-catching juxtaposition in Paul Krugman’s latest New York Times column, titled “All the G.O.P.’s Gekkos,” a reference to Gordon Gekko, the villain featured in the 1987 film Wall Street. Before I get to the juxtaposition, some preliminaries:

Krugman begins by offering a highly tendentious and misleading survey of the evidence on private equity’s impact on unemployment:

The popular image — shaped in part by Oliver Stone — is that buyouts were followed by ruthless cost-cutting, largely at the expense of workers who either lost their jobs or found their wages and benefits cut. And while reality is more complex than this image — some companies have expanded and added workers after a leveraged buyout — it contains more than a grain of truth. One recent analysis of “private equity transactions” — the kind of buyouts and takeovers Bain specialized in — noted that business in general is always both creating and destroying jobs, and that this is also true of companies that were buyout or takeover targets. However, job creation at the target firms is no greater than in similar firms that aren’t targets, while “gross job destruction is substantially higher.” [Emphasis added]

Incredibly, I drew on what appears to be the same study (“Private Equity and Employment“) in a column I wrote some months ago. Note Krugman’s use of “gross job destruction. The authors of the paper — Steven J. Davis, John Haltiwanger, Ron Jarmin, Josh Lerner, and Javier Miranda — compare target firms and control firms, i.e., firms that were the subject of private equity transactions and comparable firms that were not.

The authors offer the following summary of their findings:

(1) Employment shrinks more rapidly in target establishments than in control establishments in the wake of private equity transactions. The average cumulative two-year employment difference is about 7% in favour of control.

This seems consistent with the story Krugman tells.

(2) However, employment also grows more slowly at target establishments in the year of the private equity transaction and in the two preceding years. The average cumulative employment difference in the two years before the transaction is about 4% in favour of controls. In short, employment growth at controls outstrips employment growth at targets before and after the private equity transaction.

But wait. Employment grows more slowly at target establishments in the two years preceding private equity transactions. This seems worthy of note — a complication for the story Krugman tells. To underline this, it suggests that the firms were declining before the private equity transaction, i.e., that they might have gone out of business.

Read the full article here.