Would You Like Cheese With Your Propaganda?
A loyal reader over at Bank of America Securities points me to the growing trend of union developed blogs on private equity. Clever Going Private readers will immediately recognize the political agenda that underlies these blogs and be entirely unsurprised (and uninspired) by their tenor and the thinly veiled propaganda that is shot through their rhetoric. Among the more sinisterly subtle is "Behind the Buyouts," a seductively data-filled "dot-org" that practices the "modicum of truth, a plethora of lies" disinformation methodology. Let us delve into the depths:
Though exact figures are hard to come by, the hallmark of the private equity industry is the incredible wealth being created for the small number of individuals who drive the buyout business.
The key principals at the largest private equity firms are billionaires. Using money from banks, insurance companies, pension funds, and other wealthy individual investors, they continue to launch corporate buyouts worth billions, even tens of billions of dollars, extracting fees of hundreds of millions of dollars from the companies they buy and often generating profits of 20 percent or more.
These profits come during a period of historic income inequality in America, at a time when millions of Americans are working harder and harder for less, with less health care, less retirement security, and less time to spend with their children. According to a report released in March 2007 by two leading economists, the top 1 percent of Americans—those with incomes above $350,000—received the largest share of national income since 1928.
Ordinarily, one might wonder after the point of an income equality discussion in the midst of a private equity backgrounder. However, these pronouncements have become quite common, can be recognized in the wild by the presence of the distinctive snowcloneish phrase "the top [w] percent of [x] earn [y] percent of [z]."
Not surprisingly, the kow-tow to "income equality" or "income disparity" has become a rally cry against business (focused lately on private equity and hedge funds in particular). A few voices, however, point out some flaws in the focus on "income equality," as a measure of anything relevant.
One good place to start is the Economist's special report on inequality. The Economist Blog also has a bit of rationality to inject into the debate. Another is the recent op-ed piece (subscription required) in the Wall Street Journal by Alan Reynolds which points out that "wealth" rather than just "income" is a more useful construct:
In recent years, an increasingly huge share of the investment income of middle-income savers is accruing inside 401(k), IRA and 529 college-savings plans and is therefore invisible in tax return data. In the 1970s, by contrast, such investment income was usually taxable, so it appears in the Piketty-Saez estimates for those years. Comparing tax returns between the 1970s and recent years greatly understates the actual gain in middle incomes, and thereby contributes to the exaggeration of top income shares.
In a forthcoming Cato Institute paper I survey a wide range of official and academic statistics, finding no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth. The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.
The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.
But the important thing is to recognize what the heart of this argument is: "Shame on you for making money while ordinary families are working harder." Extending this argument, shame on "ordinary families" for making so much while so many children in Africa starve every day. Personally, I am highly suspicious of anyone who wants to shrink the pie because any one group has "more than its fair share," whatever that means. Long time Going Private readers will be well acquainted with my feelings on the use of the word "fair" in such contexts.
And even if the 6 paragraph discussion of income equality didn't get you, you still need to be afraid because:
Unlike publicly traded companies that are subject to federal securities laws and regulations as well as to daily scrutiny by financial analysts and the business media, private equity buyout firms operate virtually free of oversight and public accountability, their profits and practices largely hidden from view. Far from a coincidence, this lack of transparency is built into their business model, providing buyout firms with investment advantages that publicly traded companies do not enjoy.
Don't worry though. The SEIU has some guidelines that will solve all of our economic problems.
The SEIU Principles for The Private Equity Buyout Industry:
The buyout industry should play by the same set of rules as everyone else.
Workers should have a voice in the deals and benefit from their outcome.
Community stakeholders should have a voice in the deals and benefit from their outcome.
Sounds kind of like Venezuela.