Romney's Bain Capital did not create 100,000 jobs

[RecycleMichael]

This is from the Wall Street Journal.

http://articles.marketwatch.com/2012-06-07/commentary/32080872_1_job-creation-new-jobs-staples

SANTA CLARA, Calif. (MarketWatch) — Discussions about the 100,000 jobs created by Mitt Romney during his years as CEO of Bain Capital have surfaced again. While there appears to be no question that Mitt Romney made successful investments — and a lot of money — did Mitt Romney create more than 100,000 jobs while at Bain Capital?

Both the Republican candidate and incumbent Democratic president feel Romney's experience as CEO of Bain Capital is a useful topic for their campaigns. Romney says it prepared him to become a job-creating president, and Barack Obama's team believes it shows that Romney does not care about the 99% who can be adversely affected by the activities of private equity firms.

The job of the president of the United States is starkly different from that of the head of a private-equity firm. Obama's net jobs performance includes a loss of about 550,000 jobs since he took office (excluding job losses in January 2009), according to the Bureau of Labor Statistics. However, since the recession officially ended in June 2009, about 2.5 million jobs have been created.

Key in counting job creation is including not only new jobs, but also those jobs that are lost. This is where the debate turns to a comparison between apples and oranges, at least from the perspective of an economist. The Labor Department counts both sides. The Romney campaign conveniently omits the indirect adverse effects — for example, crowding competitors out of the market — of helping companies grow and prosper.

I am not disputing the fact that if you add up all the new employees who were hired by companies while owned by Bain Capital that you would get a number north of 100,000. Moreover, even if one calculates net new employees — the number of new employees hired minus those who lost jobs directly due to Bain Capital's ownership and activities — I suspect one could still show that more than 100,000 net new employees were hired by companies owned by Bain Capital.

No, my concern is that the above analysis only considers the direct effects and not the indirect effects of Bain Capital's ownership and activities. For example, as companies acquired by Bain Capital expand, what happens to competitors? Consider Staples Inc., touted to be one of Bain Capital's biggest successes. Sure, Staples grew from one store in 1986 to more than 1,000 stores in 1996, and in the process, hired tens of thousands of new employees (today Staples employs more than 90,000 people).

But did Staples' expansion create tens of thousands of jobs? The answer is no. Why? Because when you consider the indirect, or second-order effects of Staples' expansion, it becomes clear that as Staples expanded it displaced other retailers. That is, was Staples' dizzying expansion fueled by an equally dizzying increase in the market for office supplies in the U.S.? Or did Staples' expansion crowd out other retailers?

Data from the U.S. Census Bureau appears to support the latter. The number of retail establishments primarily engaged in the distribution of stationery, such as paper and paper products, declined by 25% (from 5,391 to 4,041) between 1986 and 1996.

If these displaced retailers were as efficient as Staples, then for each new employee that Staples hired theoretically one job was lost at a displaced retailer. However, if Staples was in fact more efficient on average than the displaced retailers, then more than one job might have been lost for each job that Staples "created." So, Staples' expansion may have reduced net jobs in that industry.

Again, data from the U.S. Census Bureau appears to support the latter. Between 1986 and 1996, the number of employees working at retail establishments primarily engaged in the distribution of stationery declined by 35%.

In all likelihood, we would see a similar story emerge for other companies that Bain Capital acquired, such as Burger King, Hospital Corporation of America, The Sports Authority, and Toys "R" Us.

This discussion is admittedly far from complete and certainly does not consider all the effects — labor market and otherwise — of Bain Capital's acquisitions. Further, this discussion is not intended to pass judgment on Bain Capital's activities — or other private-equity firms' activities.

Determining whether such firms are "good" or "bad" for the economy is beyond the scope of this piece. I simply want to point out that counting the number of new employees hired as a result of a firm's activities is a misleading measure of job creation at best.

John Ifcher is an assistant professor of economics at Santa Clara University.

[Conan71]

It's a good argument until you get to the fact that retailers like Staples, Wal-Mart, and other big box stores end up employing more net employees than the mom & pop shops they obsoleted.  As well, they offer higher paying store management and corporate management positions as well as benefits the M & P's did not or could not offer.  Where do people go who are displaced by a big box store?  They don't disappear.  Many end up with a better job at a big box.

That said, I loathe big box stores and prefer to support local shops whenever possible whether it's retail or dining out.

[Gaspar]

I think it would probably be safe to state that Romney created a few more jobs in his private sector career than President Obama did in his. 

As far and economic and business experience is concerned, Mr. Romney's experience and success is exponentially greater than President Obamas.  It would be very difficult to argue otherwise.

[heironymouspasparagus]

That's why I use these guys when I can...and need office supplies.    They used to be pretty small, but seem to be growing quite a bit...  They aren't Staples (yeah, I go to Staples, too from time to time).  I'm a very "small guy", yet they always treat me like a big customer.

https://www.sundanceoffice.com/

[nathanm]

It's a good argument until you get to the fact that retailers like Staples, Wal-Mart, and other big box stores end up employing more net employees than the mom & pop shops they obsoleted.

You forget to mention that those big box stores depend rather heavily on tax incentives from state and local governments. Who pays for that? You do, I do, and their locally owned competitors do. I'm not quite sure why it is that we've decided it's a good idea to force small businesses to subsidize their competitors.

And in Wal-Mart's case, they suck about 24 cents of every dollar spent out of the local economy. On average, a dollar spent generates about a dollar fifty in other economic activity in a city. That's why everyone thinks it's a great deal to subsidize horse shows and other events that attract people from out of town. You get their dollar and the 53 cents. My dollar, already being in the local economy, isn't as useful in that sense.

[Conan71]

You forget to mention that those big box stores depend rather heavily on tax incentives from state and local governments. Who pays for that? You do, I do, and their locally owned competitors do. I'm not quite sure why it is that we've decided it's a good idea to force small businesses to subsidize their competitors.

And in Wal-Mart's case, they suck about 24 cents of every dollar spent out of the local economy. On average, a dollar spent generates about a dollar fifty in other economic activity in a city. That's why everyone thinks it's a great deal to subsidize horse shows and other events that attract people from out of town. You get their dollar and the 53 cents. My dollar, already being in the local economy, isn't as useful in that sense.

That was one of the major flaws in the river tax package in 2007 which was going to create rapids in the river, office space, more retail & service level jobs and unicorns for the little kids.

I'm not a fan of subsidies to attract large retailers or employees to cities.  However, local governments seem to think it's worth it in sales tax revenue and expansion of the tax base via the creation of more jobs or higher paying jobs.  Without a net gain in population or becoming a destination attraction, I've long held that creating more retail within a city simply serves to cannibalize the pre-existing sales tax collection points.

That still doesn't negate my original assertion, if that was your intent.

[nathanm]

Well, it does show that regardless of how many jobs are created by big box retailers, they come at a high cost, both in jobs lost in local competitors and their sucking us dry with tax incentives. Much better to have businesses that actually stand on their own two feet.

[Teatownclown]

Big Box retail is dying a slow death.

Here's another financial magazine coming down on Mittens: http://www.bloomberg.com/news/2012-07-15/romney-s-bain-yielded-private-gains-socialized-losses.html

Romney's Bain Yielded Private Gains, Socialized Losses
By Anthony Luzzatto Gardner Jul 15, 2012 5:30 PM CT
Mitt Romney touts his business acumen and job-creation record as a key qualification for being the next U.S. president.
What's clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm's partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.
What's less clear is how his skills are relevant to the job of overseeing the U.S. economy, strengthening competitiveness and looking out for the welfare of the general public, especially the middle class.
Thanks to leverage, 10 of roughly 67 major deals by Bain Capital during Romney's watch produced about 70 percent of the firm's profits. Four of those 10 deals, as well as others, later wound up in bankruptcy. It's worth examining some of them to understand Romney's investment style at Bain Capital.
In 1986, in one of its earliest deals, Bain Capital acquired Accuride Corp., a manufacturer of aluminum truck wheels. The purchase was 97.5 percent financed by debt, a high level of leverage under any circumstances. It was especially burdensome for a company that was exposed to aluminum-price volatility and cyclical automotive production.
Casino Capitalism
Forty-to-one leverage is casino capitalism that hugely magnifies gains and losses. Bain Capital wisely chose to flip the company fast: After 18 months, it sold Accuride, converting its $2.6 million sliver of equity into a $61 million capital gain. That deal, which yielded a 1,123 percent annualized return, was critical to Bain Capital's early success and led the firm to keep maximizing the use of leverage.
In 1992, Bain Capital bought American Pad & Paper by financing 87 percent of the purchase price. In the next three years, Ampad borrowed to make acquisitions, repay existing debt and pay Bain Capital and its investors $60 million in dividends.
As a result, the company's debt swelled from $11 million in 1993 to $444 million by 1995. The $14 million in annual interest expense on this debt dwarfed the company's $4.7 million operating cash flow. The proceeds of an initial public offering in July 1996 were used to pay Bain Capital $48 million for part of its stake and to reduce the company's debt to $270 million.
From 1993 to 1999, Bain Capital charged Ampad about $18 million in various fees. By 1999, the company's debt was back up to $400 million. Unable to pay the interest costs and drained of cash paid to Bain Capital in fees and dividends, Ampad filed for bankruptcy the following year. Senior secured lenders got less than 50 cents on the dollar, unsecured lenders received two- tenths of a cent on the dollar, and several hundred jobs were lost. Bain Capital had reaped capital gains of $107 million on its $5.1 million investment.
Bain Capital's acquisition in 1994 of Dade International, a supplier of in-vitro diagnostic products, was 81 percent financed by debt. Of the $85 million in equity, about $27 million came from Bain with the rest coming from a group of investors that included Goldman Sachs Group Inc.
From 1995 to 1999, Bain Capital tripled Dade's debt from about $300 million to $902 million. Some of the debt was used to pay for acquisitions of DuPont Co.'s in-vitro diagnostics division in May 1996 and Behring Diagnostics, a German medical- testing company, in 1997. But some was used to finance a repurchase of half of Bain Capital's equity for $242 million -- more than eight times its investment -- and to pay its investors almost $100 million in fees.
Bankruptcy Filing
Dade was left in a weakened financial condition and couldn't withstand the shocks of increased debt payments when interest rates rose and revenue from Europe fell because of a decline in the value of the euro. The company filed for bankruptcy in August 2002, because of its inability to service a $1.5 billion debt load. About 1,700 people lost their jobs while Bain Capital claimed capital gains (net of its losses in the bankruptcy) of roughly $216 million, an eightfold return.
There are many other examples of this debt-fueled strategy. In the two years following the acquisition in 1993 of GS Industries, a steel mill, for $8 million, Bain Capital increased the company's debt to $378 million on operating income of less than a 10th of that amount. Some of this was used to pay Bain Capital a $36 million dividend in 1994. That degree of leverage was excessive in light of the cyclicality and capital-intensive nature of the steel industry.
By the time the company went bankrupt in 2001, it owed $554 million in debt against assets valued at $395 million. Many creditors lost money, and 750 workers lost their jobs. The U.S. Pension Benefit Guaranty Corp., which insures company retirement plans, determined in 2002 that GS had underfunded its pension by $44 million and had to step in to cover the shortfall.
Bain Capital's acquisition of Stage Stores, a department- store chain, in 1988 was 96 percent financed by debt (mostly in junk bonds) -- an extreme level for a cyclical and very competitive low-margin business. Bain sold a large part of its stake in 1997 for a $184 million gain, three years before the company filed for bankruptcy because of its inability to service its $600 million debt.
Success, entrepreneurship, risk taking and wealth creation deserve to be celebrated when they are the result of fair play and hard work. President Barack Obama is correct in distinguishing the patient creation of value for the benefit of investors through genuine operational improvements and growth -- the true mission of private equity -- from the form of rigged capitalism that was practiced by some in the industry in the past when debt was cheap and plentiful.
While Bain Capital wasn't alone in using financial engineering to turbo-charge its returns, it was among the most aggressive under Romney's leadership. Enriching investors by taking leveraged bets isn't a qualification for a job requiring long-term vision and concern for public welfare. It is appropriate to point that out to voters.
(Anthony Luzzatto Gardner works at Palamon Capital Partners, a private equity fund based in London, and was director of European affairs in the U.S. National Security Council in 1994-95. The opinions expressed are his own.)
Read more opinion online from Bloomberg View. Subscribe to receive a daily e-mail highlighting new View editorials, columns and op-ed articles.
Today's highlights: the editors on good news from Guantanamo, why Jamie Dimon's bonus should be clawed back and how to put more electric cars on the road; William D. Cohan on Romney's magical IRA; Albert R. Hunt on the candidates' need to spell out debt-cutting plans; Stephen Marche explains why Canadians are now richer than Americans.
To contact the writer of this article: Anthony Luzzatto Gardner at tonylgardner@hotmail.com
To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net

In reading the Businessweek article one thing becomes clear: The tithing of congregants dissolves members Federal tax liability and funds their colony. Sound like shrinking government while funding a separate order? Sounds to me like the Teahead's first cousin shrinking government on their own terms. Do you approve of a religious sect deriving more income from their tax free status while  "donations"  allow their members to avoid paying support for the country's social services and defense? Think about it. Is that patriotism or an effort to form their own nation within a nation and withholding a patriotic duty? I believe this to be a major issue....Mittens paid 3 times more to his church than to his government and laid off thousands, bankrupted pensions, outsourced jobs while hoarding millions.

[Teatownclown]

Again, he's being commanded by LDS not to show he gave more $$$ to them than funds to support our military, educators, government workers and those fellow citizens that need help.
That's an educated guess.

[Conan71]

Again, he's being commanded by LDS not to show he gave more $$$ to them than funds to support our military, educators, government workers and those fellow citizens that need help.
That's an educated guess.

Thank God I'd already digested dinner before the photo of snake face popped up.