The high tax rates of the inflationary 1970s had forced a deadening siege of conglomeration and corporate bloat and resulted in a catastrophic 60 percent decline in the real value of corporate equity. This was the era of palatial new Corporate headquarters, jet fleets, and lavish entertainment budgets all serving incoherent jumbles of unrelated companies that had equity worth less than the sum of their parts. Corporations often had either to splurge or merge to avoid a suffocating confiscation of profits through the interplay of inflation with exalted tax gouges, which could rise to effective rates above 100 percent of real returns.
Conglomerates artfully combined companies nursing losses with companies harvesting profits, thereby muting the impact of the deadly tax regime.But Ronald Reagan’s counter-inflationary supply-side tax policies, coupled with Paul Volcker’s monetary contraction, made these morbid combines dysfunctional…
Between 1976 and 1993, which covers Romney’s Bain Capital years, Jensen calculates that U.S. corporations conducted 42,621 merger and acquisition deals worth a total of $3.1 trillion. Selling firms won premiums of 41 percent, generating $899 billion in constant dollar gains for shareholders (well over a trillion in today’s dollars). Buying firms also gained on average, by increments that increased over the years. Since Bain under Romney was an out-performer, its results were better proportionally.
Harvard economist (later Treasury secretary) Larry Summers speculated that these gains disguised wealth transfers from bondholders, workers, suppliers, and communities. Jensen disproved this charge, showing — in the aftermath of the transactions — sharp increases in capital expenditures, R&D, employment, and share value.
During this period, encompassing the Reagan years, the nation massively led the world in job creation with between 50 and 55 million new jobs, at steadily rising pay, compared to some 10 to 15 million jobs lost. With the U.S. generating jobs far faster than overseas rivals, this restructuring could hardly have caused job losses to foreign countries. We continued to lead the world in job creation, launched the computer revolution, and maintained our manufacturing employment level until the crash of 2000.
The disastrous economic policies of the Nixon and Carter administrations included wage and price controls, accommodation of increasing inflation, and crippling energy policies, which included bizarre price controls. As a result of these and the factors that Gilder discussed, public stocks became incredibly cheap. KKR exploited the opportunity and created the PE industry. This negative article is supposed to show how KKR did horrible things, when it paid shareholders 3x for their stock and restructured a company; in reality, it makes the opposite point.
Corporate executives who never before thought of doing a hostile takeover of a golf partner CEO’s firm were faced with the situation that sometimes not doing so amounted to ignoring their fiduciary obligations to their own shareholders. The results were sometimes strange, but often they were strightforward: buy out existing shareholders at a good premium, restructure operations, and sell subsidiaries that had a better strategic fit elsewhere. One of the ancillary benefits of this movement was that it put all the other boards and CEO’s on notice that they had better clean up their act or they were the next target.
Final point from Gilder’s piece:
If Romney had been listening more attentively when I gave my speech back in 1982, he might have been more cogent in responding to the charges of “vulture” capitalism in later years. I showed that consumer spending is nowhere near 70 percent of the real economy (GDP leaves out all intermediate transactions in the supply chain) and is nearly irrelevant to economic growth (“supply creates its own demand”). I spoke on the centrality of venture capital and the power of entrepreneurs responding to tax rate reductions: “High tax rates don’t stop rich people from being rich; they stop everyone else from getting rich,” I said. “Progressive tax rates don’t redistribute incomes, they redistribute taxpayers…from factories and offices and onto foreign beaches and early retirements,” among other old favorites that still ring true looking across to Europe in 2012. And I made my case that capitalists thrive only by serving others. But at the time, in the early 1980s, I still did not really grasp the deeper sources of the power of venture capitalists and private equity players.
Note: “consumer spending is nowhere near 70 percent of the real economy (GDP leaves out all intermediate transactions in the supply chain) and is nearly irrelevant to economic growth.” Such an interesting point, particularly regarding the Keynesians and their focus on increasing final demand. It’s not at all relevant. The 1980’s takeover boom was about lowering direct operating and SG&A costs and de-conglomeratizing companies that had become bad vessels for innovation and strategic focus. Compare today: Dodd-Frank and the ACA have produced similar corporate sclerosis from uncertainly and added costs, even as they have done almost nothing to address the problems they boast of having cured. Our very own self-inflicted 1970’s again!