In a recent blog post Professor Paul Krugman argues that private equity and other activist investors did little to improve the U.S. economy, which was performing well before Bain et al. came along in the early 1980s. He writes:
Let’s look at how trends changed after 1980 or so, when the underlying rules of American business (and politics) shifted. Start with productivity – I use a log scale, so that the slope of the trend represents the rate of growth. See the big acceleration? Neither do I – productivity growth has actually been slower since the rise of Bain-type operators.
If he looked a little closer at his graph, Krugman would notice a flattening out in the middle, which historians refer to as “the 1970s,” when productivity lagged badly. But Krugman was so pleased with his insight that he shared it with New York Times readers two days later:
Let me take a moment to debunk a fairy tale that we’ve been hearing a lot from Wall Street and its reliable defenders . . . Once upon a time, this fairy tale tells us, America was a land of lazy managers and slacker workers. Productivity languished, and American industry was fading away in the face of foreign competition. Then square-jawed, tough-minded buyout kings like Mitt Romney and the fictional Gordon Gekko came to the rescue, imposing financial and work discipline. . . .You can see why Wall Street likes this story. But none of it – except the bit about the Gekkos and the Romneys making lots of money – is true. For the alleged productivity surge never actually happened. In fact, overall business productivity in America grew faster in the postwar generation, an era in which banks were tightly regulated and private equity barely existed, than it has since our political system decided that greed was good.
Krugman crudely mischaracterizes economic history by combining the 1950s and 1960s (when productivity growth was strong) with the 1970s (when it stank). Here is the annual average growth in non-farm productivity, using data in a Bureau of Labor Statistics chart.
Productivity Change in the Nonfarm Business Sector, 1947-2011:
Last updated: March 7, 2012
While Krugman claims “the alleged productivity surge never occurred” in fact productivity accelerated from 1.1% growth in the 1970’s to 2.1% in the 1990s and 2.5%, 2000-2007. Productivity slowed in the 1970’s for many reasons, including the cultural revolution of the 1960s that urged Americans to “tune in, turn on, and drop out,” rising inflation (which enabled firms to maintain profit margins by raising prices rather than cutting costs), surging regulation, rising taxes, price controls, and demographics. (Baby boomers and women streamed into the labor force; inexperienced workers are less productive.) With inflation accelerating and the dollar collapsing, the U.S. economy was performing so poorly by the late 1970s that Fed Chairman G. William Miller lost his job after just eighteen months; Paul Volcker rushed down from the New York Fed to handle the emergency. Corporate reforms pushed by Wall Street financiers were just one of many factors that gradually restored productivity growth over the next 15 years; other drivers were tax cuts, lower inflation, and deregulation.
Among the prime beneficiaries of this capitalistic reformation were poor people. After trending higher from 1970 to 1982, the poverty rate moved lower from 1982 to 2000,* even though Gordon Gekkos and Mitt Romneys were running rampant and income inequality was rising. (Income inequality was low during the 1970s because virtually no one except Texas oil barons and Washington bureaucrats was prospering.)
More on all these trends – and much more — in later posts.
*U.S. Census, Income, Poverty and Health Insurance Coverage in the United States, 2010 (September, 2011), Figure 4.