An Obsolete Job Versus an Outsourced One

By way of Charles Pierce, we find this doozy of a quote from Joe Klein (boldface mine):

The current controversy over whether Romney was or was not running Bain capital during the years 1999-2002 is a relatively minor nail-the functional equivalent of the Pledge of Allegiance. Bain was involved in the global economy during those years. This meant outsourcing jobs to places like Mexico and China, which meant the creative destruction of obsolete jobs here at home.

Some jobs are truly obsolete–there isn’t much need for farriers today, as the horseshoe market is in decline. And other jobs that are primarily labor driven, such as clothing manufacturing might not be competitive internationally, in that there is no way for companies to turn a profit with U.S. wages. But a lot of companies are doing fine–they are productive, if not ‘efficient‘ as Bernard Finel notes regarding ‘troubled companies’ (boldface mine):

“Troubled” companies have a particular meaning on Wall Street. Sure, sometimes they refer to companies that are just muddled, have over-expanded, and are badly managed. But more often, what they are talking about is companies that do not seem to providing a large enough return to shareholders—a stagnating stock price in particular. But that does not mean a company is “troubled.” It can be quite profitable, have productive and loyal employees, have satisfied customers, and cash on hand.

What players like Bain do is enforce a Wall Street preference. There is a bias against companies that seek a “quiet life.” They are shunned by institutional investors, which depresses stock prices and makes these companies “troubled” in the first place. It isn’t that they are not profitable, but rather than institutional investors don’t like them, and as a result they trade at dramatically lower P/E ratios. Indeed, it isn’t even clear that takeover targets do have weaker stock performance if you look at total returns, including dividends.

Once a company goes public, it is essentially subject to “disciplinary” takeovers if it fails to act in accordance with financial sector preferences. This is often phrased as “poorly performing managers,” but what does that really mean? That is really just about enforcing a certain conventional wisdom about what a company ought to do. But these preferences are socially problematic. Consider some of the things that seem to contribute to being a takeover target: slow growth, stable revenues, cash on hand rather than debt, generous employee compensation, conservatively-funded pension or insurance plans

…So, in a sense, Bain, and other buyout specialists, serve to enforce a particular type of corporate behavior that focus on expansion at the expense of predictability, risk acceptance in terms of contractual obligations to employees, and a ruthless focus on cost controls at the expense of employee loyalty and stability.

As a practical matter, it is not clear that this sort of approach is conducive to more rapid economic growth.

Numerian makes the case that this has nothing to do with economic growth (boldface mine):

So far the debate has been largely about whether Bain Capital exported jobs (it certainly did), but Obama for whatever reason is missing the broader point: equity investment as practiced the Mitt Romney way destroyed economic value in the US. It’s been doing this for 30 years, and making its practitioners phenomenally rich. The loss of American jobs is one thing; the loss of manufacturing capacity, of industrial know-how, of whole communities, of competitive edge – in short, of the basic benefits of capitalism, is the real story. Mitt Romney is the anti-capitalist. He doesn’t want free markets, because his expertise is in gaming the system. He doesn’t care about managerial skill or running a company for the long term, because that works against maximizing his profits in the shortest time possible. He certainly doesn’t want transparency, because deep down there is nothing he has done that he can point to with pride (it’s curious how so many of these equity extraction guys prefer to operate in secrecy and darkness). He knows that his record is one of repeated failure in the capitalist realm, and that he nonetheless persevered destroying companies with debt so he could take the debt proceeds for himself. What he is lacking is the basic moral sense to comprehend how deeply wrong – and in the Christian sense sinful – his professional and personal behavior has been.

In the case of Dade-Behring, this wasn’t even the way to maximize profitit is not ‘efficient.’ This approach is often nothing more than the high-finance equivalent of a mob bust-out, even if it is gussied up in McKinsey-speak.

In a market economy, many functions that are governance functions are determined by the private sphere. Bad decisions can lead to thousands losing their jobs, counties losing their tax bases, and dependent or downstream businesses going bust. Large companies, or companies like Bain Capital which can strongly influence large companies, provide many key functions: goods or services (obviously), employment, and often infrastructure needs (e.g., telecommunications) that affect local communities or even entire regions or economic sectors.

Given these companies’ power of governance, no society can afford to be in thrall to the Cargo Cults of Efficiency or Maximizing Shareholder Profits. That, as we have learned over the last three decades, leads to governance–and government–by and for sociopaths.

This entry was posted in Basic Human Decency, Bidness, Economics, Fucking Royals. Bookmark the permalink.

7 Responses to An Obsolete Job Versus an Outsourced One

  1. Seems to me the worst thing a company can do for itself is go public. Having been through such an experience once, it definitely was not a fun time for most employees, for precisely the reasons highlighted above. Doesn’t matter how good the product is, how good the sales are, how productive the employees are, how profitable the company is, they will cut every budget they can get their hands on and fire every employee they can justify firing just to make the books look all pretty like the investors want them, consequences for the actual health of the company be damned, because if the stock starts to turn south in the long run, they’re just gonna flip their assets to the next victim as soon as they’ve bled the current one dry.

  2. Jim Thomerson says:

    Your comment about farriers being obsolete is not correct. Mrs. Romney’s horse needs shoes, for example. The need for farriers is not as large as it once was, but it will persist so long as people want their horses shod, and do not want to do it themselves (as my father did). It is also a job which would be very difficult to outsource.

  3. Kaleberg says:

    Even companies like Apple have to worry about vulture take overs. That’s why they issued their first dividend earlier this year, as a defensive measure. I ran the numbers and with their cash flow and cash on hand, they are a prime take over target.

    It might be a bit out of my league, but I could see some major investment bank setting up a pool and doing a hostile, highly leveraged take over. The banks have lots of cheap money from the Fed, so this could work nicely. They could probably pay off the takeover loan in a year or two, plunge the company into debt and pay it out as a special dividend, then liquidate the thing over the next few years.

    By issuing a dividend, Cook and his board indicated that they’d fight, and that they’d stand a good chance of winning.

  4. Misaki says:

    QQ, the mean capitalists lowered my wages! And I let them do it by continuing to work!”

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