In Praise of Private Equity

by on January 31, 2012 at 10:39 am in Current Affairs, Economics | Permalink

Excellent piece by Reihan Salam on private equity and how Bain fit into the larger picture of a dynamic economy.

The difficult truth that virtually no politician is prepared to acknowledge is that the road to job creation runs through job destruction.

…Chad Syverson, an economist at the University of Chicago’s Booth School of Business, found that what separates top firms from bottom firms is, typically, a large difference in productivity, with the top ones producing almost twice as much with the same measured input. This creates an almost irresistible temptation for investors. If Firm X, languishing at the 10th percentile in terms of productivity, could somehow be overhauled to match the productivity levels achieved by Firm A, at the 90th percentile, the potential for profit would be huge. Note, however, that halving “measured input” in order to double productivity will often mean shedding the weakest performers and giving those who remain the tools they need to do their jobs better and faster. Private equity does exactly this.

What Mitt Romney discovered was that American corporations sometimes had to be dragged, wailing and whining, into a state of efficiency. As a management consultant at Bain & Company, Romney had studied successful firms and then told other firms how to replicate their strategies. But those firms had come of age in the fat years of American corporate dominance, when many believed that the Japanese could do little more than manufacture cheap toys and textiles, and many were reluctant to accept his newfangled advice. It eventually became clear that if Romney and his cohort were going to remake American business, they’d have to raise money to make their own investments. Spurred by the senior partners at Bain & Company, Romney and his merry band of consultants established Bain Capital.

I wish Romney were as eloquent in his defense as is Salam.

The Original D January 31, 2012 at 10:49 am

No politician would make a stump speech about the importance of job destruction, but it’s the implied side effect of lower trade barriers. Clinton was very brave to push NAFTA through a Democratic Congress. He could have punted with minimal political backlash.

Bender Bending Rodriguez January 31, 2012 at 4:38 pm

What’s the mechanism for a president to stop legislative ratification of a treaty signed by his predecessor?

lemmy caution January 31, 2012 at 8:20 pm

he can make some phone calls.

Derek Scruggs February 1, 2012 at 12:05 am

The Aden’s controlled congress and would not have taken up ratification if zckinton hadn’t pushed for it. It was tiuch & go right up until passage.

Derek Scruggs February 1, 2012 at 12:06 am

Damn iPad. Aden’s = Dems

Todd January 31, 2012 at 10:54 am

Romney is too busy being eloquent about building a massive wall along the Rio Grande because he thinks Americans are willing to pay $9 dollars for an avocado.

Still Romney will win his party’s nomination, in large part because he is the only real Republican contender who is not proposing policy expenditures based on the cinema of William Cameron Menzies.

Tony January 31, 2012 at 11:43 am

Zing!

asdf January 31, 2012 at 11:05 am

I thought private equity was about taking fairly sound companies, buying them up by issuing huge debts in their names, gutting all the maintanence and staff, sucking out all the cash into your private equity fund, flipping them public and getting slick salesmen to pump it to $30/share only to have it crash to a $1/share a year after you unloaded your holdings when people realized how much long term damage was done to the company.

Or maybe that’s just my personal experience.

Jack Fraser January 31, 2012 at 11:29 am

Not to be crude, but the lenders would never stand for something quite like that. As a guy who has arranged some of these kinds of deals from the bank’s perspective, we’re relatively aware of what goes on. We would not lend, or get hedge funds/AMs to lend, if we didn’t think there would be sufficient cash flows to repay. (For what it’s worth to those who wail and gnash teeth, we really hate the dreaded dividend recap, as risk management gets fussy). They certainly aren’t angels though. I would heartily agree that I would never, ever buy the equity of a firm from a PE shop in an IPO and I’m not so sure why people do.

The Epicurean Dealmaker really did a bang-up job on this topic. To be frank, he’s probably one of the few writers on the internet who understand the ins and outs of the investment banking business. He’s especially keen for noticing the tax deductability of interest hardly underpins the investment rationale of sponsors. See here: http://epicureandealmaker.blogspot.com/2012/01/rape-of-persephone.html

Apologies for the long post.

Lou January 31, 2012 at 12:58 pm

Excellent post. But I will say this- PE firms generally IPO at pretty good values because 1) they are still major shareholders after the IPO and 2) they want to keep the public market pipeline open because if all they ever did was screw people, they would never be able to IPO another company. I would be somewhat skeptical of an IPO from a fund that doesn’t typically come to the public markets, because that second incentive doesn’t exist for them, but all of the information you need to invest is on the table in the S-1. Finally 3) they may be at the end of their fund life and therefore are forced to sell.

Putting aside the technical factors, conceptually it still makes sense to invest in a PE IPO. PE capital costs are always a premium to public market capital costs because of the lack of liquidity and expectations of investors who are paying high fees. Their incentive is to sell when they can no longer earn an excess return, whether that’s through operational improvement, financial engineering or whatever. So a return that’s not attractive to a private equity investor may still be attractive to a public investor. A common sense way of looking at it is, if you can’t show an IRR that’s better than public markets, you’re probably not going to stay in the PE business very long.

asdf January 31, 2012 at 12:59 pm

I don’t really have time to respond to the entire attached post, so I’ll just harp on two things.

1) One of the first things I noticed is that the assumptions in his model differ from what I’ve seen (which isn’t how all private equity works, but I digress). For instance in the deal I spoke about the company went from public to private to public within a year. A single year. Do you really think the PE guys made a bunch of productivity improving decisions in that year? I was there, its not the case. Mostly they just gutted things that were needed in the long term so that the quarterly results would look good for awhile and they could flip the stock at a favorable rate pretty quickly.

2) There is also an assumption that investors are A) smart B) well informed and C) their managers incentives are lined up with the owners of the funds. Rarely have I seen this be the case. Let’s consider a generic mutual fund in someones 401k considering purchasing the stock this PE firm is flipping. The manager (a rather mediocore man who couldn’t get a job on wall street or at a PE shop) is expected to invest roughly in some index, with some variation, and will be bonused for outperformance. Underperformance won’t affect him (besides not getting the bonus), and many years of underperformance might cost him a job but then he will just get a similair job at another company. And of course he’s expect to do some trading to justify why this person’s 401k is in his fund instead of an index fun, even if he really has no big investment knowledge. I mean he only manages the fund because he’s a pretty charismatic guy and his company gave the kid of the union head that made them the manager for the unions 401k a cushy job.

So there is an IPO. A guy with 20 IQ points on him that’s very charismatic calls him up and gives him a slick talk about buying the company. And if it takes off he will outperform his benchmark, and get a bonus! If it doesn’t work out well its the union workers money, not his. He cares, but he doesn’t really care. His incentives are different, he’s not that bright to begin with, and those nice quarterly numbers he’s being shown give him some cover. So he buys the stock.

byomtov January 31, 2012 at 7:07 pm

If you hate the dividend recap so much, why allow it?

Is it because if you don’t someone else will?

Lawyer January 31, 2012 at 11:14 am

The PE model has changed radically in 25 years. Mostly, like in other things, because there aren’t as many low hanging fruit. You can’t really make the same outsized returns taking a moribund company and turning it around since the economy is so much more global and so much more competitive. Further, so much more money has flowed into the industry that the good deals are heavily. Yet, the people who run PE firms don’t close up shop, they just switch from focusing on carry to focusing on AUM. Consequently, KKR and Carlyle have billions and billions under management. They buy companies, pay themselves special dividends, and bankrupt the entity. It’s mostly wealth transfer. I’m agnostic as to whether or not this is good.

GWright January 31, 2012 at 11:15 am

For a less rosy view of the actual policies supporting private equity firms:

http://www.newyorker.com/talk/financial/2012/01/30/120130ta_talk_surowiecki

Jack Fraser January 31, 2012 at 11:31 am

Tax deductability of interest matters far less to returns than starting with an equity stake of 40%, ramping it up and selling quickly.

Kenneth Widmerpool January 31, 2012 at 11:38 am

Very weak criticism by Surowiecki. Dividend recaps were nothing more than, in retrospect, misplaced exuberance at the end of the run-up (notice the time period – 2003-2007). Homeowners were buying houses with no money down at that point. Says nothing whatsoever about PE. Cheap shot.

The Original D January 31, 2012 at 1:15 pm

“Misplaced exuberance” nevertheless made millions for the PE fund while bankrupting the companies. At least in the dotcom bubble the investors took a bath too.

Kenneth Widmerpool January 31, 2012 at 3:35 pm

Easy credit made winners of lots of people, not just PE.

Jack Fraser January 31, 2012 at 11:37 pm

As Kenneth implies, a DR is a lot like a HELOC in function, if not necessarily in form. But the fundamental premise of the asset purchase drives returns for the purchaser, just like with a home and a mortgage.

Urso January 31, 2012 at 11:47 am

The Economist has an article out this week which, while not demonizing private equity, basically argues that it ain’t all that and is largely buoyed by the favorable tax treatment it gets.

figleaf January 31, 2012 at 11:51 am

Right, Alex. And “private equity” (a.k.a. vulture or LBO capitalists) only raise money by “creatively destroying” failing companies.

You know, like the way Ronald Perelman heroically kept “rescuing” Marvel Comics by perpetually re-leveraging it back down into penny-stocks range despite its jaw-droppingly solid franchises and ability to grow sometimes exponentially.

Yep. That’s creative destruction at its finest. Just take the worst of the worst companies and squeeze all that nasty fat out of them so it can be put to “better” use elsewhere.

Except, of course, once Perelman somehow lost control of Marvel it… kind of… became one of the world’s most profitable media companies.

Hmm…. I think the world of Reihan but he’s a business man, not an economist. And business guys have no obligation to look at the downsides of anything beyond their own bottom lines. That’s actually the way it should be. (Because, seriously? If business people who look too closely at the downsides they end up never going into business.) Economists, on the other hand, are supposed to be made of sterner stuff.

Well. They’re supposed to be.

Romney can’t make a case as well as Reihan not because he’s ineloquent but because, as Reihan himself notes and you chose to cite, “It eventually became clear that if Romney and his cohort were going to remake American business, they’d have to raise money to make their own investments.”

He, and by extension you, assume that “raising money to make their own investments” necessarily means only targeting unsound companies, knocking off the accumulated rust and rot, and putting reformed, revitalized enterprises back on the market. But if one’s goal is to raise money for one’s own investments there is nothing preventing one from taking the Perelman approach and taking perfectly profitable companies and sucking them… er, I mean “leveraging” them dry.

Considering, further, that Marvel rebounded rather spectacularly once Perelman was detached from its jugulars I’d think a good economist might consider that there could be a difference between creative destruction and plain old-fashioned destruction.

The poor sweet independent bookstore owners around the corner from my house are hanging on by the skin of their teeth thanks to the entirely laudable creative destruction Amazon.com has engendered. I can only think of one “record store” left in town (actually there might be two) but sooner or later the straws they’re clinging to will part and Amazon and Apple will have creatively destroyed those last vestiges of a bygone era as well. My poor little shrinking daily newspaper seems to be holding on only thanks to the billboard-sized ads it’s able to sell to what I suspect are equally imperiled Big Mall department stores. As a former paper boy I’ll feel sorry for them when they’re gone… but I’ll read about it in my RSS feed long before I hear about it on dead trees.

Point being that actual creative destruction kind of rocks. There’s not a lot of indication that Bain Capital did a lot of that. But they didn’t outright go around extorting profitable businesses for protection money the way the Mafia does, or simply vandalizing them the way street punks do, or just stealing recyclable oils and aluminum from the back the way… I dunno exactly who’s doing that but somebody’s making money doing that. And so, I guess, Romney has something to be proud of.

But I don’t expect that, having been there, he can defend what he actually did as eloquently as Reihan Salam who, I believe, wasn’t there.

figleaf

Lou January 31, 2012 at 1:18 pm

And that’s why private equity backed firms default more than others. Oh wait, they don’t. As usual, a lot of left wing talking points against private equity, but no actual facts. But we should take your word for it because you’re a comic book geek, right?

Bender Bending Rodriguez January 31, 2012 at 4:42 pm

Best. Comeback. Ever.

figleaf January 31, 2012 at 8:56 pm

I know you were speculating from zero information but yes, in fact I did read comic books. In 7th Grade. In 1972.

By the time Perleman had his hooks in Marvel I was more inclined to read Investor’s Business Daily. I read about the Perelman problem in an analyst’s report on the difference between a successful brand and a successful stock.

Also, not to sound peevish but I didn’t say anything about private equity default rates. At no point did Perelman allow Marvel to default! But last I checked “not defaulting” is neither the only nor the best metric of “creative destruction.”

I chose the Marvel/Perelman example because it was a fairly notorious example in financial-adviser circles of the difference between the profitability of private equity (high in Perelman’s case) and the profitability of its holdings (very low in Marvel’s case.) For some reason I’m not surprised you’d never heard of it. It was a long time ago. Perhaps you were still playing with Power Rangers?

figleaf

figleaf January 31, 2012 at 10:48 pm

My apologies for losing my temper, Lou.

I don’t have a particular problem with either private equity firms or leverage. In fact, to stick with the high-visibility Marvel, inc. example, the people who finally turned it around after Perelman bankrupted it (my apologies also for saying he didn’t) also used leverage.

My point in bringing it up in the first place isn’t because of some kind of “left wing” distaste for business. Instead it was in response to the laughable contention that all capital “destruction” is “creative destruction.” And to highlight how simple destruction is entirely compatible with Salam’s gushy observation that early on Mitt Romney’s group simply needed to raise funds. Ron Pereleman was also interested in Marvel strictly in terms of his ability to make money from it rather than to turn it around or make it more “efficient” in terms other than it’s cash-extraction value prior. Even in bankruptcy he evidently pulled enough equity out of the company to make it worth it to him to pay an $80 million dollar settlement rather than go to trial. Which suggests his total proceeds, and therefore his exposure to risk, was considerably higher. (Analyst records and available court records suggest he pulled down between $200 and $400 million.)

Again, up to a point (the point where one is willing to pay $80 million to settle, for instance) that kind of capitalism is perfectly legal. And it can certainly be profitable. It can even creative! It’s just not the sort of “creative destruction” proponents of capitalism (including myself) believe in, support, and even seek to profit from.

Finally, I’m not even saying that Romney’s group only engaged in the sort of practices Newt Gingrich (not, to the best of my knowledge, a “left wing” talking pointer) condemns. I’m just saying Salam’s talking through his hat if he thinks all LBOs and other forms of private equity investment involve “creative destruction.”

And I believe that’s one reason why Alex’s lament will go unanswered: Mitt Romney understands the business better than does Reihan Salam, therefore Salam is able to wax more idyllic about it.

Sheesh!

figleaf

byomtov February 1, 2012 at 5:08 pm

I’m just saying Salam’s talking through his hat if he thinks all LBOs and other forms of private equity investment involve “creative destruction.”

Of course he is. Salam is just spouting a party line. There’s lots of PE firms, and lots of PE deals. Even if we take it as given that on average they are beneficial – a generous assumption – there’s no way to know the results of Bain’s deals without looking at them specifically. Not all destruction is creative. Most of it is just destruction.

Paul January 31, 2012 at 11:52 am

One can’t help but notice that America itself would benefit from “being dragged, wailing and whining, into a state of efficiency.” But it’s unclear that Romney (or anyone else) has the skills to make it happen. It will take a lot more than a really big bank loan.

Nicoli January 31, 2012 at 3:35 pm

American productivity might, but not the 30% he would “fire” to get the job done.

Crenellations January 31, 2012 at 12:24 pm

I wish Romney were as eloquent in his defense as is Salam.

But then he wouldn’t have been a successful consultant. That’s a very different job than pundit, professor, polemicist. It’s more akin to, say, politician.

Ed January 31, 2012 at 12:54 pm

“Consequently, KKR and Carlyle have billions and billions under management. They buy companies, pay themselves special dividends, and bankrupt the entity. It’s mostly wealth transfer. I’m agnostic as to whether or not this is good.”

Good comments on this thread,but this caught my attention. Its mostly wealth transfer, but I’m agnostic as to whether or not this is good? How can something that is “mostly” wealth transfer be good?

The Original D January 31, 2012 at 1:21 pm

The market made me do it! ;)

will January 31, 2012 at 2:27 pm

That one made me spit out my coffee too.

John Ellis January 31, 2012 at 12:58 pm

If dragging poorly run corporations, “wailing and whining, into a state of efficiency” was all they did that would be a great service. And on many deals that is what they do.

But enough times that it is a pattern, they are not only adding debt but just taking companies private and then public again and working with the same management that was in place before. These managers who couldn’t figure out how to maximize shareholder returns suddenly figure it out when the company is private and they personally have big equity stakes.

In those deals what they do is more like transfer wealth from public shareholders to a select few private managers and the PE firm that backed them.

Brian J January 31, 2012 at 1:03 pm

Except that, the serious criticism of Romney and Bain, as opposed to the political ones made by Gingrich to the delight of the Democratic party, isn’t so much that his firm was responsible for job losses as it is that he managed to make out like a bandit while getting enormous (but unfortunately legal) tax advantages and, in some cases, sticking the government with the bill for things like pension obligations. I’d like to see someone defend this with a straight face.

I’d also be curious to hear some sort of explanation for how, exactly, Romney improved these companies. What sort of management practices did he implement? Did he try any incentive programs to improve productivity? What about salaries? Or was he merely a finance guy, for the most part? If that last bit is true, there’s nothing wrong with that; we need skilled people in all sorts of roles. But let’s not kid ourselves by pretending it’s the same thing as running a company by overseeing day-to-day operations.

Norm January 31, 2012 at 1:56 pm

I, too, would like to see somewhere an analysis of what Bain did with various companies. As various comments show PE works on a spectrum from on one end “find a failing company, repair it & make money selling it” to the other end of “steal a good company, strip it and exit with the money.” Where was Romney on this spectrum? Is there a public analysis of Bain’s record?

Mark Brophy January 31, 2012 at 4:28 pm

Is Mitt Romney the Investor’s Best Friend?

http://brophyworld.com/is-mitt-romney-the-investors-best-friend/

Tom January 31, 2012 at 1:33 pm

Immigrants especially subcons like Salam and Jews have exploited the fact that the prior elites (i.e. WASP establishment) had constructed a rather robust system of economic rents that protected the prior elites’ position in the US society, and then lost sight of the fact that this rent stream wasn’t really reflective of their merit. These immigrants are simply better at rent-seeking than the prior elites — and that’s pretty much the size of it. All other advantages such as quasi-affirmative action, etc. are primarily results of superior rent-seeking combined with the self-deception of white elites that they weren’t rent collectors.

“Economic rent” as defined by Ricardo is woefully inadequate — and is probably better defined as “the sum of all externalities”, which can, within the environment of a parasitic Federal Reserve Banking system, best be estimated by what neo-classical economists talk of as “modern portfolio theory” and its “risk free interest rate” usually approximated by short term Treasury instruments, although public choice theory has a lot to offer in this regard as well (indeed it subsumes the Fed).

bunker brown January 31, 2012 at 8:06 pm

Someone please translate this into English

decklap January 31, 2012 at 1:42 pm

Im not anti PE but please…. Romney is not in the business of dragging companies toward greater productivity, he is in the business of making money off the sale of those companies. Now, if those companies end up being more productive as a result then fine but they may also end up in bankruptcy and its all the same to PE… that’s what many people find odious. Look…. sometimes the lion eats the baby gazelle….now maybe that culls the heard or maybe it destroys the heard, the lion doesn’t care, but at least the lion doesn’t pretend that he’s creating gazelles.

Andrew' January 31, 2012 at 3:53 pm

He’s crapping out leaner gazelles.

will January 31, 2012 at 4:02 pm

Well that’s politics. He can’t get up and say I’m a greedy who’s pretty smart. It does look slimey but the people who know the difference aren’t a large voting population. He should probably just say “I’m ambitious(greedy), smart and my interests are aligned with that of the general US population.” but I don’t think people will believe him.

As a side effect he gets rid of all the slow and unhealthy gazelles. Yes they die, but the remaining population is more competitive and repopulate to be more fit for survival. Yes this is tongue in cheek, but at least the unemployed don’t die. It’s not a terrible thing to take over an ailing company and oversee an orderly liquidation IF plausible medicine has been tried.

Bill January 31, 2012 at 1:53 pm

Attacking private equity is misguided, except for carried interest and one other thing: how p e partners make big political contributions to get public pension investments and the issuance of public bonds to support a business they acquired or tax breaks for the company they acquired.

Ever wonder why p e partners and investment bakers are politically active?

Lou January 31, 2012 at 2:01 pm

Notably Steve Rattner of Quadrangle and the NY Common Retirement Fund. Rattner, who served the Obama Administration as “Car Czar”, was never prosecuted, although they did manage to find a way to punish brokers who had nothing to do with the blatant bribery and corruption that was taking place under his watch. Similar fraud has taken place in California at Calpers, where investment officers have been bribed into making investments with lucrative job offers.

For some reason it always comes as a surprise to people that the party of large government is usually the one involved in its corruption.

Bill January 31, 2012 at 8:16 pm

Like Bain?

The Original D February 1, 2012 at 12:10 am

You mean the parties. Plural.

Adrian Ratnapala January 31, 2012 at 2:02 pm

Even if creative destruction creates wealth on net, Salam paints a fairly clear picture of how the today’s growing firms will produce fewer jobs than the old firms that they are displacing (because modern high tech doesn’t need as many medium-skilled hands). However his explanation of why this is OK, or what we should do about it (bring productivity improvements to health, education and other government influenced sectors) is highly theory laden and will not convince anyone who does not already share Salam’s ideology.

Aneesh January 31, 2012 at 2:04 pm

“I wish Romney were as eloquent in his defense as is Salam”

Instead he’s eloquent in making up lies of the number of jobs he “created’ and being a “job creator”‘

Nicoli January 31, 2012 at 4:11 pm

Salam’s piece is good but his reasoning contradicts his conclusion that “Innovative businesses create jobs by dreaming up new products and processes. And innovative business models are embraced only when incumbent firms, whether they manufacture steel or educate kids, fear going out of business.” Recent innovative business models focus on outsourcing and replacing workers with technology, they don’t focus on hiring domestic workers.

jorod January 31, 2012 at 9:43 pm

We really hate efficiency… unless we are the ones making the profits.

Michael Haley February 1, 2012 at 2:17 am

Quite an economics education here in the comments. Now we know bankers would never make loans to people who couldn’t pay them back,and that transfers of wealthy are ok if mulit-millionaire investors suck all the money out of middle class workers into their own pockets, but not in the other direction. Keeps the economy going, you know.

I think a lot of people including Reihan are out of touch with reality. The whole concept of an LBO (which is essentially what this is) is to take undervalued companies and suck all the value out of them into the pockets of a few people who are already wealthy. Whatever is left is beside the point. Otherwise the Romneys of the world would never do it. The fact that you can rationalize that there are some cases where there are benefits is incidental not the goal of a buy out.

Mussolini made the trains run on time, so Reihan I suppose would argue that the benefits of fascism are being overlooked.

Jack Fraser February 1, 2012 at 9:26 am

To be fair, I said expect. Not sure if you missed that part of economics with expected values and whatnot. Mind you there almost has to be a sale on the back end.

As far as the “goal,” the goal is to make the aforementioned sale before time kills your IRRs. It’s hard (though not impossible, natch) to sell something that’s absolute garbage to investors without a speculative upside. This is why you see PE firms flipping companies they bought in 2005-2007 to each other, they have to keep their IRRs high.

What you’re describing is more of the Barbarians at the Gate (and really Chainsaw Al) styles of management. Well that era is mostly over and done with.

But you’re right. Folksy wisdom is the most powerful analytic tool available to the modern student of economics and finance.

An aside from your post, I’ve always wondered whether or not PE firms changed management culture everywhere in the 80s and beyond. If you know you can get eaten alive by KKR or BX, you might have an incentive to be a bit less sclerotic.

Nemi February 1, 2012 at 2:27 am

“…Chad Syverson, an economist at the University of Chicago’s Booth School of Business, found that what separates top firms from bottom firms is, typically, a large difference in productivity”

And since you usually do not have producer-specific prices with respect to inputs and outputs, but instead use e.g. revenue as a proxy for output and labor cost as a proxy for input, the above observation isn’t tautological at all (low wage labor that produces a expensive output usually mean that a business will be successful).

Nemi February 1, 2012 at 2:30 am

I.e, cut wages and “efficiency” go up.

Kasia February 1, 2012 at 10:59 am

How much of this is actual growth or just economies of scale? How much of this is just creative accounting? After all, this TFP measurement is just a residual. I am curious to know how much of private equity is just MBA financial engineering and book-keeping and how much of it real input-output analysis. Remember, technical studies like Himmelberg Meyer and Sinai (2005) had convinced us that the gains in home prices up to 2004 were real!!

Brett February 1, 2012 at 7:34 pm

I’m worried that the American (and eventually world) job market this new economy is creating will be a trifecta of the David Author Hypothesis about the polarization of skill, income inequality, and the winner-takes-all “superstar economy”. In other words, most people will end up on the “bottom” side of the polarization of skill, doing lots of relatively low-skilled positions for low wages because it’s cheaper to use them than robots.

A much smaller group of people will have professional positions, but god help you if you’re second- or third-rate at your job – you get dropped down into the bottom side of the divide with a ton of debt from college, while the “winners” in those professions make a ton of money with significant help from technology (which is probably what is going to happen to the market for lawyers if regulatory capture doesn’t stop it). An even smaller group of people hold actual wealth in the form of bonds, stocks, etc – shares in the economic growth, and they get rich off it. And now and then, someone from somewhere in the spectrum of employment pulls off a good entrepeneurial opportunity and rises to prosperity.

Brian Slesinsky February 1, 2012 at 11:19 pm

I don’t understand this notion that job destruction is necessary for job creation. Even in good times when we’re close to full employment, it doesn’t seem like growing companies are much constrained due to being unable to find workers. There’s quite a bit of turnover, and growing companies tend to be more attractive than declining ones, so voluntary job switching should be sufficient.

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