At a time of mounting economic frustrations, it’s easy to place the blame on unpopular businesses and industries. During her time as a lawmaker, U.S. Sen. Elizabeth Warren, D-Mass., has unfairly labeled private equity (PE) firms as “vampires” that bleed companies dry, despite the pivotal role that these companies play in furthering innovation and fostering growth.
Although there’s plenty of evidence that PE is a boon to workers and entrepreneurs, Sen. Warren is determined to use the heavy hand of government to punish PE. Her legislation to “stop Wall Street looting” would impose onerous regulations on investment and growth at the worst possible time. Instead of doubling down on dubious regulations, lawmakers should be searching for ways to reinvigorate and expand the economy.
While every company aspires to become the next Amazon or Walmart, supply bottlenecks, regulatory uncertainty, and pandemic-related problems can get in the way. A timely acquisition can help get an ailing business back on track and supply the critical expertise needed to tackle these issues. Sen. Warren would require strict limits on the ways that investors could profit from these acquisitions, making bankruptcy the only real option for struggling companies. According to a Chamber of Commerce report, introducing regulatory hurdles into the acquisition process would result in a raft of unintended consequences.
The analysis finds that, “these restrictions and taxes would be so impactful that, if enacted, even in a modest-case scenario, the country’s workforce would be reduced by approximately 6 million jobs, and combined federal, state, and local tax revenues would drop by approximately $109 billion per year in the long run.” And the fallout would hardly be limited to the U.S.
An economic analysis produced by The Brookings Institution notes, “[t]oday, hundreds of private equity funds have a substantial track record of investing in small, medium-sized and scalable businesses around the world, with about 400 funds in China alone, as well as multiple funds operating in Africa, Latin America, Asia and elsewhere. These funds have demonstrated their development impact.”
Washington, D.C. regulations can cause significant problems in international markets, which can in turn hurt Americans by weakening demand for U.S. exports and causing production snafus for U.S.-bound products.
Lawmakers such as Warren will nonetheless continue to push for stricter rules based on a fundamental misunderstanding of how investment markets operate. Contrary to the scary stories being offered of firms being destroyed by PE investors, companies such as Dollar General, Petco, and Michael’s became more productive following acquisitions and are in a better position to cater to consumers. And there’s little evidence that these successful turnarounds come at the cost of jobs. One 2013 study by scholars at the Universities of Chicago, Maryland, and Michigan found that the net employment decline two years post-buyout is just 1%.
Other analyses have resulted in job loss or gain estimates all over the map, but the picture is not uniformly negative as suggested by Sen. Warren and her Congressional allies. The simple truth is that no two buyouts are the same and can result in hiring or downsizing campaigns depending on the specifics of the situation. But as the Chamber report makes clear, these investment activities certainly create jobs. When companies become more productive and are better able to attend to consumer needs, the entire country benefits through lower prices and more tailored, durable goods. That in turn allows other businesses to make much-needed purchases, expand, and hire more workers in the process. This cycle also puts more money in consumers’ pockets at a time when few things are for certain.
The truth is that lawmakers and the Biden administration can work closely with each other to make sure the economy is working for everyone. Putting up more regulatory hurdles will only result in more mass misery.
David Williams is president of the Taxpayers Protection Alliance.