Tuesday, May 29, 2012

Economics:  How Change Happens

As Reihan Salam noted in a fair-minded review of the literature in National Review, in any industry there is an astonishing difference in the productivity levels of leading companies and the lagging companies. Private equity firms like Bain acquire bad companies and often replace management, compel executives to own more stock in their own company and reform company operations.

Most of the time they succeed. Research from around the world clearly confirms that companies that have been acquired by private equity firms are more productive than comparable firms.

This process involves a great deal of churn and creative destruction. It does not, on net, lead to fewer jobs. A giant study by economists from the University of Chicago, Harvard, the University of Maryland and the Census Bureau found that when private equity firms acquire a company, jobs are lost in old operations. Jobs are created in new, promising operations. The overall effect on employment is modest.

While American companies operate in radically different ways than they did 40 years ago, the sheltered, government-dominated sectors of the economy -- especially education, health care and the welfare state -- operate in astonishingly similar ways.

For more, see How Change Happens by David Brooks, May 21, 2012 at NYTimes.com.

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