Defending Private Equity: AEI Economists Weigh-In

In light of recent attacks on Governor Mitt Romney’s record at Bain Capital, American Enterprise Institute (AEI) director of economic policy studies Kevin Hassett and economist Steven Davis examine in their recently published piece what is private equity, its impact on jobs, and its role in the American economy.

Hassett and Davis find that private equity firms are a force for good because:

• Private equity firms make investments in a wide range of businesses. The goal … is to create a thriving business so the private equity firm can sell its investment stake at a profit. This simple fact undercuts the claim that private equity firms systematically destroy jobs and loot companies. It’s hard to take a company public or sell it at a profit when it’s been looted.
• They provide attractive returns for their investors.
• The effect of private equity buyouts on employment in target firms is, on average, quite small.
• Private equity buyouts accelerate the process of creative destruction: old jobs disappear more rapidly, new jobs get created more rapidly, and productivity growth increases as a result.

Kevin Hassett is a former senior economist at the Board of Governors of the Federal Reserve System and has served as a policy consultant to the Treasury Department and adviser to the presidential campaigns of John McCain (2000, 2008) and George W. Bush (2004). He can be reached at khassett@aei.org or through veronika.polakova@aei.org.

Steven Davis is a labor economist at the University of Chicago Graduate School of Business, a research associate at the National Bureau of Economic Research, and a visiting scholar at AEI. He can be reached at sdavis@aei.org.

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