Right now, the interests of the GOP donor class are
being put above the interests of the American people, and easily 90 percent of
GOP voters. It’s beyond time for that to change.
Tucker Carlson just ran a segment where
he outlined one reason why much of blue-collar America is being left behind.
“One of the big factors in
this slow-moving disaster is the utter transformation in the way our leaders
think about the gilded economy,” said Carlson. During the last gilded age, the
ruling class was rich, “but it was still a recognizably American class,” that
“felt some obligation to the country around them.” No longer.
As an
example of this shift in civic duty, Carlson cited Paul Singer, a
billionaire investor who runs a hedge fund called Elliot Management Corporation
(EMC). Singer is worth more than $3 billion, and has long been active in
Republican Party politics.
Singer was a
large funder to George W. Bush’s two presidential campaigns, and to Mitt Romney
in 2012. During the Republican primaries in 2016, Singer supported Sen. Marco
Rubio, and gave $1 million to an anti-Trump PAC. When Trump won the election,
Singer gave $1 million to
Trump’s inaugural committee.
Like most other members of the Republican establishment and donor
class, Singer supports tax cuts and most types of deregulation, but is socially
liberal and pro-mass-migration. He also supports an interventionist foreign
policy overseas.
Profiting from People’s
Misery
Carlson slammed Singer’s EMC for buying sovereign debt from
financially distressed countries, calling this “vulture capitalism.” He went on
to rake Singer over the coals because he has “made billions by buying large
stakes in American companies, then firing workers, driving up short-term share
prices, and in some cases taking government bail-outs.”
Carlson then gave the examples of Delphi Automotive and Cabela’s.
Singer bought Delphi, an automotive parts supplier, and took “billions of
dollars” of government bailouts, funded by the taxpayer. Once this happened,
jobs moved overseas, and retiree pensions were cut, with the cost shifted to
taxpayers. In response, Delphi’s stock soared.
Yet for
non-speculative investors in the company, as Greg Palast has
reported, of 29 plants in operation when hedge funds including EMC were buying
Delphi’s debt, only four were still operating in the United States by 2012.
Tens of thousands of workers lost their jobs, while Singer’s hedge fund cashed
out for more than $1 billion.
Then the Fox host told the story of Cabela’s, headquartered in
Sidney, Nebraska. Cabela’s on its own was a healthy and profitable company. But
Singer’s EMC took an 11 percent stake, and then lobbied the company to sell to
a similar firm, Bass Pro Shops. It did.
The stock price surged, and Singer cashed out. But Sidney,
Nebraska was devastated. A town of nearly 7,000 people lost 2,000 jobs almost
overnight. Home values plummeted, keeping people stuck while jobs disappeared.
Carlson says this type of capitalism “creates nothing.” He’s mostly right.
The Problem with
Singer’s Brand of Capitalism
In defense of Singer, activist investors do shake up stodgy boards
and self-serving CEOs. They take a position in a company, and publicly lobby
that company’s C-Suite to do things these “activists” think will increase the
share price. Sometimes that includes splitting up a corporate behemoth that
would function better as smaller entities—when only the current CEO’s pride is
the motivation for the behemoth to continue as is.
Delphi, too,
is a complicated story. The automotive parts company was coming out of
bankruptcy before Singer
bought it. That doesn’t excuse the mass-outsourcing of jobs, or policies that
allowed this to happen even after a taxpayer bailout, but Singer doesn’t face
the sole responsibility for what happened to those jobs.
Yet there’s a dark side to Singer’s brand of capitalism. For
example, the case was surely made that Cabela’s and Bass Pro Shops had
“synergies.” They sell the same stuff, and the stores even look similar. But
the two companies were separately profitable. Now, the combined company has a
ton of debt, and little room to grow profit aside from cutting costs and using
their newly acquired market power to increase prices.
Not only
that, if everything is about shareholder returns, it should be noted that most mergers destroy
shareholder wealth, not build it.
Hedge funds are different than private equity funds, and there are
various types of private equity and hedge fund strategies. Many are totally
benign, and often, private equity actually helps firms start up or recover from
bankruptcy.
But there is
a strain of private equity, known as leveraged buyouts (LBOs), that has been
more destructive. In an LBO, a private equity (PE) firm buys a company. But
that company is too big and expensive to be bought with the PE money alone, so
paying out the existing shareholders requires saddling the company with oodles
of debt. Often, 90 percent of
the acquisition price is funded via debt.
But the PE firm doesn’t owe that debt, the company does, and some
of the debt can even be used to pay the PE firm, and its partners, a dividend.
The PE firm then exits the investment by re-taking the company “public” at what
the PE firm hopes is a higher share price. At this point the PE firm has made
money, and has no ties to the company it used to own, but that company still
has the debt load.
Quite often,
the higher share price after the PE firm exits doesn’t last, and the debt
becomes unbearable. In fact, LBOs increase the
probability of bankruptcy tenfold.
The reason is simple and entirely obvious outside of Wall Street.
It makes sense to lever a firm up if it is growing, and the new capital can
help it reach greater scale. But leverage to pay off the private equity firm or
buy back shares, saddled on a previously profitable company that has a steady
business model and slow growth, is disastrous.
That’s why
there’s a long list of retailers hit
by the debt load left over by private equity’s financial engineering.
Quick-witted people might think of Amazon here, but many of these companies
were profitable with little debt before private equity rushed in. There’s Simmons Bedding Company, Sears, and Toys-R-Us, among
many others. Studies say that private equity-induced leverage has killed
a half-million to more than 1 million retail
jobs in the United States.
And it isn’t
limited to retail. Nursing homes and hospitals also
make the list of firms saddled with debt. The debt didn’t add more buildings,
produce new things, or hire more employees. Instead, it was financial
engineering that paid a select few off, while the whole suffered.
Elizabeth Warren and Ben
Sasse
In the face
of this problem, in has rushed Democrat presidential candidate Sen. Elizabeth
Warren, who wants to impose new rules on
private equity firms, which includes attempting to limit the debt that can be
slapped on a target firm. Policymakers should give these rules a serious look.
But often rules such as these come with unforeseen consequences that harm the
good actors, while bad actors find a workaround.
And while Warren talks about corporate governance reform, there’s
already plenty of talk of “stakeholders” over “shareholders” in America’s
business schools. Already, corporations do plenty that isn’t in shareholders’
interests. But less shareholder power often only means more power to leftwing
special interest groups.
A better
solution than Warren’s plans may be better antitrust
enforcement, and a reform of existing antitrust
law. But it must be stressed that there’s no easy solution to these
problems, and that Singer’s brand of capitalism is only a symptom of
deeper, more systemic problems
in America’s economy, that specifically harm the
working and middle class.
But Carlson is right that blue-collar and Middle America has been
totally ignored by policymakers. At the end of his segment, Carlson said he got
a text from a well-known person in Washington. “Holy smokes, I can’t believe
you are doing this, I’m afraid of Paul Singer,” the text said.
Carlson then asked why Sen. Ben Sasse—an anti-Trump Republican from
Nebraska—has never commented on the destruction of Sidney. Carlson said he got
no response from Sasse, but then noted that during Sasse’s Senate run, “Sasse
received the largest possible donation from Paul Singer.”
It’s time for a change. Right now, the interests of the GOP donor
class are being put above the interests of the American people, and easily 90
percent of GOP voters. That doesn’t mean more government intervention, but it
often means smarter existing government intervention, or a change to intervention
that already exists and benefits one part of the country over the other.
The Dishonest Debate
about Government’s Role
Trade is one
example. For decades policymakers in D.C. have created international
competition for U.S. manufacturing workers, while other sectors of
the U.S. economy have actually been allowed to create more barriers to
competition and become less competitive.
Politicians accuse those who are skeptical of what is currently
called “free trade” of being “economic liberals” and of violating free market
tenets. But today’s system of the fiat dollar as the world’s reserve currency,
and the trade deals that existed before the Trump administration, were huge
government “interventions” that stacked the deck against U.S. manufacturing
jobs. There never was a free market in trade.
Interest
rates are another example. Sure, because of demographics, it makes sense that
nominal interest rates would decline. But there is growing evidence that
decisions made by central bankers affect the “natural rate of interest,” or the
rate at which monetary policy doesn’t cause excessive debt creation or debt
destruction. In other words, policymakers have pushed rates and borrowing costs
lower.
Monetary
policy—which can cause high debt levels and high prices for assets essential to
family life, such as a home, while reducing economic dynamism—can and
does influence demographics.
And ever lower rates, more than central banks would like to admit, are a byproduct of the current
monetary system, and central banks’ rush to bail out markets during
bouts of financial turmoil.
Of course, indebted
Washington, D.C. is dependent on these low rates and continued monetary
interventions to continue the largess of government, which isn’t yet forced to cut
spending because interest rates have yet to rise, in spite of
the large government debt load. Yet nominal rates going lower—along with
negative real, after-inflation rates—has perfectly corresponded with increased
financialization in the economy and increased debt because of the cheaper
borrowing costs to households, firms, and governments.
It’s no
mistake, then, that the rise of the private equity buyout model has been
entirely driven by cheap debt, booming ever
since rates started significantly dropping in the 1990s. In general, hedge
funds and private equity funds—both forms of “alternative investments”—have
taken off as investors have searched for stable but higher returns.
Many of
these investors are the pension funds of teachers, firefighters, and police
officers, who face lower returns on safe government debt and still need to meet
a nominal return benchmark to make due on their lofty
promises. To meet that benchmark, they have invested in alternatives
as a way to increase returns while allegedly not taking on too much risk.
Ironically, private equity LBO firms, and Singer’s hedge fund, count these
pensioners as customers.
Too Many Republicans Are
Asleep at the Wheel
Finally, there’s one more example of how the debate
about government intervention is skewed. Aside from de-industrialization, the
other primary affliction of the working class has been family breakdown. Even
here, politicians have turned a blind eye to existing government
intervention that adds to the crisis—in the form of major
subsidies for nonmarital childbearing and large penalties to marriage in the
welfare system. Too often, it was Republicans who allowed these programs and
their marriage penalties to creep into the middle class.
Instead of fixing penalties to
marriage that can cost a family up to a third of household income, leftwing
pundits have said that the cure for family breakdown is more birth control,
while rightwing pundits have droned on about “culture,” which implicitly blames
the poor and working class for all the problems they face. Both sides are full
of it.
Far too much of the conservative punditry class, and far too many
Republican politicians, have no idea what’s been going on in the country over
the last 50 years. They have hijacked conservatism and turned it into something
that isn’t conservative.
They drone on about tax cuts, and assume the
“little platoons”—families, churches, schools, and community organizations that
are the bedrock of conservatism—are just fine. If they aren’t fine, these idiots
blame the amorphous boogeyman of “culture,” without considering how existing
policies, that they can change, influence the culture.
Love or hate Trump, he
marks only the beginning of the undoing of this type of warped, outdated, and
unconservative way of thinking. The best part of it is that actual conservative
voters don’t need to be convinced. They’ve been real conservatives all along,
and are dying for their “betters” to better reflect the things they care about.
Willis L.
Krumholz is a fellow at Defense Priorities. He holds a JD and MBA degree from
the University of St. Thomas, and works in the financial services industry. The
views expressed are those of the author only. You can follow Willis on
Twitter @WillKrumholz.