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NY Times Op-Ed, July 2, 2020
The Neoliberal Looting of America
The private equity industry, which has led to more than 1.3 million job
losses in the last decade, reveals the truth about free markets.
By Mehrsa Baradaran
“It’s hard to separate what’s good for the United States and what’s good
for Bank of America,” said its former chief executive, Ken Lewis, in
2009. That was hardly true at the time, but the current crisis has
revealed that the health of the finance industry and stock market are
completely disconnected from the actual financial health of the American
people. As inequality, unemployment and evictions climb, the Dow Jones
surges right alongside them — one line compounding suffering, the other
compounding returns for investors.
One reason is that an ideological coup quietly transformed our society
over the last 50 years, raising the fortunes of the financial economy —
and its agents like private equity firms — at the expense of the real
economy experienced by most Americans.
The roots of this intellectual takeover can be traced to a backlash
against socialism in Cold War Europe. Austrian School economist
Friedrich A. Hayek was perhaps the most influential leader of that
movement, decrying governments who chased “the mirage of social
justice.” Only free markets can allocate resources fairly and reward
individuals based on what they deserve, reasoned Hayek. The ideology —
known as neoliberalism — was especially potent because it disguised
itself as a neutral statement of economics rather than just another
theory. Only unfettered markets, the theory argued, could ensure justice
and freedom because only the profit motive could dispassionately pick
winners and losers based on their contribution to the economy.
Neoliberalism leapt from economics departments into American politics in
the 1960s, where it fused with conservative anti-communist ideas and
then quickly spread throughout universities, law schools, legislatures
and courts. By the 1980s, neoliberalism was triumphant in policy,
leading to tax cuts, deregulation and privatization of public functions
including schools, pensions and infrastructure. The governing logic held
that corporations could do just about everything better than the
government could. The result, as President Ronald Reagan said, was to
unleash “the magic of the marketplace.”
The magic of the market did in fact turn everything into gold — for
wealthy investors. Neoliberalism led to deregulation in every sector, a
winner-take-all, debt-fueled market and a growing cultural acceptance of
purely profit-driven corporate managers. These conditions were a perfect
breeding ground for the private equity industry, then known as
“leveraged buyout” firms. Such firms took advantage of the new market
for high-yield debt (better known as junk bonds) to buy and break up
American conglomerates, capturing unprecedented wealth in fewer hands.
The private equity industry embodies the neoliberal movement’s values,
while exposing its inherent logic.
Private equity firms use money provided by institutional investors like
pension funds and university endowments to take over and restructure
companies or industries. Private equity touches practically every
sector, from housing to health care to retail. In pursuit of maximum
returns, such firms have squeezed businesses for every last drop of
profit, cutting jobs, pensions and salaries where possible. The
debt-laden buyouts privatize gains when they work, and socialize losses
when they don’t, driving previously healthy firms to bankruptcy and
leaving many others permanently hobbled. The list of private equity’s
victims has grown even longer in the past year, adding J.Crew, Toys ‘R’
Us, Hertz and more.
In the last decade, private equity management has led to approximately
1.3 million job losses due to retail bankruptcies and liquidation.
Beyond the companies directly controlled by private equity, the threat
of being the next takeover target has most likely led other companies to
pre-emptively cut wages and jobs to avoid being the weakest prey. Amid
the outbreak of street protests in June, a satirical headline in The
Onion put it best: “Protesters Criticized For Looting Businesses Without
Forming Private Equity Firm First.” Yet the private equity takeover is
not technically looting because it has been made perfectly legal, and
even encouraged, by policymakers.
According to industry experts, 2019 was one of the most successful years
for private equity to date, with $919 billion in funds raised. The
private equity executives themselves can also garner tremendous riches.
Their standard fee structure involves collecting around 2 percent of the
investor money they manage annually, and then 20 percent of any profits
above an agreed-upon level. This lucrative arrangement also lets them
tap into the very favorable “carried interest” tax loophole, allowing
them to pay much lower capital gains tax rates on their earnings, rather
than normal income taxes like most people.
An examination of the recent history of private equity disproves the
neoliberal myth that profit incentives produce the best outcomes for
society. The passage of time has debunked another such myth: that
deregulating industries would generate more vibrant competition and
benefit consumers. Unregulated market competition actually led to market
consolidation instead. Would-be monopolies squeezed competitors, accrued
political power, lobbied for even more deregulation and ultimately drove
out any rivals, leading inexorably to entrenched political power.
Instead of a thriving market of small-firm competition, free market
ideology led to a few big winners dominating the rest.
The current crisis has revealed that the health of the finance industry
and stock market are disconnected from the actual financial health of
the American people.Credit...George Etheredge for The New York Times
Take the banking sector. For most of American history, banks were
considered a public privilege with duties to promote the “best interest
of the community.” If a bank wanted to merge or grow or offer new
services, the regulators often denied the request either because a
community could lose a bank branch or because the new product was too
risky. During the neoliberal revolution of the 1980s and ’90s, Congress
and bank regulators loosened the rules, allowing a handful of megabanks
to swallow up thousands of small banks.
Today, five banks control nearly half of all bank assets. Fees paid by
low-income Americans have increased, services have been curtailed and
many low-income communities have lost their only bank. When federally
subsidized banks left low-income communities, vulture-like fringe
lenders — payday, title, tax-refund lenders — filled the void. As it
turns out, private equity firms are invested in some of the largest
payday lenders in the country.
Faith in market magic was so entrenched that even the 2008 financial
crisis did not fully expose the myth: We witnessed the federal
government pick up all the risks that markets could not manage and
Congress and the Federal Reserve save the banking sector ostensibly on
behalf of the people. Neoliberal deregulation was premised on the theory
that the invisible hand of the market would discipline risky banks
without the need for government oversight. Even a former Fed chairman,
Alan Greenspan, the most committed free market fundamentalist of the
era, admitted in the understatement of the century, that “I made a mistake.”
We can start fixing the big flaws propagated over the last half century
by taxing the largest fortunes, breaking up large banks and imposing
market rules that prohibit the predatory behaviors of private equity firms.
Public markets can take over the places that private markets have failed
to adequately serve. Federal or state agencies can provide essential
services like banking, health care, internet access, transportation and
housing at cost through a public option. Historically, road maintenance,
mail delivery, police and other services are not left to the market, but
provided directly by the government. Private markets can still compete,
but basic services are guaranteed to everyone.
And we can move beyond the myths of neoliberalism that have led us here.
We can have competitive and prosperous markets, but our focus should be
on ensuring human dignity, thriving families and healthy communities.
When those are in conflict, we should choose flourishing communities
over profits.
Mehrsa Baradaran (@MehrsaBaradaran) is a professor of law at the
University of California, Irvine, and author of “The Color of Money:
Black Banks and the Racial Wealth Gap.”
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