The Curmudgeon's Attic

The seven fat years of the eighties (roughly 1983-1989) have been attributed to a number of causes.  I think Henninger is the first to assert that it was private equity firms, such as Mitt Romney’s Bain Capital, that carried the water, from the WSJ article posted January 18, 2012:

Read through S&P’s justification for last week’s downgrades of nine European countries. Along with the expected dumping on those countries’ fiscal profligacy, one finds as well a blunt recognition of Europe’s moribund “fundamentals,” meaning their ability to produce “strong and consistent” economic growth.

If not for Bain Capital and the other, bigger players who commenced a decade of leveraged buyouts and hostile takeovers in the 1980s, the odds are that the U.S.’s “fundamentals” would be similarly weak. Instead, the U.S. corporate sector remade itself during the Bain years.

Private equity was an effect, not a cause of the eighties boom.  There were several causes that coalesced at approximately the right time to make for rising economic fortunes. 

First and foremost, as is almost always the case with periods of rapid economic expansion, the eighties witnessed a revolution in productive efficiency.  The eighties ushered in the first mainstream application of the ongoing information technology revolution–the personal computer.  Productivity soared.

Next, Presidents Carter and Reagan led the charge at the turn of the decade to deregulation of a number of industries, particularly in the transportation sector (trucking, airlines, railways) and banking and finance.  Costs declined, consumption expanded, economic growth obtained.

Next, the baby-boomer hippies of the sixties and seventies finally reached their productive, consumptive years, fueling booms in the housing and automobile markets, along with a compelling democratization of the investment class.  Everyone bought houses, Beamers and stocks. 

Last, Fed Chairman Tall Paul Volcker restored the dollar’s usefulness as a medium of exchange and temporary store of value by his draconian tight money policies, taming the dollar’s hangover from the excesses of the late sixties, Nixon’s abandonment of the gold standard in 1971, and two oil shocks during the mid and latter seventies. 

Henninger claims that firms like Bain Capital in the eighties, and the creatively destructive capitalism they represent, explain the difference with America’s still more or less vibrant economy and Europe’s gathering irrelevance.  There’s an alternative explanation for Europe’s stagnation relative to the US that has nothing to do with private equity capitalism.  Try this–the median age of the European Union is over forty, with the population of 20 of the 27 countries at or, in some cases (Germany, Italy, Greece), well above, the mark.  The median age in the US is right at 37, which is old and rapidly increasing, but still, it’s hardly the level of the EU, yet.  The population growth rate in the EU is nil, at roughly 0.098% per year.  The US population growth rate is far higher, almost a full percent per year.  The fertility rate in the EU is roughly 1.5 children per female, not even enough to replace the existing population as it grows old and dies.  In the US, the rate is right at replacement, 2.1 children born per female.  (Demographic information is derived from the CIA World Factbook.)  All the creatively destructive capitalism in the world won’t rescue Europe from stagnation and ultimate irrelevance if it does not start producing more children.

Henninger is correct that private equity played a role in America’s resurgently competitive economy, but it was minor, and mostly just along for the ride caused by its young, vibrant population coming of consumptive and productive age and discovering new ways of doing old things, a process that was helped by Presidents Carter and Reagan in their removal of structural governmental impediments (regulations, mainly) to economic activity, and the return of a sound and stable currency regime by the Fed. 

Private equity simply made hay while the sun shined.