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 Krumholz
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.
