Voice for Business

Is private equity a good thing for the economy? Is it an institution that, as its supporters claim, promotes value-optimizing change, creates jobs, and encourages innovation and entrepreneurial risk-taking? Or are the critics correct that private equity is merely a game of “trading ownership claims,” as Vanderbilt law professor Margaret Blair has suggested, in which the deal makers themselves may be enriched, but only at the expense of the rest of society? In this two-part essay, I will examine the nature and role of private equity in a modern capital-using economy.

As the 2008 fiscal year dawns, the United States continues to stand astride the global economy. In spite of the housing slump and recent gyrations in the mortgage market, U.S. financial assets are approaching a record high of $50 trillion, having grown by about 15 percent in the last year, according to the McKinsey Global Institute. Government figures indicate that real GDP—the primary measure of inflation-adjusted national output—will reach a record of roughly $13.7 trillion this year, with the unemployment rate hovering around 4.7 percent. (In the Eurozone, total unemployment is about 7.2 percent.) America’s federal budget deficit has dropped all the way down to 1.15 percent of GDP, compared to the post-1970 annual average of 2.3 percent.

As Brian Wesbury, chief economist at First Trust Advisors, points out, recent years have brought war, rising international tensions, spiraling oil prices combined with uncertain supplies, and unpredictable budget shocks such as Hurricane Katrina—and yet the underlying resiliency of the U.S. economy remains a wonder to behold. We have witnessed record gains for the Dow Jones Industrial Average, U.S. exports, industrial production, real hourly compensation, corporate profits, federal tax revenues, retail sales, productivity, employment, university enrollment, and even airline passenger traffic.

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