Our Hollow Economy

topic posted Tue, April 13, 2010 - 2:02 PM by 
AFL-CIO President Richard Trumka:

For a generation, our intellectual culture has suggested that in the new global age, work is something someone else does. Someone we never met far away in an export processing zone will make our clothes, immigrants with no rights in our political process or workplaces will cook our food and clean our clothes.

And for the lucky top 10 percent of our society, that has been the reality of globalization — everything got cheaper and easier.

But for the rest of the country, economic reality has been something entirely different. It has meant trying to hold on to a good job in a grim game of musical chairs where every time the music stopped, there were fewer good jobs and more people trying to get and keep one. Over the past decade, we lost more than 5 million manufacturing jobs — a million of them professional and design jobs. We lost 20 percent of our aerospace manufacturing jobs. We're losing high-tech jobs — the jobs we were supposed to keep. [...]

The fact is that for a generation we have built our economy on a lie — that we can have a low-wage, high-consumption society and paper over the contradiction with cheap credit funded by our foreign trading partners and financial sector profits made by taking a cut of the flow of cheap credit.

The Simmons Bedding Company, manufacturer of the famous Beautyrest mattresses, has finally been flipped one time too many. This story carries an important message for financial reform, now under consideration in the U.S. Senate.

Sold seven times in 20 years from one private investment firm to another, last fall the 133-year-old company filed for bankruptcy and laid off 1,000 workers. Simmons is a textbook example of a dangerous trend in which brand-name companies are turned into gambling chips by leveraged buyout ("private equity") dealmakers. And it's a prime example of why the Senate must directly challenge private equity's wealth extraction business model in order to rein in the casino economy.

Private-equity funds are leveraged private pools of capital that benefit from extensive tax subsidies. They are unregulated and shrouded in secrecy, and they extract big profits while the companies, their employees and many of their investors lose. In the Simmons case, the leveraged buyout firm that brought the company to bankruptcy walked away with $77 million in profits on top of hundreds of millions of dollars in special dividends. The Wall Street investment banks that arranged the deals pulled down big money, too. Meanwhile, a thousand employees lost their livelihoods, the company's bondholders lost more than $500 million, and a value-creating American company was in effect pawned for cash.

Simmons is hardly the exception. Linens 'n Things, KB Toys and Mervyns are all brand-name companies that went bankrupt because they could not keep up with the debt burdens that resulted from leveraged buyouts. In fact, of the 163 nonfinancial companies that went bankrupt last year, nearly half were backed by leveraged buyout firms.

The people in Washington who are supposed to be looking out for our interests seem to have forgotten two important facts:

* Workers are consumers, you can't impoverish the one and expect and expect the other to flourish.

* Speculation is not investment. Credit default swaps do not provide employment nor expand the economy.
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