Capitalism needs capital


Michael K. McMahan

Tucked away in the massive $ 3.5 trillion budget proposal currently pending in the United States House and Senate is a provision that prohibits the investment of pension plan assets, including IRAs, in private companies. Of the many provisions in this law that will kill jobs, this will prove to be one of the worst.

Most politicians have little experience owning and managing private businesses. These are usually lawyers or government administrators in one way or another. What they know about private businesses, they learn from those who contribute to their campaigns or from occasional engagement with business owners and not through day-to-day work with clients and payroll.

Decisions that direct less capital to the private economy will result in slower economic growth and fewer jobs. I know this because I have spent a career managing investments, especially small business investments.

Of the five private equity funds that I have managed over the past 15 years, about a third of private equity comes from IRAs. The owners of these accounts are not titans of the industry. They are teachers, small business owners, factory workers, pastors, doctors, farmers and other ordinary citizens. They can have tens of thousands of dollars in an IRA to provide additional income in retirement; or, they may have a few hundred thousand dollars resulting from a rollover of a company pension plan such as a 401 (k).

These are important assets for these ordinary Americans. Investing some of that money in small businesses boosts the US economy and can lead to increased return on investment for the IRA owner. The money these investors provide is for inventory and sales and shipping and wages and salaries. This is often critical capital that prevents layoffs during lean times and provides the fuel for expansion in better days.

It is understandable that few politicians understand the importance of this dynamic. Political jobs are funded by taxpayers who have no choice but to participate. The experience of the political class is to live on other people’s money and not on their own.

The government is not creating jobs. Let me repeat that. The government is not creating jobs. Jobs are created in the private sector by combining capital, initiative, risk and work. Take away or reduce the amount of capital available for investment and no initiative, risk or job will create jobs.

Another way to put it is to say that we are capitalists. Capitalism without capital is like baseball without baseballs. Nothing is happening. I know this because I have managed private equity funds for many years. I also played baseball.

Does being a private equity manager make me biased? May be. But the wealth that I helped create does not come entirely to me. In fact, it comes little to me and my associates.

It is primarily the responsibility of the owners and workers of the companies we sponsor. It also sometimes benefits investors who provide the money needed to move businesses forward. Much of this comes from the retirement assets these investors have accumulated. Remove that source of funding and the economy will suffer.

Passing the $ 3.5 trillion tax and spending bill that many support in the halls of Congress will be a big mistake for the economy and especially for working people. It will be a big blow to small businesses. Sometimes doing nothing is better than doing something. In this case, doing nothing is by far the best choice.

Michael K. McMahan is a resident of Gastonia.


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