You know what’s worse than the government wasting money? That money not getting spent at all.

Private equity firms are sitting on some $1 trillion in “dry powder,” or uninvested capital from previous fundraising rounds. Like cash-heavy companies in the corporate world, the firms are hoarding more cash, partly because they’re having trouble finding worthy investments amid economic uncertainty and a dearth of cheap debt that helped juice returns in the pre-crisis days. It’s also taking longer for PE firms to exit their investments, as M&A and IPO activity remains choppy. Thus, many PE investors are locked into funds that sit on a large share of their cash and charge them a hefty management fee—usually 2% of assets per year—for the privilege.

It’s not like these funds should be somehow “required” by society to spend this money. That’s obviously ridiculous. They are supposed to be finding investments that will generate a positive return, and they don’t feel confident they can do that, so they are sitting on the money, and sucking out 2% management fees until they have to give it back. From a financial self-preservation perspective, that makes sense (from an efficient distribution of growth capital, not so much). 

Here’s the real takeaway, though. We must stop telling ourselves that capital, in private hands, and regulated solely by profit incentives, inevitably leads to growth. In the right environment, maybe it does. Combined with sufficient broad, non-profit motivated public investment (grants, university research, public works), I’m almost certain it does. You’d never want to strangle out private investment given it’s track record in society. 

And yet… that’s exactly what we’re doing with public investment. Constantly reducing public spending — especially outside of defense — to the bone, and cutting high end tax rates, puts a staggering amount of potential growth capital in the hands of a relatively small number of groups that are looking for pure financial returns. In general — and this is now from significant personal experience, so I’m not just pulling this out of a bong with a Che Guevara sticker on it or anything — these people aren’t creative. They aren’t imaginative. They don’t can’t about solving problems. They are frightened by and largely hostile to change, new pricing models, new markets, and new ideas. In other words, they are bad entrepreneurs. 

You know the story about the determined, self-made billionaire, who mortgaged his house and maxed out all his credit cards because he believed in his business, and that’s what it took to make his enterprise successful? I know it, because that’s what every investor seems to want. And you know what? That’s exactly the opposite of how a giant private equity firm thinks. They would never take those risks, because they’re too big, and have too much to lose. 

This is why trickle-down economics, at the scale we’ve applied it, doesn’t work. It requires us to pretend that the very, very rich — both individuals, and companies/funds/etc. — are similar economic actors to regular people, and that they’ll behave in a similar way. For instance, a thriving middle class is full of people who spend most of their money, and save a little bit, creating enormous opportunity for poorer people to create businesses based on that spent money. 

But that’s what someone making $75k does. That’s not what someone sitting on $100 million, or $1 billion, or $100 billion, does. They can do basically anything they want with a small percentage of what they have; they’re simply less dynamic than a large group of diverse minds working with that same block of capital. 

We’ve all been conditioned over the last thirty years — myself included — to believe in the dynamism of unregulated, private capital, as if it was a monolithic concept of the universe that simply “worked” on it’s own, once it was uncorked, like nuclear fusion or something. It’s not. Again, at scale, It’s a small number of extremely comfortable people looking to make safe returns without overturning the apple cart. You’re not going to the moon in the 1960s on the backs of private equity, not because it’s impossible, but because private equity never would have done it. 

People talk about the government as “the lender of last resort”. in fact, the government’s willingness — even tendency — to lose money on things is increasingly making it the venture capitalist of last resort. And we’ve undercut it’s ability to do that. 

As a society, we really, really have to stop fighting the fights from the 60’s and 70’s. Our inability to think outside of that box is why I can sit here and propose vital, life-saving reforms to private, capitalist innovation and be immediately dismissed as peddling “socialism”. 

You’re doing it right now, aren’t you?