Romney & Bain: Intention versus Method
Yuval, Avik Roy, Ramesh, Michael Walsh and Jonathan Last at The Weekly Standard, among many others, have all written perceptively about the relationship between Mitt Romney’s work at Bain Capital and our political economy.
I think that this paragraph from Jonathan Last gets to the nub of the issue:
Romney’s work at Bain differs in some important ways from how he has characterized it thus far. When Romney says that his goal at Bain was to “create jobs,” that’s not entirely true. As a private equity firm, Bain’s goal was to maximize return on investment (ROI) for a small group of high net worth investors. Sometimes that meant giving seed money to a promising start-up. Sometimes it meant rescuing a company and turning it around. Sometimes it meant finding revenue streams a company hadn’t realized—including government bailouts. Sometimes it meant off-shoring a company’s jobs. And sometimes it meant finding a company whose component parts were worth more than the whole—and dismantling it.
Without respect to the electoral politics and messaging for a moment, the predominant form of “bad” capitalism in contemporary America is created by the joining of a capitalist enterprise with the coercive power of the state, not by the impurity of the motivations of the capitalist. This distinction is crucial for defenders of free enterprise.
This perversion of capitalism normally arises in one of two ways: (1) the crony capitalism of state-backed enterprises, or (2) the implicit violence of lawbreaking by dishonest capitalists. The root problems that need to be addressed in finance in the U.S. are things like Fannie / Freddie, too-big-to-fail, government bailouts of specific companies and so forth, on one side, and Madoff-type scandals, on the other. No real political economy is ever textbook-pure, so there will always be some of both of these, but they ought to be reduced from their current levels.
But requiring that businesspeople make decisions based on some putative idea of altruism, even if such a stricture could be defined and enforced, would be a terrible idea. Capitalists should not be restricted as to intention, but as to method. As a rough-and-ready rule, they should be forbidden from using force. The government may also choose to place additional regulations on them (weights and measures rules, minimum wage laws, non-discrimination laws, etc.). While any given regulation is debatable, some formal regulation is required for real markets, and capitalists should have to obey the law. Further, real markets depend to some extent on informal norms – e.g., general commercial honesty, an ethic of a “deal’s a deal,” and so on. This last point can obviously get somewhat fuzzy, but is still important.
Within these constraints, we should generally want capitalists to pursue their self-interest in business dealings. This is not some falling short of humanity, but the way we grow the material wealth of the society as a whole over time. This is the meaning of Adam Smith’s famous aphorism that:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own neccessities but of their advantages.
The valid criticism of Romney as a capitalist would be that he worked government angles to seek advantage for himself, or broke laws or crucial norms. Seeking to make more money within the rules is a good thing, not a bad thing, for a capitalist to do. That is, Romney’s immediate goal was almost certainly to make money, not to “create jobs.” But the effect of Romney’s actions was to do this – though most of these jobs were created indirectly. This is Adam Smith’s famous “invisible hand.”
Romney was working to “create jobs” only in the sense that if you believe in this, you can have confidence that you are doing your part to increase overall material well-being of society by acting as a self-interested capitalist. More precisely, if all capitalists act this way, then over time, society will advance materially. Tracking your indivudal contribution, or even knowing if it was positive or negative, is a fool’s errand. This is why the very act of trying to count the jobs created at Staples, assessing how many would have been created had Mitt Romney not agreed to take the job running Bain Capital instead of somebody else, estimating how many of these Staples jobs need to be netted against other jobs that therefore were not created at other business supply stores, and so forth is so self-defeating. If we could accurately calculate things like that, we would have much less need for markets in the first place.
The key argument made by critics of “financial capitalism” that can be construed as consistent with all of this relates to the idea of informal norms. In simplified and illustrative terms, this argument would be that by doing something like breaking a norm against laying people off after age 50, these firms create value for themselves, but at the expense of the long-term degradation of society, and therefore the transfer of wealth from almost everyone else to themselves. This is a huge subject that will not be resolved in a blog post, but the key problems that critics of leveraged buyouts seem to point to are layoffs and moving production offshore. Restraining business from doing either of these things is a terrible idea for long-run wealth (and job) creation, and goes to the heart of the creative destruction inherent to real free enterprise.
Obviously there are shades of gray, and as I said all markets require regulation, but we need to be grown-ups about the choices we face. Enjoying the growing wealth created by free markets without the pain, uncertainty and risk that they involve is a fairy tale for an advanced economy.
To end with a word on the politics, I agree with Yuval that this implies that Romney’s work at Bain is only a partial preparation for high political office. On one hand, it would presumably help him to see the economy in a more practical light; but on the other, participating in a capitalist economy is a very different task than regulating it. I have no idea how the politics of this will play out, what is the best way for a Romney campaign to communicate these ideas, or even if they should be communicated at all. But I am convinced that “de-politicizing” our now much politicized economy is very important for America’s future growth and prosperity.
(Cross-posted to The Corner)
When Romney stops trying to cast himself as a “job-creator”, I’ll agree that his opponents should take a more nuanced view of his time and role at Bain.
But there are some broader issues here. One is the disproportionate role the financial industry has come to play in our economy. The other is that conservatives as a whole give no indication that they’ve learned anything about economics from the last 4 years. Hell, conservatives as a whole give no sign they’ve learned anything about economics from the last 30 years.
Mike
— MBunge · Jan 11, 04:29 PM · #
In broad strokes, I agree, but I think there’s an important space between points 1 and 2 which is particularly relevant to finance capitalism, and that isn’t perfectly captured by the picture you present.
A primary concern of regulation generally is to prevent the socialization of risks and costs and the privatization of profits. Thus, we regulate air pollution because only a fraction of the costs of pollution are born by the polluter; most are born by the public. So in the absence of regulation, there’s an incentive to harm the public if increasing pollution would be profitable for a given firm. The debate we then get into is over how much cost in terms of reduced economic activity is it worth to reduce the pollution (which, of course, has economic costs as well), what the optimally efficient design of a regulation might be, what are the prospects for regulatory capture, and so forth.
With finance, though, risk to the financial system itself is inherently socialized; no government is ever going to let the financial system itself go under. And everybody in the market knows this. It might (or might not) be possible to address “too big to fail” with respect to any single firm with some kind of limit on total assets or something, but not with respect to the system as a whole, and so long as individual banks follow one another lemming-like off one cliff after another (which they do with metronomic reliability), the system as a whole remains vulnerable.
Regulation is intended to prevent financial firms from doing things that would put the system as a whole at risk. But the financial crisis made me far less confident than I once had been that the regulators – here and abroad – both know how to do that reliably and can be trusted to act on that knowledge with sufficient alacrity sufficiently far in advance. And in the aftermath of the financial crisis, the government is far more deeply implicated in the specific actions of the major banks than it has ever been, without really having imposed a new regulatory framework.
It’s a tough problem. I would love to wind down the cozy relationship between banks and the government that the aftermath of the financial crisis has only entrenched more deeply than before. I’m just not terribly sure how to do it.
None of which is terribly relevant to what Mitt Romney did when he was at Bain, and your points on that are entirely valid. All I’d add is that a major issue facing America today is getting regulation of the financial system right, and I don’t think Romney’s experience at Bain is actually going to serve him terribly well in thinking about that problem. (On the other hand, guys with extremely relevant experience are the ones responsible for getting us into this mess.)
— Noah Millman · Jan 11, 04:47 PM · #
“Seeking to make more money within the rules is a good thing, not a bad thing, for a capitalist to do. That is, Romney’s immediate goal was almost certainly to make money, not to “create jobs.” But the effect of Romney’s actions was to do this – though most of these jobs were created indirectly. This is Adam Smith’s famous “invisible hand.””
I think we’re selling free enterprise short if we suggest that its participants are motivated primarily by money. The most successful businesses are driven by more motivating missions. Without an powerful ethos, you don’t have a corporate culture to drive improved performance. You don’t have people working late hours to pursue projects they are passionate about — they just turn up and reluctantly do the minimal strictly necessary to avoid being fired.
Google seeks to make the world easy to search, Apple sought to make computers attractive and accessible, WalMart seeks to deliver groceries at very low cost.
If the entrepreneurs behind them were motivated primarily by lust for money and a desire to enjoy it, then Brin and Page would have cashed out and retired the day after their IPO. Steve Jobs would have been less exacting. Sam Walton wouldn’t have insisted on staying at the Days Inn.
It’s the same for Bain Capital. I’m sure Romney didn’t put in the hours because he truly needed $500m instead of $400m. I’m sure it was because he thought he was performing a valuable service. The notion that he was working to turn failing companies into successful ones, probably was what got him out of bed in the morning.
It’s unfair to characterize the value of free enterprise as about an invisible hand. The butcher, the baker, and the brewer, are very visible hands — that, while not entirely self-abnegating — are motivated as much by the pride in producing good products, as they are by the bottom line.
The signalling function of prices is to work as a constraint, not as a lodestar. It’s good for entrepreneurs to be forced to quit businesses that use up more resources than they create, but we want them to be motivated by passion for their work, too. That’s why people rightly complain when talented artists “sell out” — when they stop doing what they excel at, purely because there is more money elsewhere.
— Chris · Jan 11, 04:56 PM · #
What MBunge said above. If I ran for county prosecutor arguing that from my decades of legal practice, I know how to keep criminals locked up, it would be entirely fair game for someone to point out that I was actually a criminal defense attorney — notwithstanding the fact that criminal defense work, ethically conducted, is entirely honorable work and an important part of our criminal justice system.
— alkali · Jan 11, 05:30 PM · #
“But requiring that businesspeople make decisions based on some putative idea of altruism, even if such a stricture could be defined and enforced, would be a terrible idea.”
Certainly we cannot require this from all businesspeople, but I’m not sure why we can’t require it from the ones who want to be president.
I don’t think anyone is suggesting that Romeny should be prosecuted for his business practices – the suggestion is that the kind of man who has no qualms about buying a company and stripping it for its assets at the expense of the people who depend on it for their livelihoods is not the kind of man we want to run the country.
— Yariv · Jan 11, 05:51 PM · #
Mike,
I haven’t made a careful study of Romney’s claims, and tried to emphasize that I am very far from expert about how to manage the electoral politics of it.
Noah,
I agree strongly on the specific needs for financial regulation that flow from the (sensible, in my view) government controls and supports on parts of the finance system. I didn’t want to get into it in detail in this already long post, and consider it a subset of the “need for regulation” point I made.
Chris,
That’s a fair point. I thought about ways to word this more precisely to account for this, but the semantics became incredibly involved, and I didn’t think affected the basic point. The other quick comment is that I’ve worked with a lot of private equity guys (not including Mitt Romney), and I have found them to be very, very motivated by money.
alkali,
It’s a fair point, and as I said to Mike, I wasn’t really trying to describe the electoral politics as much as trying to establish a criterion for “bad” vs. “good” capitalism.
yariv,
I tried to make the point at the end that what you do as a successful businessperson isn’t necessarily a lot like what you do as a successful national public official. That said, if you believe that “stripping the assets” etc., in less loaded language, actually drives long-term economic growth and job creation, then I don’t see them as morally incompatible at all.
Best,
Jim
— Jim Manzi · Jan 11, 06:08 PM · #
It seems to me that at least part of the “bad” capitalism problem is our inability to distinguish between capitalism v. crony capitalism and capitalism v. healthy democratic society. The concepts overlap (and, in the latter case, can be complementary), but they are not the same.
This is not just a “current” problem. A generation ago, it was “What’s good for GE is good for America” and today we’ve replaced Wall Street with GE. And before GE, maybe it was the robber barons.
I am skeptical that Romney would be the one to recognize the difference between the country’s interests vs. those of the business and finance industries. Experience in such professions has all too often meant privileging their interests (in taxes, regs, etc.) over average citizens’ interests.
— AK · Jan 11, 08:27 PM · #
Can we get rid of the silly phrase ‘job-creator’ altogether? I think it’s deeply misleading, if not ideological nonsense.
— matt · Jan 11, 10:08 PM · #
I think some things venture capitalist do to make money are both (apparently) within the rules and unethical. When you buy a company with borrowed money and then borrow more money using that company as collateral and then pay yourself that money and meanwhile the company goes bankrupt under the burden of all the new debts (I don’t even know what happens to the original loan used to buy the company in the first place), then you have definitely violated a number of “social norms.” I just heard on the radio today that four of Bains top 10 investments went bankrupt in this type of situation.
— cw · Jan 12, 07:00 AM · #
Actually, I just figured out what happens to the original loan in the above example. The VC borrow money to buy the company, then have that company borrow twice as much again using the company assets for collateral, pay off the original loan and pay themselves the remainder, leaving the company with unsustainable debts. This happened fairly often corporate raider era.
— cw · Jan 12, 07:05 AM · #
I also think it’s fair that, no matter how wonderful Bain may or may not have been, Romney be questioned about the whole industry of which Bain is a part. It has a somewhat checkered history and whether Romney can distinguish between “good” and “bad” capitalism is not only important but entirely relevent to his political argument.
Mike
— MBunge · Jan 12, 04:29 PM · #
Jim says that along with the overriding ethos of maximizing profits there are informal norms. But the list of informal norms seems pretty short (and laying people off over 50 off is definitely not one of them). Take pollution for example. There should be informal norms about not making your neighbor’s water unfit to drink and their air poisonous, but there isn’t. Business fights tooth and nail for it’s right to destroy it’s neighbor’s natural resources. They send millions in court and in lobbying. And there are all kinds of other examples. Cigarettes. Child labor. Unionization.
I don’t think there are hardly any informal norms that temper profit maximizing behavior. Free market culture has always been in conflict with the health and well being of society. It has always been rapacious, causing great damage to society, and the only thing that has made free market culture less rapacious is government regulation. I definitely agree that businesses create wealth and value that is shared with everyone through goods and jobs. And I agree that there has sometimes to be some kind of trade off. Some environmental degradation in exchange for jobs and goods, for example. But free market culture does not agree that there needs to be a trade off. As it is, (and always has been) the ethos of business is get all you can get, regardless of everyone else. If free market ethos included some level of altruism or even simple human consideration, then we would not need so many costly regulations and our society would be healthier in many ways.
So I am saying, contra to JM, that businesses are rightly criticized for lacking altruism, that their ethos of maximizing profits before all else is a moral failing which is harmful to society. Maybe it is a failing that is so central to humanity that it cannot be weeded out of society. But if you want to argue that, then you can’t complain about regulation. If your only ethos is maximizing profits above all else, then government regulation has to be maximized as well.
— cw · Jan 12, 06:22 PM · #
contra to JM, that businesses are rightly criticized for lacking altruism, that their ethos of maximizing profits before all else is a moral failing which is harmful to society.
— kindle fire converter for mac · Jan 13, 10:03 AM · #
I’m not sure the “free market culture” cw is describing is actually the same as mainstream modern corporate culture. Lots of private sector firms love to go on both internally and externally about how good they are for the environment, and while these are undoubtedly self-serving, they also reflect a real self-conception. Because of the American culture war, there are exceptions who gear themselves towards a red-state version of what constitutes doing good. But those companies also talk a lot about their charitable works and what they are doing for the community.
In other words, most real-world capitalism involves something other than an ethos of maximizing profits above all else. Of course, it is a constraint for all private firms and is part of the ethos, but it is rarely all of the ethos.
One of the things that makes Romney somewhat vulnerable is that private-equity firms are much closer to a “profit uber alles” than the firms most voters work for.
— Pithlord · Jan 13, 09:57 PM · #
“Lots of private sector firms love to go on both internally and externally about how good they are for the environment, and while these are undoubtedly self-serving, they also reflect a real self-conception.”
I see those ads on tv too. How Chevron is a “green” corporation. I think there may be some companies that are actually trying to be more “green” or to “give back to the community” or “innovate for a brighter tomorrow” and I salute these companies. This is an example of the altruism that I called for. But I think most of it is just public relations designed to maximize profits.
I think small businesses actually include some form of altruism in their business decisions. One reason is becasue the owners are often in direct contact with the employees and the nieghbors. It’s harder to lay someone off that you see face to face every day or dump solvents into the creek that flows into the lake you live next to. But I think that most large companies opperate under the profits before all else ethos. One reason is becasue it is easier for the people that make all the decisions to believe in creative destruction becasue they are not in contact with employees or neighborhoods that get destroyed, but also becasue this is what they have been taught. This is the accepted ethos, as Jim has implied in his post. The history of industrial pollution and it’s regulation or the tobacco industry are perfect and clear examples of the ethos that companies are operating under. There are many others. And as Jim says, in free market culture this is how it is supposed to be.
I also want to emphisis that I am not against corporations or the free market. I just think they should take more responsibility for social good. It should be a factor in their decision making, instead of something to be rationalized away behind some self-serving dogma they were taught in business school.
For instance, you are a CEO making 20 million dollars a year. You can get something done offshore and save a a couple million a year at the cost of laying off 30 people. If it’s profits above all else, including your own personal profits, then you go ahead a do it. But if have a little altruistic balance in there, and you care a little bit about your employees and they business they support in their community and the fabric of american society which is more or less based on having a healthy middle class, you might decide that a million less in profits is worth it. Or, fulfilling your duty to your stock holders, you try to find cuts elsewhere. Or (and I know this is the most absurd thing I have written yet) you and and a few other executives take a tiny pay cut.
— cw · Jan 13, 11:06 PM · #