The economic recovery, or the lack thereof, is the central topic for the election. Liberals like my colleague E.J. Dionne posit that this is “a distinction between the capitalist we typically honor who comes up with a good product and hires people to make and market it; and another kind who takes over a company, pulls out all the cash he can, and then abandons it to die?” But this is a straw man worthy of President Obama.
As I and many, many others have written, the Newt Gingrich-David Axelrod cartoon bears no resemblance to the particulars of Bain or the private equity markets more generally. It is simplistic and ultimately misleading to suggest that someone comes up with a good product and hires people without any need for investors and ready access to capital.
This leads naturally to the question of how creative the destruction wrought by our current brand of capitalism actually is. Since the dawn of the leveraged buyout era three decades ago, many friends of capitalism have questioned whether loading companies with debt as part of these deals is good for companies and for the economy as a whole.
Does this approach cause unnecessary suffering among the employees of the companies in question and the communities that often lose plants and jobs as a result? Sucking pension and health funds dry to aggrandize investors seems less like a creative act than a betrayal of workers who made bargains with their employers in good faith.
But this “brand” of capitalism is capitalism, and in its undiluted state does create hardship, but nothing in comparison to the amount of suffering inherent in other, less successful economic models. Two points should be kept in mind. First, we don’t have undiluted capitalism precisely because, while capitalism is the greatest wealth-creator the world has ever known (I think Obama even said this), we don’t as a compassionate society want undue suffering in the short term. Hence, we have unemployment insurance and an array of social safety-net programs.
Second, capitalism is unmatched in its ability to lift and keep people out of poverty. (On this topic I would heartily recommend “Wealth and Justice: The Morality of Democratic Capitalism” by Peter Wehner and Arthur Brooks, as well as Brooks’s new book, “The Road to Freedom: How to Win the Fight for Free Enterprise.”) Brooks makes the case succinctly:
More specifically on Bain, The Post editorial board wrote in January:
Private-equity firms recruit investors — individuals, university endowments or pension funds — and use their money to start, restructure or expand businesses whose shares are not publicly traded. Once profits start flowing, the private-equity partners cash out, often by taking the company public. Of course, if the investment goes bust, the partners either lose money or make less than they hoped.
Risking your money on a business idea, and persuading others to join you, is Capitalism 101 . . . .
Mr. Romney and his partners at Bain astutely spotted and nurtured winners, and bet on their share of losers. Of 77 major deals that the firm did under Mr. Romney, 17 either filed for bankruptcy or closed their doors by the end of the eighth year after Bain first invested, according to the Wall Street Journal — a relatively high proportion that partly reflects Bain’s willingness to take on smaller, troubled firms. (Bain responded to the Journal that its figures included companies that went under even after Bain cashed out.) Among the success stories of Mr. Romney’s tenure are Staples and the Sports Authority. Those companies have thousands of employees, who might otherwise have worked at mom-and-pop competitors, or not at all. It’s hard to say how much credit belongs to Mr. Romney — mainly a rainmaker at Bain by his final years — and how much to other investors, or to workers and managers themselves.
A Bain-backed Kansas City steel mill, GS Technologies, went belly-up in 2001, at a cost of 750 jobs; but Steel Dynamics of Fort Wayne, in which Bain invested after more risk-averse financiers balked, is still going strong.
Indeed, the Obama campaign’s crusade against Bain essentially makes Romney’s underlying point: The Obama team either doesn’t understand how the economy works (i.e., it doesn’t grasp the nature of capitalism) or it is simply out to throw mud, recognizing that its own record is indefensible.
Part of the problem with the Bain attacks, as well as the Buffett rule and Obama’s anti-Wall Street rhetoric, is a peculiar, and essentially incorrect view, of wealth. If Bain or the 1 percent are getting rich, as Obama would have us believe, then others are getting poorer or are being defrauded. So, naturally, government must step in to rearrange the slices of the pie. But we know that is not the case. Our economic opportunities are limited only by the impediments that government (taxes, stifling regulation, etc.) and individuals (lack of skills and work ethic) impose.
So yes, we do face a choice: The president wants a bigger and more intrusive government that seeks to do “better” than the market (see Solyndra), while Romney wants the most dynamic economy possible with a social safety net and modest regulation. If that is clearly laid out for the voters, Obama is in big trouble. That pretty much explains why Obama is busy constructing a parade of straw men, doesn’t it?