Newt Gingrich’s comeback victory against Mitt Romney in South Carolina can be attributed to many things — Newt’s debate performances, Mitt’s tax returns, etc. But it all started when Newt Gingrich and Rick Perry tore into Mitt Romney’s involvement in Bain Capital. Romney’s main response to the Gingrich-Perry critique has been that it’s “kind of strange” to have to defend his private-sector record to Republican competitors. If Romney is to recover from his loss in the Palmetto State, however, he’s going to have to do a lot better than that. He’s going to have to defend his record as a private-equity investor specifically and substantively.
There is no better place to start than with Bain Capital’s investments in South Carolina. It was there, after all, that Romney’s opponents portrayed him as a “vulture capitalist” who “looted” working-class livelihoods in a greedy quest for profit. Indeed, two Bain Capital–owned plants in South Carolina, a steel mill in Georgetown and a photo-album factory in Gaffney, ultimately closed down, resulting in several hundred layoffs. “If you’re a victim of Bain Capital’s downsizing,” said Rick Perry last week, “it’s the ultimate insult for Mitt Romney to come to South Carolina and tell you he feels your pain, because he caused it.”
But a review of what actually happened in South Carolina tells a different story. And that different story is quite representative of how private-equity investors helped bring global competitiveness to much of American industry.
Let’s start with Georgetown Steel, Bain’s South Carolina foray into the steel industry. The story of steel starts over a century ago. Steel production had been one of the great engines of American industrial growth in the late 19th and early 20th centuries. U.S. Steel, founded in 1901 as a consolidation of several mid-sized manufacturers, quickly became the largest producer of steel in the world, and was the first corporation in history with a market capitalization of more than $1 billion.
In the aftermath of the New Deal, however, labor unions began to flex their muscles. In 1959, the United Steelworkers of America launched a devastating nationwide strike that shut down 85 percent of all U.S. steel production for four months. As a result of the effects that the strike was having on the national economy, and even on the nation’s military capabilities, President Eisenhower invoked the Taft-Hartley Act, and forced the union to end the strike.
While Eisenhower’s move appeared to be a setback for union power, unions were able to extract significant concessions from the steel industry, such as automatic annual wage increases and new pension and health benefits. This outcome was to have long-term consequences for steel manufacturing in the United States.
Beginning in 1959, American consumers of steel, such as the automakers, resolved to become less vulnerable to future disruptions in their supply of raw materials. For the first time, they began importing steel from abroad in significant quantities. They found that steel from emerging economies like Japan and South Korea was just as good as American steel, but much cheaper.
By the 1970s, the American steel industry was hemorrhaging business to foreign competitors. Manufacturers compensated by laying off workers, but this created a new problem. Experiencing the same dynamic that federal entitlements do today, manufacturers were faced with a growing number of retirees’ bloated pension costs and benefits, which they were funding with output from a shrinking number of active workers.
The Carter administration, aiming to prop up the industry, gave $300 million in loan guarantees to five steel companies. (Ironically, the largest recipient of Carter bailout funds, Wisconsin Steel, went bankrupt soon after due to a labor strike at one of their main customers.)
Successive presidents also tried, and failed, to prop up the steel industry. Ronald Reagan imposed quotas on imported steel. Bill Clinton provided $1 billion in loan guarantees to the industry. George W. Bush enacted tariffs on foreign steel. None of it worked. Over a seven-year period in the 1990s, more than 40 U.S. steel manufacturers went belly-up. Nearly all were union shops.