Re: Romney and Bain

by Avik Roy

Yuval and Ramesh link to the Jonathan Last post on Romney and Bain. Michael Walsh also weighs in with some thoughts. The basic gist of the counterargument is, as Yuval puts it,

But it has revealed two problems that conservatives who have risen to Romney’s defense and the Romney team itself will need to address. The former have too easily treated finance as the entirety of capitalism, and so have needlessly made both the defense of finance and the defense of capitalism more difficult. And the latter have too easily treated Romney’s Bain experience as the entirety of the case for his election, and so have needlessly made both the case for Romney’s Wall Street work and the case for his candidacy harder.

I attempted in my NRO piece to do just that: to explain why private equity-driven corporate turnarounds do, indeed, represent the best of capitalism. To take failing businesses on the verge of bankruptcy, and reorganize them into thriving, growing enterprises is a difficult task that contributes in manifold ways to the public good: not only by “creating jobs,” but by creating products that are cheaper or more useful than those that came before, thereby increasing the prosperity of millions of consumers.

The value of a company like Staples is not merely in the tens of thousands of people that Staples employs. It is also in the reduced costs and increased convenience that consumers of office supplies enjoyed as a result of Staples’ efficiencies, which in turn allowed those consumers (usually themselves businesses) to reduce their own costs and hire more people.

Michael Walsh asserts that corporate restructuring is “incidental” and exploitative. His counterexamples are curious, though:

A “job creator” is the bestselling author (Stephen King, Dan Brown, et al.) whose works help keep his publisher afloat and who indirectly provides employment for editors, copy reader, designers, public relations staff and management. A “job creator” is Eastman or Ford or Steve Jobs or Bill Gates or anyone else who creates industries. A “job creator” is the screenwriter (Robert Rodat) who typed out the words: “EXT. OMAHA BEACH – MORNING,” won Steven Spielberg an Oscar and gave employment to all these people through the force of his own creative imagination.

It’s implausible to me, at least, that Stephen King wrote books for any other reason than because he took pleasure in writing, and possibly because he dreamed of being a successful or famous writer: not because he cared about job creation. Same for Steve Jobs and Bill Gates and Michael’s heroic screenwriter. The “force” of a screenwriter’s “creative imagination” is certainly worthy of admiration, but it also takes creative imagination to restructure businesses in ways that successfully adapt them to an unpredictable future environment. To say that an Oscar-winning movie is more socially useful than driving down the cost of office supplies is, at the very least, a contestable assertion.

Jonathan Last says: “So was Bain a bunch of job-creating capitalists, or a band of corporate raiders? The answer seems mixed.” As more comes out about Bain Capital’s history, Jonathan will appreciate that the answer is not mixed.

First of all, the term “corporate raider” has a specific definition: it applies to individuals or institutions who, like Gordon Gekko, engaged in hostile takeovers of companies, proceeding to break them up purely out of an interest in maximizing profit, without any interest in improving the underlying operations of the acquired company.

The Bain Capital formula was quite different: it involved consensual acquisitions, often with the old management staying on to manage the restructured company. Bain Capital sought not to break up businesses, but to improve them. The firm is certainly not beyond reproach, and as I wrote in the piece, Bain’s practice of drawing out dividends before its turnarounds were complete is one that is worthy of debate.

But the same could be said of Apple’s monopolistic practices, practices that have drawn complaints from competitors and suppliers. The same could be said of the movie studios, which produce both Oscar-winning films and tawdry junk. The idea that screenwriters and gadget-makers are heroic, whereas turnaround artists are not, is its own kind of prejudice, one that is worthy of further discussion.