Rather amazingly, New York magazine has published an accurate and thorough account of Mitt Romney’s career at Bain Capital. Back in September, I wrote a column on the same subject for The Daily. I offered a brief, stylized take on how private equity works, which necessarily missed some nuances:
To understand leveraged buyouts, it helps to understand two different approaches to increasing productivity, which I’ll borrow from the writer and entrepreneur Jim Manzi. Increases in “operational efficiency” can be thought of as finding new and better ways to play a particular game. Increases in “allocative efficiency” can be achieved by choosing the games you happen to be best at playing. When I was a kid, Deion “Prime Time” Sanders was famous for playing professional football and professional baseball. Most professional athletes, including many truly great athletes, never go that route. They figure they’re better off choosing their best sport (allocative efficiency) and then devoting all of their time and energy to excelling at it (operational efficiency).
In the business world, investors are putting capital to work. At places like Bain Capital, brainy women and men crunch numbers to determine where they’ll get the best return for their money. In the 1980s, a few rocket scientists decided that a large number of American companies were flabby, uncompetitive and needed a kick in the ass. Manufacturers based in Asia and Europe were tearing U.S. firms to shreds. The plan was to turn these companies around by buying them, booting out old management, and doing a combination of things — getting out of some business lines and into new ones, firing the weakest or the most expensive employees, and much else — to turn them around. They generally paid for this by issuing huge amounts of debt, which had a side effect: Companies either had to make their debt payments or go under, which had a funny way of persuading management to concentrate on improving operational efficiency.
Ben Wallace-Wells, the author of the New York story, gives a far more detailed take, and he quotes Nicholas Bloom of Stanford and Steven Kaplan of Chicago Booth, among others — a sure sign that he talked to the right people.
Even by the standards of the times, Bain Capital grew tremendously fast: from $37 million under management in 1984 to $500 million in 1994 (and $65 billion today). To other businesses, the buyout industry both presented a model for better profits and posed a take-over threat. “Having the private-equity guys out there disciplined other companies,” says Nick Bloom, a Stanford economist. Some techniques developed in the buyout laboratory spread. Productive workers and managers were rewarded, while unproductive ones were cut loose. Corporations realigned themselves to deliver more value to their shareholders, increasing dividend payments and stock buybacks. Within a decade, ordinary businesses were giving large stock and option packages to CEOs. Executive compensation soared. “These Bain Capital guys,” says Neil Fligstein, an economics-sociology professor at the University of California, Berkeley, “were agents of the shareholder value revolution.” By the mid-nineties, The Business Roundtable had changed its definition of the role of a company, winnowing a broad set of responsibilities down to a single one: increasing shareholder value. [Emphasis added]
Contrast this with Barack Obama’s interpretation of the U.S. corporate revival of the 1980s, which I discussed back in February:
Do we want to see the “change in corporate culture that significantly boosted corporate productivity for a long time” spread to these sectors that have traditionally been insulated from robust competition? One can make a decent case that part of the reason this “change in corporate culture” did not spread is that the sectors the president identifies, with the partial exception of energy, are sectors in which the productivity-enhancing dynamic of competition, liquidation, and innovation has been dampened by the heavy role of the state and relatively high levels of union density. It seems that the president is misinterpreting the cultural shift that took place in the 1980s. Firms didn’t embrace quality improvement, efficiency, and increasing productivity because fear of the Japanese lit a fire under their behinds. Rather, shrewd executives understood that corporate raiders would seize their assets if they didn’t. In a similar vein, the rise of pay-for-performance didn’t reflect some perverse disregard for working stiffs. It reflected a desire to retain footloose talent. …
Actually, the “old ideological debates” are very salient. Do you believe that corporate culture changed because the federal government decided that it should change, and created a series of targeted federal initiatives to make it change? Do you believe that it changed because benevolent CEOs wanted to rescue the United States from a descending swarm of ferociously competitive Japanese firms? Or do you believe that firms and individuals responded to the incentives offered by lower marginal tax rates, labor market deregulation, and lower barriers to trade? The president seems to believe some combination of the first and second, which is a decidedly old and very ideological view. On the question of how do we create a smarter economy, some of us believe that the first answer is that there is no single answer, and more importantly that the answers aren’t likely to come from the White House.
Back to Wallace-Wells. He offers an even-handed take on AmPad, a buyout that proved problematic for Romney during his 1994 U.S. Senate campaign against Ted Kennedy:
In October 1994, a machine operator named Harold Kellogg gathered five of his colleagues; borrowed a brown van from a used-car dealership in Marion, Indiana; and began to drive east on I-90, headed for Boston, where Romney, in his first political race, had suddenly begun to threaten Ted Kennedy. Kellogg had worked, for eleven years, for an office-supplies manufacturer called SCM, but a few months earlier his plant had been acquired by a Texas-based company called American Pad and Paper, in which Bain Capital had a majority stake. AmPad fired all of the union workers at Kellogg’s plant, more than 250 people in total, then hired most of them back at much lower wages; for years, they had gotten health-care coverage as part of their pay package, but now AmPad asked them to pay half of the costs. The whole plant walked out.
The narrative that the Kennedy campaign had been trying to build through the summer was that Romney was a Gordon Gekko type, but it didn’t really catch until Kellogg and his five friends started touring Massachusetts, visiting manufacturing plants, and then confronted Romney during an appearance at an East Boston Columbus Day parade. Kennedy’s campaign commercials were suddenly filled with flat midwestern accents. Romney promised, tepidly, to meet with the Indianans, “to see if there’s anything I can do.” Kennedy held on, and the line among political consultants was that the Kellogg stunt had helped turn the election.
It didn’t do much to help Kellogg. The plant in Marion closed down six months later, and the machine operator went to work at a nearby glass company. Management sent in Pinkerton guards and, according to a union source, took away machinery and moved it to nonunion plants in Utah and Massachusetts. “You had an industry where the only thing they did was converting paper to make Siegel pads, notebooks, and copy paper,” says Marc Wolpow, who was at the time the Bain Capital partner who worked on the AmPad deal. Labor in the plants, he says, was nearly a commodity product—the only thing Kellogg and his co-workers did was to move paper from one machine to another. This could be done more cheaply at plants in China or Indonesia. “Those jobs were going to get destroyed internationally. That plant was going to go out of business, and there was nothing Mitt should have done, or could have done, to prevent it.” But it is harder to be so charitable when you look at the broader moral contours of the arrangement. By 2001, five years after the company had been taken public, it had filed for bankruptcy and liquidated its assets. But Bain Capital made more than $100 million from AmPad for itself and its investors. [Emphasis added]
Marc Wolpow’s is decidedly unsentimental about the job losses at AmPad. But do we want to run our economy in a spirit of not offending anyone by pretending that old ways of doing business can and should be preserved regardless of changing economic circumstances or do we want to be as productive as possible?
Wallace-Wells goes on to highlight a little-understood aspect of the buyout story:
After the plant closed, the head of its union, Randy Johnson, tried to keep track of where everyone went. He assembled a roster of the destinations of his former colleagues—some moved to Tennessee, some to Texas—but the effort was incomplete, and what Johnson compiled was only a partial catalogue of loss. It’s difficult to track the fallout of any one private-equity firm’s work, but scholars have been able to look at the conesquences of the industry as a whole. These studies have consistently found that private-equity takeovers improve productivity and shed jobs. But one interesting nineties study, by two academics, Don Siegel at SUNY Stony Brook and Frank Lichtenberg at Columbia, found something surprising: White-collar workers, for the first time, were more vulnerable than blue-collar workers. “Part of what the private-equity firms were doing was replacing office workers with information technology—that’s where they were getting some of their gains,” says Siegel, now the dean of the University of Albany’s business school.
Here, too, private equity seemed to provide an early warning of broader changes. In three years during the early nineties, the Princeton economist Henry Farber has found, roughly 10 percent of American white-collar male managers lost their jobs. For the first time, according to data collected through the General Social Survey, white-collar workers were nearly as worried about losing their jobs as blue-collar workers. Those white-collar workers who kept their jobs worked harder, and the compensation that had once been spread through the broader middle ranks of corporations now collected at the top. In 1980, a CEO had earned about 35 times the wages of an average worker; by 1990, it was about 80; and by 2000, it was about 300. The portion of America’s gross national product that ended up in the hands of workers declined by more than 10 percent between 1979 and 1996; the portion that went to investors rose by a similar amount. “What you end up with is a choice between a bigger cake less equally split and a smaller cake equally split,” says Bloom, the Stanford economist. “But that’s a social question.” [Emphasis added]
This helps explains the intensity of the resentment of the upper-middle-class agains the rich, which is one of the defining elements of our politics.
There’s much more to the article, some of which those of us who believe in the virtues of a dynamic market economy will find discomfiting. I came away from the article more impressed by Romney than I had been before. Others will, I’m quite confident, see their worst suspicions confirmed, particularly those motivated primarily by anger and anxiety over wage and wealth dispersion.
There was only one significant thing missing from Wallace-Wells’s article:
“If you think about that era—I grew up in the sixties and seventies—business wasn’t a particularly noble profession,” Geoffrey Rehnert, an early Bain partner, told me. “The best brains went into medicine, the next best went into law.” American business, he said, “had a thinner bench.” Those who gravitated to Bain built a culture that was “not entitled at all. Not a single person was born with money in their family. Every single person came from a blue-collar or middle-class background.”
“Except for Mitt,” I said. (Romney’s father had been the head of American Motors Corporation, the governor of Michigan, and a member of the Nixon cabinet; there is no credible way to describe the American elite that excludes Mitt Romney.)
“Even he didn’t come from affluence,” Rehnert insisted. “He wasn’t a trust-fund guy.”
Perhaps what he meant was: Romney wasn’t a Wasp. He never really talked to his co-workers about his Mormonism, but he sometimes joked with Jewish colleagues about how their religions made them all outsiders.
Here’s the thing: Romney’s father George, the subject of my Tuesday column for The Daily, was born in a small colony of American Mormons in rural Mexico, and he spent the rest of his childhood in desperate childhood in various settlements across the American West. He never had a chance to complete his college education, but even getting to the point where he could go to college was a feat. Romney was raised in privilege. But his father was the kind of person who gave money back to his company when he felt that he had been paid too much, and the main reason he entered politics was to address the plight of America’s most poverty-stricken people, and in particular African Americans living in inner cities. George Romney was a blend that you don’t often see these days: he was a devoutly religious moralist, who believed that part of the role of the government was to offer spiritual as well as material uplift. And he was also a champion of increased government spending, who fought hard to increase K-12 budgets and to implement personal and corporate income taxes in Michigan. He was the kind of person I imagine I’d disagree with on many issues, yet he also lived by an austere code that valued integrity above all else. One suspects that he was the kind of person who didn’t look kindly on excess or easy living, and that Mitt Romney always had to hold himself to a very rigorous and demanding standard.
A shorter way of putting this: fathers who grow up in extreme hardship can be tough to live up to, and Mitt Romney seems to have done a pretty decent job.