Politics makes for strange posturings. It seems that several of the candidates for the Republican presidential nomination—some eagerly, others somewhere between reluctantly and warily—have decided that it is evil to take over failing companies and attempt to restructure them so that they can grow and create jobs. Not for Newt Gingrich and Rick Perry the great Joseph Schumpeter’s “perennial gale of creative destruction” has enabled risk-taking businessmen to create the capitalist system that has produced the greatest material prosperity the world has ever seen. The goal is to use Mitt Romney’s success as a stick with which to flail him, in the hope that blue-collar Republican populists will add Romney to the list of bankers they despise and elitists they can very well live without.
Romney’s sin is clear. In the process of restructuring companies that were headed for the rocks two bad things happened: In some cases there were layoffs before the leaner firm went on to success, and in some cases the rescue effort failed.
Remember: We are dealing here with criticisms not from Democrats who have little use for what they see as the Darwinian aspects of American capitalism, described to me by a leading French politician as “the law of the jungle” and by a British commentator as “red in tooth and claw capitalism”—understandable jargon coming from European defenders of the social democratic system to which Obama wants to “transform” (his word) the United States. We are dealing with criticisms from candidates vying for the support of conservatives, candidates who in their eagerness to derail Romney are in essence advocating capitalism without failure. And capitalism without failure, as Carnegie Mellon University economist Allan Meltzer often reminds us, is like religion without sin: it won’t work.
To understand what the Wall Street Journal calls “this extraordinary debate within the Republican Party over what constitutes acceptable capitalist behavior,” we have to understand Bain Capital. During Romney’s tenure, Bain gathered capital from investors and lenders, and invested in 77 companies, according to a Wall Street Journal study. Some 22 percent filed for bankruptcy or went out of business, some struggled along, some few produced extraordinary profits for Bain’s investors—roughly 50 percent to 80 percent annually. Like an oil man who drills exploratory wells knowing that 9 out of 10 will be dry holes but that the successful one will cover the cost of all 10 and yield a profit, private equity firms gamble on the overall success of their portfolios, rather than on a single winner.
This does not mean that Bain is an exemplar of modern capitalism. Its practice of pulling money out of companies before they were on solid ground is not unassailable. Nor does it mean that Romney has mounted the best possible defense of his business dealings. He announced that he enjoys firing service providers who don’t give good service (insurance companies in particular)—true, but not exactly felicitous phrasing in the fraught atmosphere of the Republican primary fight and high unemployment.
It is indeed unfortunate that the debate about American capitalism is being cast as a debate about the role of financial architects. Schumpeter did include in his list of forces that drive capitalism forward “the new type of organization,” and Bain Capital certainly was one such, and created other new types when it reorganized companies. But there is more to capitalism than finance, much more. There is the investment by risk-taking, innovative entrepreneurs of the sort that populate Silicon Valley, and garages cum laboratories around America. There are people blessed with what John Maynard Keynes famously called “animal spirits” — men possessed “of a spontaneous urge to action rather than inaction.”
Romney, born to considerable wealth, with a picture-postcard family, always unruffled, hardly qualifies as one of these dashing, often eccentric heroes of capitalism. But neither is he that creation of liberal Hollywood, Gordon Gekko of “Greed is good” fame. He is a successful investor and good manager who, among other things, revived stationer Staples, which now employs over 70,000 workers, and Domino’s Pizza with 145,000 employees. He is close to succeeding in his almost decade-long quest for the Republican nomination and will oppose an incumbent president who has little use for bankers, and absolute distaste for “the rich,” alternately described by him as “millionaires and billionaires,” and any family earning more than $250,000 per year. It is Romney’s misfortune that his Republican colleagues have provided the president with enough video footage depicting the one-time Bain chief as the Darth Vader of American finance and a job destroyer to keep Romney on the defensive throughout the campaign, and to taint him with the brush that should be reserved for bailed-out, bonus-bearing bankers.
None of this is to argue that Romney’s stewardship of Bain Capital uniquely qualifies him for the presidency, although if voters think government is simply business writ large, and that the skill required to manage Bain is the skill needed to restructure government, Romney is their man. If they think an entirely different world view from that of Barack Obama is required, he might be their man, at least for the moderates to whom he appeals. Romney neither wants to shut down the government nor expand it, and probably would make an effort to shrink it a bit around the edges, quite a difference from Obama, whose expansionist instincts are clear and unhidden as he steers the U.S. towards the European social democratic model of a shrunken military, expanded welfare state, more regulation, smaller cars—you get the idea.
Two things are certain. First, running a private-equity firm is not a disqualification for the highest office in America, as might be the case with lobbying on behalf of mortgage giants Fannie Mae and Freddie Mac and calling for politicization of the court system (Gingrich); being unable to remember which government agencies one really hates and wants to eliminate (Perry); calling for moral standard-setting by the government to govern private individual behavior (Santorum); having no clear economic plan (Huntsman); or—how to put it—being plain weird (Ron Paul).
Second, none of this might matter. If Paul, rebuffed by the Republicans, decides to head the third-party, Libertarian ticket that is on the ballot in every state, he might siphon off as much as 6 percent of Romney’s vote according to an estimate by the Lindsey Group, virtually assuring Obama an extension of his stay in the White House. As might a significant, continued fall in the unemployment rate.
Pulitzer Prize winning columnist Charles Krauthammer says we are in the midst of renegotiating our social contract. Pity that’s being done in the heat of a political campaign.