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How Many Cheers for Bain?

10:55 AM, Jan 10, 2012 • By JONATHAN V. LAST
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There’s a line of thinking you often hear from Republican-types about how markets are never wrong. You think a certain CEO’s lavish compensation is ridiculous? Nonsense, those types tell you. You think that a CEO’s VORP—that’s a baseball stat that translates, in this case, to the CEO’s marginal value versus the average replacement CEO—couldn’t possibly be so high? They simply counter that he’s worth the money because there’s someone willing to pay it. The results in a market triumph considerations of value.

Romney and Bain

And there’s some truth to that. Free markets are, in the long run, wonderfully efficient and wise. The problem is, they aren’t, in the short or medium run, always wise (this is why we have bubbles); they aren’t perfectly free (every market is distorted by rent seekers and other externalities); and the efficiencies they produce are not always beneficial to society writ large (see the effects of the pornography and gaming industries).

To understand these limitations is not to attack or disdain the free market. It is merely to give, as a very wise man once wrote, a clear-eyed “two-cheers” for capitalism.

Yet because the free market has been under constant assault from the left for most of the last 80 years, Republicans often mount an automatic defense of it, or any of the businesses that operate within it, at the first sign of criticism. And that’s what has happened over the last few days with Newt Gingrich’s attempt to bring Mitt Romney’s days at Bain Capital to public light. There has been, in many Republican circles, something of a freak-out that anyone would dare try to paint an operation such as Bain in an unflattering light. To do so, they argue, constitutes an indictment of the free market itself.

For Republicans who are boosters of Romney, this is a perfectly understandable reaction. But I would argue that for more disinterested conservatives, there is no positive duty to mount the barricades and defend Bain from being looked at critically. Here’s why.

(1) Mitt Romney is a very impressive—and genuinely decent—man. And his accomplishments at Bain are likewise impressive. For a variety of reasons (the general dislike of government, Romneycare) he chose to make his work at Bain central to his candidacy with constant and over-the-top talk about how he created “100,000” jobs. As such, he invited voters to look at what he did there and determine if they believe it was both (a) admirable and (b) germane to the presidency.

(2) Romney’s work at Bain differs in some important ways from how he has characterized it thus far. When Romney says that his goal at Bain was to “create jobs,” that’s not entirely true. As a private equity firm, Bain’s goal was to maximize return on investment (ROI) for a small group of high net worth investors. Sometimes that meant giving seed money to a promising start-up. Sometimes it meant rescuing a company and turning it around. Sometimes it meant finding revenue streams a company hadn’t realized—including government bailouts. Sometimes it meant off-shoring a company’s jobs. And sometimes it meant finding a company whose component parts were worth more than the whole—and dismantling it.

(3) Is it fair to take into account all this work, and not simply look at the top-line numbers? When voters evaluate a politician’s record, they look at both the whole and the parts. One or two tough votes can make or break a political career. By the same token, it’s perfectly reasonable for voters to look at a businessman and evaluate both the sum of his career and individual examples of his work. Would it be understandable for a voter to render a verdict on Bain based upon the few times when it shut down a business—in the way they might judge a legislator whom they generally liked, but cast a vote they vehemently disagreed with? I’d argue, yes.

(4) When people think “job creation,” they typically think about an enterprise that builds something. Bernard Marcus’s Home Depot, for instance. Or Steve Jobs’s Apple. Romney’s Bain was nothing like those firms. It was a hybrid venture capital/consulting operation designed to find hidden value in other companies and take advantage of it on behalf of its investors.

As Jerry Seinfeld would say, “Not that there’s anything wrong with that!” Creative destruction is important to the macro economy. And by providing fat returns to Bain’s backers, Bain was simply liberating inefficiently used capital to be put to work by them in more efficient ways.

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