How Many Cheers for Bain?
10:55 AM, Jan 10, 2012 • By JONATHAN V. LAST
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.
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.
At least that’s one way of looking at it. Another would be that Bain liberated capital from one inefficient use and turned it into wealth, which was transferred to its investors. And which may—or may not—have been used more efficiently by them. No one really knows how it was used in the short-run and you have to be one of those “markets are always right” Republicans to assume that they put it to more productive use.
(5) So was Bain a bunch of job-creating capitalists, or a band of corporate raiders? The answer seems mixed—and again, there’s nothing wrong with that. You could make a sophisticated economic argument that access to capital is even more important than entrepreneurial genius in the grand scheme of things. That’s why poor countries with no capital never seem to catch a break even though they must—just by the law of averages—have had some brilliant entrepreneurs in their ranks.
But what is efficient isn’t always admirable. And the near-term results in a market are not always efficient, as the crash of 2008 shows. It is perfectly reasonable for voters to be allowed to examine Bain and determine (irrespective of their support of the free market) whether they find it compatible with the White House.
(6) Given all of that, why the collective Republican backlash over Gingrich bringing scrutiny to Bain? There are three possible explanations. First, Gingrich’s attacks are not perfectly fair and dispassionate. That’s certainly true. But, as Romney said during Sunday’s debate, “this ain’t beanbag.” And there was no a similar call for fairness earlier in the campaign when Romney, over the course of weeks, demagogued and distorted Rick Perry’s positions on Social Security and college tuition for illegal immigrants.
Second, the reporting on Bain tends to come from sources such as the New York Times. Like Gingrich, you cannot trust the Times to be exquisitely fair in every regard. But you also cannot discount everything they report simply because it’s in the Times.
Third, the conversation about Bain must be shut down for the same reason the primary process has continually been declared “over”—because the Republican establishment has decided that Mitt Romney must be the nominee and any attempt to derail that outcome must be quashed. That’s fine. The Republican establishment is certainly entitled to pursue its own interests.
But conservatives do not have a duty to aid them. We will have a series of elections and the voters will decide who the nominee will be. In the course of that process, the voters are entitled to take a long and detailed look at Mitt Romney’s chief stated qualification for the presidency.
And they can render a verdict on Romney’s work without conflating the specific case of Bain Capital with the free market itself.