Tuesday, July 17, 2012

Attacks on Bain and Romney Aren't Attacks on Capitalism

Although some like to pretend otherwise, and to invoke the age-old tactic of suggesting that a political opponent a hypocrite,
Over the years of his presidency, Obama has not been a critic of globalization. There’s no real evidence that, when he’s off the campaign trail, he has any problem with outsourcing and offshoring. He has lavishly praised people like Steve Jobs who were prominent practitioners. He has hired people like Jeffrey Immelt, the chief executive of General Electric, whose company embodies the upsides of globalization. His economic advisers have generally touted the benefits of globalization even as they worked to help those who are hurt by its downsides.

But, politically, this aggressive tactic has worked. It has shifted the focus of the race from being about big government, which Obama represents, to being about capitalism, which Romney represents.1
that argument has two significant flaws. First, there's no hypocrisy. Second, attacks on Bain, Romney and outsourcing are not attacks on capitalism.

On the first issue, David Brooks complains that the President seems to like leaders of industry such as Steve Jobs, and has employed people like Jeffrey Immelt. And you know what? Had Mitt Romney been applying for a job as a guy who pioneered a similar program in Massachusetts, and wanted to be personally involved in sharing that success with the rest of the nation, I suspect the Obama team would have considered him for the job. But liking somebody, expressing admiration for them within their sphere of competence, hiring them in one capacity or another... none of it constitutes the expression that "This person is qualified to be President".

I can acknowledge that Steve Jobs helped create Apple, and through that company transformed the way we interact with computers. I can say that he was both willing to make and learn from mistakes, and that some of his business and strategic decisions at Pixar and Apple showed tremendous insight and foresight. I can also say that I don't think that those skills would have translated into his being a great President of the United States and that, given his well-documented personality quirks, he might not have even ranked as good. Would Brooks disagree with any of that? I doubt it. So we're on the same page: Being a good to great business leader does not automatically translate into a qualification to be President.

On the second, the issue is not whether Obama has tried to stop globalization. If we're honest about it, it's a done deal. It would take years of enormous effort to significantly reduce our nation's role in the globalized economy, let alone to stop it, and there would be serious consequences to retreat.

Although Brooks acknowledges the upside of globalization, he brushes off the downside. His suggestion that the President is a hypocrite and his pretense - and I do believe he knows better - that the President is attacking capitalism is meant to distract people from the fact of that downside. Does Brooks doubt that, if interviewed or directly asked about global markets, the President would freely and ably address the upside of globalization? Again, I doubt it. But if not, we're effectively again on the same page: The problem isn't that Obama is attacking capitalism and globalization. The problem is that he's able to recognize and speak to the downside, while Mitt Romney is not.

The problem is that, despite Brooks' hagiographic effort to reinvent Romney's work as that of "an efficiency expert", taking "companies that were mediocre and sclerotic and try[ing] to make them efficient and dynamic". The problem is that, under that narrative, the American workers who are laid off in favor of outsourcing, domestic or international, are actual people, many of whom worked extremely hard for years in ways and under conditions Brooks can't even imagine. Obama's message to them is not "I'll stop globalization", it's "I understand your situation, and we need to work to find ways to get you back into the workforce in a decent job at reasonable pay."2 Romney's message, so far, seems to be "We had to fire you because your wages were too high. By the way, it's my opponent's fault that you're unemployed."3

And that's the rub.
1. Obama represents big government, it would seem, because he obtained passage of a healthcare reform package that is roughly the same as the one Romney ushered through in Massachusetts.

2. Brooks can call that a "big government" attitude if he wants, but this would be the same David Brooks who describes "doubling spending on science, pre-K education and adult retraining" as a "big idea". Does that make Brooks a big government conservative? An enemy of capitalism?

3. Brooks characterizes Romney's role as head of a private equity firm as follows,
It has been his job to be the corporate version of a personal trainer: take people who are puffy and self-indulgent and whip them into shape.
What about when the "personal trainer" decides it's better to kill his client, carve him into pieces and sell off the parts?

Brooks presents a cute metaphor, sure, but it misses the point. The private equity firm is out to make money, and to maximize the return on its investment over the shortest possible period. That often will involve improving efficiency, particularly if the plan is to sell the company, but the goal is to maximize profit, not to obtain the best outcome for any particular acquisition. If you look at the mismanagement of Chrysler under Cerberus Capital Management, you can see pretty clearly how little regard they had for the long-term viability or competitiveness of the company. They were out to put in as little money as possible while extracting as much value as possible.

If you identify a company with significant real estate holdings, low debt, and a highly paid workforce, the "efficiency" introduced by a private equity firm may be to sell the real estate and lease it back, load up the company with debt, fire its workers and hire replacements at lower pay, and perhaps even to lower the quality of the company's products in order to save money on materials and production - the lease payments and interest become tax deductions, cash flow improves due to lowered production costs and lower wages, the cash holdings and proceeds from the loans and sale of assets can be pulled out by the private equity firm as fees and profits, and "everybody wins" except perhaps for the company, its workers, and its customers.

Leaving aside some of the tax loopholes that distort that process, yes, private equity firms serve a role in our system of capitalism and they can improve a company's efficiency. But it's not going to help Romney if he not only ignores the downside of his work, but also takes Brooks' lead and suggests that displaced workers represent fat that a company is fortunate to have shed. This isn't a narrative Romney wants to implicitly support:

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