Sunday, November 13, 2011

Mitt Romney and the new American capitalism

It's by no means a done deal, but it looks increasingly plausible that Mitt Romney will wind up becoming the Republican presidential candidate in 2012. And even those of us who would vote against him should probably hope that he does get the nomination, since he is the only one in the current crop of Republican candidates who isn't an out-and-out loon. (I am overlooking John Huntsman, who is very right-wing but who nevertheless seems relatively sane, because his chances of winning the nomination are so minuscule, and he has no committed base of minority support like Ron Paul.) So we need to get a clearer sense of who Romney is, what his record has been, and what he really represents.

=> For a start, here is one of the central themes running through an interesting and, on the whole, not unsympathetic profile of Romney that Benjamin Wallace-Wells did for New York Magazine, "The Romney Economy":
The political genuflection to businessmen is so gauzy and generic that praise for a candidate’s private-sector acumen can often sound phony. But Mitt Romney is the real thing. He was, by any measure, an astonishingly successful businessman, one who spent his career explaining how business might operate better, and who leveraged his own mind into a personal fortune worth as much as $250 million. But much more significantly, Romney was also a business revolutionary. Our economy went through a remarkable shift during the eighties as Wall Street reclaimed control of American business and sought to remake it in its own image. Romney developed one of the tools that made this possible, pioneering the use of takeovers to change the way a business functioned, remaking it in the name of efficiency. “Whatever you think of his politics, you have to give him credit,” says Steven Kaplan, a professor of finance and entrepreneurship at the University of Chicago. “He came up with a model that was very successful and very innovative and that now everybody uses.”

The protests going on at Zuccotti Park now have raised the question of whether that transition was worth it. What emerged from that long decade of change was a system that is more productive, nimble, and efficient than the one it replaced; it is also less equal, less stable, and more brutal. These evolutions were not inevitable. They were the result, in part, of particular innovations developed by a few businessmen beginning a quarter century ago. Now one of them has a good chance of becoming president.
Romney made most of his money as CEO of Bain Capital.
“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. [....]

It’s difficult to track the fallout of any one private-equity firm’s work, but scholars have been able to look at the consequences 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.”
Yes, that is "a social question". But it's not absolutely clear that we actually wound up with "a bigger cake" than would otherwise have been the case. Yes, the US economy grew quite a bit between 1980 and the present. But the overall cake grew at a significantly faster rate during the quarter-century after World War II (and not just in the US). Granted, such comparisons are tricky. But it's possible, at least, that as a society we actually wound up with a smaller cake less evenly split. Be that as it may ...
Economists believe there was a clear connection between the labor-market changes in the early nineties and the great profits that soon followed. “Could we have had the productivity boom without displacement? My answer would be no,” says Frank Levy, an MIT economist.

The trouble, Levy believes, was that this new shareholder-value-driven system had no built-in mechanism of regulation, and its incentives geared CEOs toward shortsightedness and recklessness. [....] If you trace the public controversies over Bain Capital over time, you can see how the obsession over shareholder value and efficiency proved not just inequitable but destabilizing. [....]
=>An article in Saturday's New York Times looks back at one of those controversial cases, and in the process helps to flesh out the picture. Some highlights:
By the green-hued yardsticks of Wall Street, the 1990s buyout of an Illinois medical company by Mitt Romney’s private equity firm was a spectacular success.

Mr. Romney’s company, Bain Capital, sent in a team of 10 turnaround experts from Boston to ferret out waste, motivate executives and study untapped markets.

By the time the Harvard M.B.A.’s from Bain were finished, sales at the medical company, Dade International, had more than doubled. The business acquired two of its rivals. And Mr. Romney’s firm collected $242 million, a return eight times its investment.

But an examination of the Dade deal shows the unintended human costs and messy financial consequences behind the brand of capitalism that Mr. Romney practiced for 15 years.

At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. And in waves of layoffs, it cut loose 1,700 workers in the United States, including Brian and Christine Shoemaker, who lost their jobs at a plant in Westwood, Mass. Staggered, Mr. Shoemaker wondered, “How can the bean counters just come in here and say, Hey, it’s over?” [....]

Bain and a small group of investors bought Dade in 1994 with mostly borrowed money, limiting their risk. They extracted cash from the company at almost every turn — paying themselves nearly $100 million in fees, first for buying the company and then for helping to run it. Later, just after Mr. Romney stepped down from his role, Bain took $242 million out of the business in a transaction that, according to bankruptcy documents and several former Dade officials, weakened the company.

Even some people who benefited from that payday and found it reasonable at the time now question it. “You would have to say, looking back, that it was too large, because it pushed us into bankruptcy,” said Robert W. Brightfelt, a former Dade president who collected more than $1 million. [....]

Dade emerged from bankruptcy two months later and the stock soon began trading publicly.

Over the next four years, its revenues and share price surged, and in 2007, Siemens, the German conglomerate, paid $7 billion to buy Dade Behring. The Dade name disappeared, but the company survived.

Bain’s strategy, as painful as it was with plant closings and layoffs, had ultimately worked, executives said. The bankruptcy “does muddy the story,” said Mr. Wolsey-Paige, the former Dade executive. “Over all,” he said, “it was very positive.”
I suppose that depends, in part, on your perspective.

As Schumpeter famously pointed out a long time ago, a "perennial gale of creative destruction" is inseparable from the core dynamics of capitalism as a socio-economic system, so it would be unrealistic to imagine that, even in the best-case scenarios, capitalism can ever deliver gain without some pain. (Schumpeter knew that Marx had already made essentially the same point, and made it quite eloquently; but, unlike Marx, Schumpeter loved capitalism.) But that's precisely why capitalism can't be allowed to simply operate unhindered, but always has to be contained, counterbalanced, regulated, and mitigated by other social, political, and cultural forces and institutions. The balance between creation and destruction doesn't automatically come out for the best, and the extent to which is does or doesn't is influenced by public policies and other socio-political factors. And the balance between who gets the gains and who suffers the pains should be, as the man said, "a social question" subject to public consideration, moral assessment, and democratic debate. We need to pay more attention to it.

Meanwhile, both of those pieces about Romney (here & here) are worth reading in full. Whatever one thinks of his record as a businessman and its implications, any claim that Romney has experience as a "job creator" should be taken with a grain of salt.

—Jeff Weintraub

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