George Will is one of the most admirable of politico-economic commentators. His opinions aren’t hastily drawn, nor uneasily reasoned. They seem to flow from his pen with a grace and certitude that embodies a man whose intellectual and emotional faculties have reached a crescendo of symphonious harmony. Look in the dictionary for the word “erudite” and it would not be outlandish to find his picture depicted there.
But. He stumbles in today’s (December 14, 2011) column in the Washington Post when trying to defend Mitt Romney against charges leveled by Newt Gingrich that Romney’s activities as head of a leveraged buy-out firm, Bain Capital, were lesss than admirable. Newt’s attack on Romney was a counterattack to Romney’s claim that Gingrich should give back the money he earned in the “private sector” as a consultant to Freddie Mac, from the column:
Soon thereafter, Gingrich, when asked about Romney’s cheeky judgment, replied: “I would just say that if Governor Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years at Bain Capital, that I would be glad to listen to him.”
Thus is the difficulty with political campaigns, or any exercise, (e.g., a courtroom) in which there is an attempt to adduce the truth through dialectic, opposing points of view: When each side is inherently biased to shape their own view of reality, truth may occasionally stumble out, but even when it does, it is often unrecognizable, and is anyway virtually irrelevant to the proceedings at hand.
Newt Gingrich’s turn as a lobbyist (he says “historian”) for Freddie Mac, for which his lobbying, er, historical society, received some $1.6 million should be Exhibit A in contradiction of his claim that he is a Washington outsider. Anyone that gets paid roughly $30,000 per hour for service as a historian is either fantastically overcompensated as so often happens in government and quasi-governmnent purchases ($600 toilet seats?), or is not a historian at all, and is being paid to peddle influence. It’s hard to imagine that Freddie Mac is so stupid that it couldn’t have gotten a perfectly good historian for something closer to $30,000 per year. How many unemployed history Ph.D’s might have jumped at the chance?
Whether or not Gingrich should give back the money, as was asked of Romney by the moderator, is irrelevant. The real question is whether Newt’s relationship with Freddie Mac impairs or enhances his fitness to be president. What does taking $1.6 million from an entity that was at the time sponsored by the government he seeks to lead, and is now under a conservatorship of that same government, say about Newt’s character and fitness for the job? Romney might press the question in his campaigning, but the answer is a judgment call for the voters.
But what of Gingrich’s claim that Romney’s Bain Capital bankrupted companies and laid off employees? Well, of course, that is precisely what sometimes happened. Bankrupting companies and laying off employees is one of many strategies which leveraged buy out (LBO) entities employ. LBO shops (and investment bankers and hedge funds and any number of other financial services entities) do not exist to create value, except for themselves. If it happens that their activities create value for others along the way, so much the better, so long as they get their (and the biggest) cut. There is no protection for either managers or workers when LBO shops come calling. In a not unusual scenario, the revenues a company generates are leveraged (hence “leveraged buy out”) to fund the purchase price, often taking a public company private at the cost of massively increasing the debt on the balance sheet. The LBO principals get paid a fee an up-front for their services in purchasing the company, but this is chump change to what they hope to receive when taking the company public again. The LBO firm then inserts its own management (or bribes existing management to its priorities), and relentlessly culls inefficiencies, which is their vernacular for getting rid of excessive employees. If everything goes well, the new company is taken public again, at which time the LBO firm really cashes out. If not, bankruptcy ensues, and the entity either ceases to exist, or strips away enough debt and again culls enough inefficiencies (i.e., fires employees) that it emerges anew from bankruptcy, configured to finally (perhaps) make money. Bain Capital, of which Romney was a co-founder, did (and does) exactly as Gingrich accused, time and again–it bankrupted companies and laid off employees–which even a cursory internet investigation reveals.
But here’s the disappointing part: Will defended Romney’s actions as if Romney were the ultimate embodiment of Smith’s virtuous capitalist, instead of being more akin to Michael Douglas’ character, Gordon Gekko, in the 1980’s movie Wall Street. Will issues an unquestioning endorsement of Romney’s activities at Bain Capital:
Romney, while at Bain, performed the essential social function of connecting investment resources with opportunities. Firms such as Bain are indispensable for wealth creation, which often involves taking over badly run companies, shedding dead weight and thereby liberating remaining elements that add value. The process, like surgery, can be lifesaving. And like surgery, society would rather benefit from it than watch it.
It is utterly false that firms such as Bain are indispensable for wealth creation. Vast stores of wealth had been created and enjoyed by humanity thousands of years before even the idea of firms like Bain arose. In the society of human organizations comprising the American economic system, Bain operates as a predator, a wolf pack, identifying weak members of the herd and either culling them for immediate gain, or cultivating them for future compensation. Does Bain perform a valuable service to society? That’s hard to argue. It treats the organization’s members as mere appurtenances, to be discarded as needed, as soon as their immediate cost exceeds their immediate value. It’d be hard to imagine, even in imperial England, that this is the sort of capitalism Smith envisioned. The selfish impulses of Smith’s virtuous capitalist operated to benefit society at large because of the efficiencies that are gained through specialization and trade. But the society at large was always Smith’s first concern. How does Bain benefit anyone but Bain? Those workers that are considered mere inputs to Bain are real people who must be cared for by society once Bain expels them. It seems to me that Bain is benefiting itself by imposing unremitted costs on society at large.
Will ends with an ode to Keynes’ idea that animal spirits drive economic systems and must be reawakened in order for the US to again enjoy economic dynamism:
And there is a photograph of Romney that will eventually be seen far and wide (and can be seen at http://wapo.st/romneybain). It shows a young Romney and six Bain colleagues feeling their oats, with paper currency protruding from their dark suits. The young men are overflowing with what John Maynard Keynes called “animal spirits.”
We should welcome such spirits and should hope for political leadership that will hasten the day when American conditions are again receptive to them. Until then, economic dynamism will not return.
We should welcome the return of animal spirits? Isn’t mankind’s innate tendency to savagery the very thing that living in society demands be overcome? Look at the photo below, noted in Will’s comments. Are these the sort of spirited animals that a civilized society should wish to lead them? (In case you can’t tell, Romney’s the one in the middle.) Juxtapose this picture in your mind with that of an employee laid-off by a company leveraged to the hilt by Bain in order to pay its upfront fees, the family struggling to get by on unemployment and food stamps. If this is economic dynamism, I’d rather prefer stagnation.