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We often hear Romney saying that his experience running Bain Capital uniquely qualifies him for the presidency because of his experience creating jobs.  It seems intuitive and a lot of people accept it without question.  Many voters cite Romney’s business experience as the main reason they would vote for him.  And why not?  Bain had a successful track record at creating profitable companies and tons of cash for Mitt and his friends.  The impact Bain had on the companies it had dealings with are debatable, with Republicans cherry picking success stories like Dominos pizza and Democrats (and Newt) cherry picking failures like AmPad.  But the fact remains that Bain obviously had more successes than failures.

But let’s put aside the debate about whether or not Bain was successful at creating jobs, it’s a debate that makes us look like we don’t believe in free market capitalism.  Let’s also put aside the debate of whether or not Bain made people rich, we don’t want to argue the “class warfare” debate that makes us look like we don’t like people getting rich.  Instead of debating the success of Bain Capital, let’s focus instead on the Bain Method.

When we focus on the Bain Method, we refocus the debate on just how crazy the idea is that Romney can apply his Bain experience to make the government create more jobs.  If we turn the Federal Government into a giant Private Equity firm, things get pretty interesting…

First of all, let’s make sure we understand how Private Equity works by looking into two typical scenarios when Private Equity can play a beneficial role:

1). Invest in new startups when no bank ever would.  New companies typically get their initial funding from Venture Capital firms that take a high risk on an unknown start up.  At a certain point, a successful startup needs even more money to expand, but they’re still too young for most banks to take a chance on.  Enter Private Equity.  Companies like Bain will partner with the start up by helping it to secure much larger loans then the small company could by themselves.  This is called increasing leverage.  How do they do it?  After taking a management role in the new company, the Private Equity partner puts its reputation on the line with the bank.  They’re basically saying “Because we’re helping out this new firm with our expertise, you can trust that we’ll make it successful based on our past record”.  After a period of time, the startup is hopefully successful enough to pay back the bank and pay out the Private Equity firm.

2). Take over struggling companies and get them back on the right track.  This scenario often results in the negative image of Private Equity as “Corporate Raiders” as the tough medicine they’ll often dole out means a lot of boats get rocked.  This is where we get all the stories about factories being shut down, jobs sent overseas, long time employees being sacked.  But forcing companies to make the tough choices is often exactly why they need the help of an outside partner.  (Do you want to fire the boss’s worthless brother?  Get Bain to do it!)  And remember, for the sake of this argument we’re putting aside any value judgments and assuming that there are circumstances where this method of aggressive management can pay off in the long run for the targeted company.

There are other ways that Private Equity works to benefit companies, but for now, let’s just focus on the two scenarios above.  And remember, we’re also still giving the benefit of the doubt that the involvement of Private Equity is a GOOD THING with these firms.  And we’re also not focusing on the outcome because we know that even the most successful Private Equity firms will still only have a slightly better than 50/50 success rate.

Now that we’ve gotten our Private Equity 101 out of the way, let’s get to the heart of the matter:  Romney’s claims that his Private Equity experience uniquely qualifies him (as president) to create jobs.

This is where things get weird.  Let’s now apply the typical Private Equity approach to our economy.  What we come up with is something that neither a free market Libertarian would want nor even a Big Government Socialist.  How would a Bain presidency create jobs?

1). Private Equity invests cash in companies to make them more productive.  Is Romney saying that he’d start a new Corporate Welfare program where he picks the winners?  Direct investment by the government doesn’t sound like free market capitalism to me, yet direct cash injection that is one of the main role of Private Equity.  I wonder what selection process a Bain presidency would use to choose the companies it directly invests in?

2). After taking a stake in a company, Private Equity managers change the company’s strategy somehow to make it better.  Is Romney proposing that the Federal Government get closely involved in day-to-day decisions of private companies to make them run better and create jobs?  Sounds like Big Government Socialism to me.  Yet that would be required if Romney wants to create jobs, he’d have to get involved with a whole lot of companies to the deep level that Bain did when they were taking credit for creating jobs.

3). Private Equity increases the leverage of the company.  Is Romney saying that the Federal Government should help private companies take on more debt?  Should we put the full faith of the Federal Government behind loans to private companies that even the banks are afraid to lend to?  But increased leverage is exactly the method used by Bain to grow the companies that it takes credit for succeeding.  

4). Private Equity forces companies to slash expenses by making unpopular choices.  Should the Federal Government encourage companies to cut expenses by offshoring their jobs, closing unproductive factories, or selling off company assets and renting them back?  Pretty scary to think of our government making a policy of encouraging this behavior.  But the Bain method requires this type of tough decisions be made to trim expenses and focus on making the company profitable – even if just for a little while…

So in conclusion, the idea that Mitt Romney’s experience at running a successful Private Equity firm makes him more qualified than Barak Obama, leads to some pretty crazy scenarios.  The business methods that may have made him and his friends very rich don’t translate very well to the Federal Government.  The thing that worries me the most how his statements have resonated with the general public.  In survey after survey, most people believe that Romney is better qualified to lead our economy because of his business experience.  We need to address that claim head-on with reasoned logic that your average voter will understand.  Describing exactly what Romney did for a living and playing that scenario through to its illogical end is the only way that we can win over voters who’s main concerns are economic issues.

Originally posted to Connection on Sat Apr 14, 2012 at 07:35 AM PDT.

Also republished by Mitt Romney Bain Chronicles.

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Comment Preferences

  •  From what I understand (0+ / 0-)

    Bain made it's profits from borrowed money.
    Jobs were cut, not created, to show a profit. It's outrageous...and legal.

    NEVER STOP READING BOOKS- Nothing else stirs the imagination or opens a mind to all possibilities.

    by Carla in Sequim on Sat Apr 14, 2012 at 02:48:02 PM PDT

  •  I imagine he means enacting policies that (0+ / 0-)

    encourage private equity to invest in more startups by keeping capital gains tax low, and so on.

    However, the current administration does seem to be following your scenario pretty closely.

    The nonprofit Citizens Against Government Waste counts nearly 20 energy companies that have gotten federal loan guarantees or grants that have run into financial trouble ranging from layoffs to losses to bankruptcies. An outside consultant hired by the White House said the Energy Department's loan pool includes $2.7 billion in potentially risky loans and suggests the agency hire a "chief risk officer" to help minimize problems.

    abc linky
    •  Yep, I'm sure he'll say low taxes are the answer (0+ / 0-)

      to everything.  Although there doesn't seem to be any connection between capital gains tax rates and the rate of new startups.  The higher capital gains tax rate during the internet boom years of the 90s didn't seem to hurt that explosion of creativity and new businesses.  And since the Bush-era cut in the capital gains tax we've seen both boom and bust.  Although it may be intuitive that low capital gaims taxes encourage new business investment, I'm not sure if that's born out by the historical record.

      •  I think I heard a it said that each time (0+ / 0-)

        cap gains was lowered tax revenue increased. Each it was raised tax revenue decreased.

        President Obama (candidate at the time) was asked at about this at one of the debates...the question was (paraphrasing) if he still favored a capital gains tax increase. Candidate Obama said he favored a capital gains tax increase because of fairness... Fairness doesn't create jobs. It may create votes but it wont create jobs.

        •  All I remember is budget surpluses (0+ / 0-)

          and plenty of job creation back in the 90's and early 2000's when the capital gains tax was much higher than it is today.  Historically speaking, there doesn't seem to be much of a connection between the tax rate and job creation.  It makes sense too, if you put yourself in the shoes of an investor.  If you have money that you want to invest in a company that you believe in, are you seriously going to skip the investment simply because you'll be taxed on the gains of that company at the same level you'd be taxed if it was income?  

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