The Bain Delusion
I made a mistake this Memorial Day weekend; I sat through the Sunday political talk shows. And what I witnessed was a uniform line of criticism from the left on Mitt Romney's experience at Bain Capital that bordered on incomprehensible.
Echoing President Obama’s remarks from earlier in the week, the left’s argument du jour was consistently some variation on this: Romney’s time at Bain doesn’t prove anything about his ability to boost employment because his responsibility was to maximize profits, not to create new jobs. This line of reasoning is staggering in its economic illiteracy.
While the Obama camp is implicitly suggesting that this focus on profit sets venture capital apart from the rest of the American economy, there is only one example I can think of a business whose main concern is increasing jobs: an employment agency.
The truth is that almost all for-profit businesses have as their primary focus a return on investment rather than a maximization of employment. Grocery stores don’t open up to provide the maximum available number of positions for checkers and bag boys; they open up to make a profit. Department stores don’t exist to create a market for sales associate positions; they exist to make money off of the goods they offer. The jobs they create are an effect, not a cause, of the success of their business model.
This represents a staggering blind spot in the economic thinking of the left. In essence, they are attempting to wish the demand side of the market out of existence. I’ve made the point before – and suggested that Mitt Romney make it as well – that business is a form of service. Government subsidies aside, the only way any job comes into existence is by creating value for the employer – who in turn is creating value for the customer.
Now, it’s certainly true that there can be a short-term tension between profit maximization and employment. The point at which a firm is most profitable is rarely, if ever, going to be the point at which they have maximized their hires. But given the near-holy reverence that our friends on the left reserve for the word “sustainable,” you would think they would understand that keeping employment artificially high while cutting into a business’s bottom line – and thus jeopardizing prospects for future employment – is a fool’s errand.
One final note: there is a germ of truth to the criticisms of equating Romney’s private-sector experience with public-sector expertise. They are very different skill sets. The public sector’s role in allowing economic growth to blossom hinges largely on things like tax rates, spending policies, and the scale and scope of regulation. A leader in private industry can gain enhanced exposure to the real-world effects of these policies, but it doesn’t follow that they have any special talent for directing them (see Corzine, Jon). But that's not an argument against Romney -- it's just an argument for the fact that biography is not necessarily a determinative guide to how someone will govern.
Even that very narrow argument would be a decent one for Obama to make if he had presided over successful economic policies. Having failed to do so, however, the Obama campaign will continue to shoot blanks on this issue – a development that should be the source of great comfort at Romney headquarters in Boston.
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Jan '11
Re: The Bain Delusion
What was also staggering was how many media types nodded their heads when they heard the distinction between making a profit and creating jobs.
One notable exception (that I caught) - Brit Hume. He pointedly explained that jobs are a consequence of profit.
How can government help create jobs? Stop trying to help.
Re: The Bain Delusion
"I made a mistake this Memorial Day weekend; I sat through the Sunday political talk shows."
Troy, Troy, I tried to warn you. That's the sort of thing you were bound to find yourself doing once you bought a French bulldog.
May '10
Re: The Bain Delusion
Why? Do they control the remote?
Jan '11
Re: The Bain Delusion
Pardon the double-dip ...
What also struck me was how obviously the Democrats are trying to narrow Romney into a corner. Romney proclaims his business experience, and immediately the Democrats interpret that (i.e., create a talking point they repeat constantly) that Romney intends to use venture capital tactics on everything. They cherry-picked one facet of Romney's business experience, and portrayed it as the only part of Romney's skill set.
It's Alinsky-style manipulation. They heard only what they wanted to hear, and then tried to narrow the audience's focus to what they could misrepresent.
Jul '11
Re: The Bain Delusion
So Troy, do you feel this election will be a referendum on capitalism itself? It appears as if the left wants this fight now and their dogs in the media are howling for it as well. I think our country is better than what Obama stands for but we shall see.
Apr '12
Re: The Bain Delusion
Could someone explain how it is possible for an investor like Bain to purchase a company at the price demanded by its owners, and then make a profit by running it out of business? If that were possible, wouldn't the previous owners have done so themselves rather than sell it for the smaller amount?The idea that this could be done was a plot point in the Oliver Stone film, "Wall Street." Gordon Gekko plotted to acquire Blue Star Airlines planning to put it out of business, fire everyone, and sell the planes to Mexico. It was never explained how this could possibly work to make money for Gekko.
Dec '10
Re: The Bain Delusion
That's the beauty of expanding government. You can create jobs in government all day long without creating a jot of value anywhere. And if you're a Democrat, you get the added bonus of having your public sector union employees provide your employment insurance. It's all powered by rainbows and unicorn farts after you've gutted the golden goose, I guess.
Mar '11
Re: The Bain Delusion
Troy Senik, Ed.:
This represents a staggering blind spot in the economic thinking of the left.
Ya think?
This would no doubt explain why the USA is Fundamentally Transforming into Greece.
Apr '11
Re: The Bain Delusion
I haven't seen Wall Street, but there are certainly examples of corporate raiders doing similar things with companies that were too unbelievably terribly managed to be worth as much as the resale of their assets.
That wasn't Bain Capital's business model, though. It was the spawn of a consulting firm, Bain, and the result of consultant frustration with companies refusing to implement improvements. Instead of merely recommending improvements, Bain Capital would purchase, keep, and improve the companies, selling them a few years later.
Jun '10
Re: The Bain Delusion
The main business skill that a President needs is: know when to get out of the way, and know that getting out of the way is almost always the best policy. Plumbers know how to create wealth with a pile of copper pipes--you don't.
Apr '11
Re: The Bain Delusion
Economic illiteracy is a serious issue. If the right is looking for converts, that is the path to inoculating the masses against Nefarious ****™
(Trademark reserved for Alan Simpson for his Epic Rant)
edited the poor trademark to avoid possible CoC violation
Edited on May 29, 2012 at 8:41pmSep '10
Re: The Bain Delusion
People on the Sunday talk shows always display a stunningly odd understanding of cause and effect.
Apr '11
Re: The Bain Delusion
There are examples of other kinds of deals in Bain's portfolio, but the buy, turnaround, sell for much, much, more was the mainstay. The next biggest component was venture capital, like Staples. The average annualized return on realized investments was 113%. For 14 years.
Run that over in your head for a bit. Do some calculations. Compare your best ever significant investments. Compare, for instance, Microsoft's ~25% internal rate of return if you'd purchased stock at the IPO, or Apple's 23%. Admittedly, the realized investments metric is misleading, and the return that investors would see was closer to 50-80%. Per Annum.
The people buying companies from Bain thought that they were worth more than they were worth before Bain purchased them. The worlds leading steel manufacturer, for instance, employing the world's leading steel industry experts, was, if you take the asset stripping story as true, paying several times as much for a company as it would have paid for it a few years before because it wanted the assets that the company already had a few years before. This suggests a heck of a finders fee, and most major manufacturers can locate rivals already.
Jan '11
Re: The Bain Delusion
James Of England:
The people buying companies from Bain thought that they were worth more than they were worth before Bain purchased them.
The premise of Bain's takeovers is that an existing company could be a profit-maker, if only they had a more realistic and competent management.
Could be ... if they had ... competent management ...
United States ... could be ... if we had ... competent management ...
Jul '11
Re: The Bain Delusion
Would somebody please explain to the President that it is not about jobs, that it is not about profits, that it is about prosperity for all, for a better future for all. I do not want or need a President who supports policies that create twice the number of the $10 per hour jobs by getting rid of the $20 per hour jobs. I need a President that supports policies that cause companies to create $30 per hour jobs because the companies need these people to be prosperous.
May '10
Re: The Bain Delusion
“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” —Adam Smith, The Wealth of Nations, Chapter II, “Of the Principle Which Gives Occasion to the Division of Labour.”
Apr '11
Re: The Bain Delusion
KC Mulville
James Of England:
The people buying companies from Bain thought that they were worth more than they were worth before Bain purchased them.
The premise of Bain's takeovers is that an existing company could be a profit-maker, if only they had a more realistic and competent management.
Could be ... if they had ... competent management ...
United States ... could be ... if we had ... competent management ...
Right, although I'd note that they were generally buying with proof rather than on faith. The problem with Troy's critique that being a businessman merely gives you a Corzine like skill set is that it depends on "business" being one thing, with one skill set. Even worse is the frequently suggested "crony capitalist" charge with no support (because none exists), which depends on the notion that all businessmen practice crony capitalism.
What Mitt did was not crony capitalism; the whole point was that the changes were difficult and resisted, or they'd have been made without the need to take the firm over.
What Mitt did was not Corzine-like (other than while briefly running Bain and Company), but involved transforming bureaucracies and understanding the impact of changes on ordinary people.
Re: The Bain Delusion
Come to think of it, I was eating a tofu burger, flipping through the New Yorker, and pricing some antique porcelain on eBay at the time. I never realized the slope was quite this slippery.
Peter Robinson: "I made a mistake this Memorial Day weekend; I sat through the Sunday political talk shows."
Troy, Troy, I tried to warn you. That's the sort of thing you were bound to find yourself doing once you bought a French bulldog. · 3 hours ago
Re: The Bain Delusion
I wish the lines were drawn that clearly. No, this is going to be a proxy war on capitalism. One in which the left gets to say -- as they have been for the last several years -- "We're fine with capitalism, just not private equity, conventional energy producers, etc."
Were they honest about their views, this would be much more straightforward. But the Dems will continue to sound supportive of markets in the abstract while hammering them in reality.
Re: The Bain Delusion
James Of England
The problem with Troy's critique that being a businessman merely gives you a Corzine like skill set is that it depends on "business" being one thing, with one skill set.
This is a perfectly legitimate criticism ... of a point I didn't make. My only point in invoking Corzine (as I think the post makes clear) is that it's silly to assert that just because someone has been in the business world they will necessarily shepherd superior economic policies.
I understand that Romney and Corzine come from different parts of the private sector. Given my druthers, I'd prefer someone of Romney's background. But the takeaway here is that reading someone's CV only allows you to conduct more informed guesswork as to how they'd behave in office. For Romney, I would think it's much more instructive to examine his time as Governor of Massachusetts, factoring in, of course, the restrictions that the composition of the legislature placed upon him.
Edited on May 29, 2012 at 9:56pm