In the Arena

Mitt’s Bain

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I have a new print column out, which TIME subscribers can find here, about the triumphs and tragedies of Mitt Romney. The triumphs are obvious: he’s won twice now. The tragedies, also obvious: he’s a prohibitively awkward candidate for President. A good part of the awkwardness stems from the core elements of his resume, all of which he has difficulty explaining: his Mormonism, his career at Bain Capital and his moderation as governor of Massachusetts. But it’s interesting, Romney’s profile resembles that of another prominent politician–Barack Obama. Both are aloof, very smart, good debaters who feel more comfortable speaking with the aid of teleprompters. Obama is much less awkward than Romney, but he’s naturally reticent and not exactly a wily pol. It is, I suppose, rather odd that in this era of pious populist baloney, as Dr. Gingrich might say, we are likely to have a general election between two candidates who are not exactly men of the people.

Steve Rattner, the private equity guy who turned around the auto industry for Obama–a major triumph, by the way–has a piece on Politico about the ways and means of Bain Capital, which he finds mostly praiseworthy, except in the case of 4 companies that Bain seems to have looted. Oh well.

I’m still waiting for one of these private equity guys to address the more subtle issues raised by their form of capitalism. The loss of jobs can be easily defended in most cases–after a desultory period in the 1970s, American corporations needed to reinvigorated, streamlined. They needed to move from the industrial to the information age, especially when it came to control of their inventories and marketing strategies. When they were good, turnaround artists like Romney and Rattner made these companies more efficient, creating more jobs (and losing fewer) in the long term. And so, the left’s reflexive whinny about job losses–no one, except perhaps Mitt Romney–likes to see people fired–is understandable, but somewhat off the mark.

To my mind, the more questionable private equity practices had to do with the way they restructured the companies they bought: it was always in the direction of higher returns–higher salaries and bonuses for executives, higher returns for the investors in their funds. What’s wrong with that? Nothing, in principle. In practice, it led to a lot of short-term, quarter-to-quarter, thinking; often it led to a stripping away of research and development, less emphasis on the patience needed to bring new products to market and an addiction to ever-increasing profit margins. This caused a fundamental distortion in the free market system.

When the aggrandizement of executives and short-term profits made the transition to Wall Street in the late 1980s, it created a diseased culture of churning, arbitrage and casino games that, when applied to housing market, created the bubble that almost caused the system to crash. Housing was a perfect metaphor: it wasn’t the quality of the product–the bundled mortgages–that mattered, it was the daily punt on which way the market would move. The amounts involved in these blind gambles–trillions–soon outstripped the amounts that was going into good old-fashioned investments, investments (or bets) on the value of real things, like the coming corn crop.

All of this has created a situation where it is far more profitable for our smartest young people to go into Wall Street’s version of casino gambling than to try to create new products and bring them to market. I’m just finishing an excellent book on a country with an entrepreneurial culture much different from ours–Start-Up Nation by Dan Senor and Saul Singer, about Israel’s wildly creative high-tech sector, which has its roots in the informal, constantly self-critical nature of the Israeli military. (I think many of our veterans, returning from Iraq and Afghanistan with skills unlike any previous American expeditionary forces, may have a similar impact on our private sector–they’ve come from a culture where creativity and entrepreneurialism, the ability to work with people very much unlike themselves, improved their chances of survival.)

The U.S. will never be Israel–but the sort of capitalism that has evolved over the past 30 years may be the exact opposite of what we need to have a vibrant, job-creating private sector. The question for Romney is not about Bain’s deals. It is about what he learned from the unintended consequences of Bain’s form of capitalism, and how he would return American capitalism to a model that creates products, jobs and long-term stability.