As head of Bain Capital, presumptive Republican nominee Mitt Romney didn’t run a corner store. He managed a company that took over other companies, with the goal of creating value for investors. Sometimes the companies managed by Romney’s company laid off workers or went bankrupt, yet Romney’s team still made money.
To Wall Street insiders, this kind of activity isn’t hard to understand. But to people on Main Street, private equity can seem downright suspicious. The Obama for America campaign has merrily exploited this divide, and the Romney campaign seems trapped by the same populist language.
“That’s how Ted Kennedy beat him so badly the first time.... Kennedy made it a political debate and not a financial one,” said Howard Anderson of MIT’s Sloan School of Management, referring to the 1994 Massachusetts Senate race. The fact that private equity executives can make money even when jobs are lost, or when bought-out companies go bankrupt, is “a tough one to sell,” Anderson said.
The Obama campaign has hit Romney on outsourcing, offshore holdings linked to Bain Capital, and Romney’s muddled explanation of when, exactly, he retired from Bain. But Romney hasn’t responded with a robust defense of creative destruction; he’s framed his time at Bain in the same language of jobs won and lost, creating a back-and-forth that has experts scratching their heads.
The election-year rhetoric on outsourcing is “garbage,” said Jagdish Bhagwati, professor at Columbia University and senior fellow for international economics at the Council on Foreign Relations. Outsourcing some jobs can make American businesses more competitive and can even preserve jobs at home, Bhagwati said.
Recent polling suggests that the attacks on Romney’s business record have done little to move the needle in Obama’s favor. But Democrats argue that the outsourcing attacks resonate in communities that have seen jobs move overseas, and that Romney’s attempt to label Obama the “outsourcer-in-chief” shows how seriously his campaign is taking the issue.
Both candidates want to frame themselves as job creators. “We created over 100,000 jobs,” Romney said of Bain during the Republican primaries. Unfortunately for Romney, he ballparked a number that has proved tough to verify.
“Experts agree that calculating net job growth across a portfolio of companies is difficult to do with precision,” Bain Capital wrote in a March letter to investors obtained by The New York Times. The company pointed to data it does track: “There should be no doubt that $105 billion of revenue growth is an economic engine with widespread benefits.” Romney knows that Bain Capital’s business isn’t domestic job creation, but he’s still tried to sell the company as a job creator.
In fact, between 1980 and 2005, private equity buyouts accelerated churn in the labor market but didn’t have much of an effect on overall employment, the National Bureau of Economic Research has found.
“What the economy needs, in part, is a good healthy dose of the kind of creative-destruction activity that private equity has contributed to,” said professor Steven Davis of the Chicago Booth School of Business, a coauthor of the NBER study. A dynamic labor market helps propel economic growth, Davis said. Romney has seemed reluctant to make that argument.
As for Romney’s retirement schedule and personal finances, CEOs and Wall Street types are much more familiar with those intricacies than people who’ve never made money off of carried interest.
High-level managers know that there can be a difference between being an active company owner and an owner in name only. That’s a tension “that securities lawyers and corporate lawyers acknowledge every day,” said Robert Jackson Jr., associate professor at Columbia Law School. It’s not unusual for executives to take a leave of absence—as Romney did when he left to manage the Salt Lake City Olympics—and remain the titular head of the firm without playing a major management role.
But the Obama campaign’s attacks—and Romney’s perplexing public statements—have turned a fairly routine situation into a campaign controversy. “A minor but real tension between Mitt Romney’s public statements and the filings looks much bigger, much more substantial, and looks almost like fraud to an average person,” Jackson said.
Similarly, offshore holdings aren’t unusual among men of Romney’s wealth, although they do raise ethical questions, Jackson said. It’s hard to know just how unusual Romney’s investments are, because he hasn’t released all his tax returns or his severance agreement from Bain.
“I was the owner of an entity which was a management entity. That entity was one which I had ownership of until the time of the retirement program was put in place. But I had no responsibility whatsoever after February of '99 for the management or ownership--management, rather, of Bain Capital,” Romney told CBS News last week. To National Review Online, Romney said of his investments: “The world of finance is not as simple as some would have you believe.”
The lack of clarity can make Romney appear secretive—a flame the Obama campaign is eager to fan. The campaign even released a ‘man-on-the-street’ web video of regular folks incredulously reading Romney’s muddled response to CBS News.
“Obama and his handlers are a disgrace in their populist fallacies,” Bhagwati wrote in an e-mail, adding: “You may quote me on the above.” But Romney has been equally guilty of pandering to his base, and has failed to articulate a vision of capitalism that inspires economists and regular folks alike.