Is Capitalism the Bain of Romney's Political Existence?

It's time for a new discussion of how the business sector can work with government not only to create wealth -- which continues to vastly benefit the already-wealthy -- but to build human capital and human opportunity.
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As charges of vulture capitalism hang in the air, Mitt Romney's claim that he understands job creation because he's a "business leader" begs us to look deeper.

We ought not look to Romney, but to Peter Drucker, the father of business management, as we answer the cry that's unceasing from middle Americans: How will America produce decent jobs and opportunity? Drucker, a consummate champion of business, leveled a serious charge ten years ago. And his accusation is ten times more relevant today.

Three divergent interpretations of our economic reality are bringing focus to our political choices. Which view prevails will determine who is our next President and what policies we can expect.

View 1: Capitalism is rough, but in the end it creates jobs. In this interpretation, the Bains of the world seek opportunities to eliminate employees, units, divisions, departments, and whole companies. Not out of sick, evil intent, but out of the convictions that these individuals and groups are just not optimally efficient. Such sub-optimal performers might well have been eliminated by the market anyway. Bain interventions led to a new life for some. Others not.

Romney argued in the New York Times that this kind of private sector efficiency is what should have happened to Chrysler and GM in 2008. Let them crash, he said at the time, and let the market have at them (with a little public bankruptcy court assistance), and salvage whatever value there is. It would have been some terrifyingly "creative destruction," but the true free marketers, of whom Mitt generally counts himself (and Ron Paul with even less hesitation), believe that in the end more jobs get created than destroyed. In this view, if the "economic man" can't create something of great enough value to earn money/a job, then so be it. That's his or her moral problem and no one else's.

View 2: Modern day capitalism is no longer a net job creator, especially in developed countries like the United States of America. In this view, it's simply foolish to look to business people for the answer to creating jobs in America. It's like looking to NBA players to keep ticket prices down. "Ahh, sorry, not my job!" In this interpretation, business people are doing what they must. Bain excels at it. They seek efficiency to grow the bottom line. As they steward businesses, labor is often a huge share of their cost of doing business, and they fastidiously manage that cost center. To make profit -- or sometimes just to stay in business -- they hold wages and jobs down.

The one percent, of course, benefit greatly as investors. And as former Secretary of Labor Robert Reich points out, many in the 99 percent also like this cold-hearted, rational capitalism. In Supercapitalism, Reich argues that as consumers, we're thrilled that prices are held down by competitive cost-cutting; and as investors, including 401(k) and pension holders, we demand that our investments pay. My 80-year-old mom told me this week that she'll get her new Ford Fusion for less than the lease she signed three years ago, and it will have many more features. And she will buy it because demanding money managers have seen that the market has performed well for her.

But many workers simply can't find work, and millions more worry that their job could be the next inefficiency to be eliminated. The pure free marketers argue that over time they create jobs by making companies healthy. And they might surprise you with the results of the supposedly horrible first decade of this century, when for all the down-sizing, American businesses that operate abroad did not cut but added a net half-million jobs. But where did those jobs get added? They added 2.9 million jobs abroad while cutting 2.5 million jobs here. These weren't just cuts to jobs in manufacturing or textiles -- there wasn't an industry that was immune. Even Ernst & Young did a million American tax returns in India. Capitalism moves capital like gravity moves water -- to the low spots. And they simply aren't in America.

As my wife, former Governor of Michigan Jennifer Granholm, and I argue in our book, A Governor's Story, continuing productivity gains and the huge surplus of cheap labor abroad dictate that efficient capitalists, which Mitt Romney certainly was, can't be trusted to create jobs. After all, the driving purpose of modern American capitalists is to create wealth not jobs.

Do you think we would ever hear Romney say that he and his colleagues assessed acquisitions and start-up investment opportunities in his board meetings by determining which ones would create the most jobs? Of course not. Free market thinkers must answer for the fact that the big problem is not that the invisible hand is being crippled by government, but that it's now moving money like David Copperfield moves coins or Apple moves music -- at lightning speed. The developing world is in a major rush to attract our capital, and our capital is nothing but fluid.

Peter Drucker, a huge believer in market capitalism, was deeply concerned about what is now Romney's Bain problem. Drucker saw that business had become a huge force in American life. And as he argues below: where there is power, there must be some accountability.

Management books tend to focus on the function of management inside its organization. Few yet accept it as a social function. But it is precisely because management has become so pervasive as a social function that it faces its most serious challenge. To whom is management accountable? And for what? On what does management base its power? What gives it legitimacy?

Drucker rightly noted, "These are not business questions or economic questions. They are political questions. Yet they underlie the most serious assault on management in its history -- a far more serious assault than any mounted by Marxists or labor unions." And what did Drucker see as that momentous threat? His three-word answer: "The hostile takeover." Drucker saw that owners like pension funds were "driven by the postulate that the enterprise's sole function is to provide the largest possible immediate gain to the shareholder. In the absence of any other justification for management and enterprise, the 'raider'... too often immediately dismantles or loots the going concern, sacrificing long-range, wealth-producing capacity to short-term gains."

There are those who wouldn't admit to these structural problems, but instead lay a third view at CEO Romney's feet:

View 3: Modern day capitalism can work, but some evil actors abuse it. In this view, CEO's and boards should create shareholder value, but they should also act responsibly regarding the fallout of their actions. Some don't. Newt Gingrich and Rick Perry are trying to pin this tale on Romney, with Perry labeling Romney a "vulture capitalist," who makes wealth by preying on the vulnerable. They postulate and Democrats will no doubt amplify the argument that Romney's no better than the Wall Street guys who bet against the very paper they sold, knowing people down the line who trusted them were going to get left holding a fraction of their investments.

If modern day capitalism is a healthy system distorted by bad actors, then we ought to at least create rules; for example, a separation between banks and investment firms to protect savers. And we ought to spend money to aggressively prosecute the rule-breakers. Yet the modern-day free market people resist nearly every "regulation" as an unnecessary burden (see the gnashing of teeth over Sarbanes-Oxley).

How does it all shake out? That's the conversation we should be having. Although we depend on private sector businesses to create wealth and in turn jobs, modern capitalism does not aim to create jobs. When it does, by definition it holds no preference for American jobs. And by historical reality it is certainly not creating lower-skilled jobs at (heretofore) livable American wages.

It's time for a new discussion of how the business sector can work with government not only to create wealth -- which continues to vastly benefit the already-wealthy -- but to build human capital and human opportunity.

Would that Peter Drucker were still alive to assist with that conversation.

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