Creative destruction
Hiring, firing and Mitt Romney
January 10, 2012
Before he entered politics, Republican presidential candidate Mitt Romney made a fortune at Bain Capital, the private-equity firm he ran from 1984 to 1999.
Ari Berman
In recent days Mitt Romney has strenuously defended his tenure at Bain Capital, lauding his former employer as a classic success story of free-market capitalism and lambasting his opponents on the left and right for practicing the “bitter politics of envy.”
In his New Hampshire primary speech, Romney claimed that “President Obama wants to put free enterprise on trial” and “turn America into a European-style entitlement society.” In Romney’s telling, Obama relies on government for his solutions, while Mitt draws his inspiration from the power of the free market. There are winners and losers in the free market, this argument goes, and it’s not the government’s job to determine who they are. At a recent debate, Romney said that government “by and large…gets in the way of creating jobs.”
But a closer look at Bain’s record under Romney reveals that the company relied on the very government subsidies that Romney and Tea Party conservatives routinely denounce as “crony capitalism.” The Los Angeles Times ran a big story yesterday about Bain’s investment in Steel Dynamics, which received $37 million in subsidies and grants to build a new plant in DeKalb County, Indiana. An analyst at the Cato Institute called it “corporate welfare.”
Romney has recently pointed to Steel Dynamics as one of his success stories at Bain, including in a new ad, which contributed to the 100,000 net jobs he’s claimed to have created at the firm (an incorrect figure he’s subsequently had to walk back). He never mentions that government subsidies played a major role in ensuring that success.
Phil Mattera, research director for Good Jobs First, provides a few more examples of the government subsidies Bain received during Romney’s tenure at his blog, Dirt Diggers Digest.
GS Industries. In 1996 American Iron Reduction LLC, a joint venture of GS Industries (which had been taken private by Bain in 1993) and Birmingham Steel, sought some $20 million in tax breaks in connection with its plan to build a plant in Louisiana’s St. James Parish (Baton Rouge Advocate, April 6, 1996). As the United Steelworkers union noted recently, GS Industries later applied for a federal loan guarantee, but before the deal could be implemented the company went bankrupt.
Sealy. A year after the 1997 buyout of this leading mattress company by Bain and other private equity firms, Sealy received $600,000 from state and local authorities in North Carolina to move its corporate offices, a research center and a manufacturing plant from Ohio (Greensboro News & Record, March 31, 1998). In 2004 Bain and its partners sold Sealy to another private equity group.GT Bicycles. In 1997 GT, then owned by Bain and other investors, decided to move its manufacturing operations to an enterprise zone in Santa Ana, California. Being in the zone gave the company, which was later purchased by Schwinn, special tax credits relating to hiring and the purchase of equipment (Orange County Register, July 9, 1999).These subsidies didn’t always provide the return states and localities were looking for. Seven hundred and fifty workers lost their jobs, for example, after Bain took over GS Industries. “They walked out of here with millions,” said one former steelworker. “They left us with nothing.”Sealy, another company cited by Mattera, moved its headquarters from Cleveland to Greensboro after Bain’s investment to take advantage of the generous government subsidies, a fact that is not likely to endear Romney to Ohioans.There are likely other examples of Bain profiting from these type of subsidies, along with a host of unanswered questions.
How much did Bain-owned companies receive in total government subsidies? Did Bain take public money and then lay off workers? Did Romney seek these subsidies out?Romney will no doubt try to channel Reagan in the coming campaign, echoing, in one form or another, the Gipper’s famous refrain that “government is not the solution to our problems; government is the problem.” Romney, based on his own compromised history, will have a tougher time making that argument.
Romney could have expected that Democrats would give him a hard time about his role buying, building, selling and sometimes closing businesses, which created — and eliminated — a lot of jobs. But he's getting ripped by his Republican opponents, too."If you are a victim of Bain Capital's downsizing, it is the ultimate insult for Mitt Romney to say he feels your pain when he caused it," Texas Gov. Rick Perry said Monday.
Newt Gingrich has echoed the sentiment that Romney profited handsomely while causing more pain than gain for workers.For his part, Romney couldn't have been more ham-handed on Monday when he said, "I like being able to fire people who provide services to me." Perhaps not so bad in context: He was talking about having the ability to change health insurers if an insurer doesn't provide good care. But as a sound bite, oh, he's going to hear this one again and again and again. And again.Romney, of course, would rather focus on the jobs that were created during his time at Bain. He pegs that at a net gain of 100,000 jobs, though he has not substantiated that claim.
So, how to look at this?
Private equity is not evil. It is a natural part of capitalism. In its simplest form, its practitioners put money to work on behalf of investors willing to take a chance on expanding young companies or fixing troubled ones. When it succeeds, the companies prosper. When it fails, the companies shrink, or disappear.
Private equity is not constructed to be some altruistic job engine, and Romney shouldn't pretend that it is. Success in private equity requires unsentimental decision-making. The goal is to produce a return on investment.Private equity companies, including Bain, are almost certain to have a mixed record. Bain funded the Staples office-supply chain under Romney's watch. It also has closed companies that it could not fix in short order.
On Monday, The Wall Street Journal reported on 77 businesses in which Bain Capital invested during Romney's tenure. Bain produced "stellar returns," largely coming from a small number of its investments, while 22 percent of its companies filed for bankruptcy or closed within eight years of Bain's involvement, "sometimes with substantial job losses."
Private equity generally operates on what many workers would consider a hurry-up timetable: Its investments might include a three- to five-year "exit strategy." Companies that fail to make money as expected typically suffer the consequences of impatient investors.
At its best, private equity births and sustains companies that provide goods and services and put people to work. At its worst, well, in the junk-bond-fueled heyday of the 1980s, some corporate raiders were accused of buying companies with borrowed money strictly to sell off assets and pocket as much cash as possible — leaving behind bankrupt shells and ousted employees.Romney's decision-making at Bain will and should undergo much more scrutiny. Romney can neither shrink from his resume nor try to sugarcoat it. He was immensely successful for his investors. His experience at Bain in some ways prepares him well for the job he seeks: Presidents have to make tough decisions too. His experience gives Romney an edge in understanding the American economy, though not necessarily the American public.
No doubt the candidate has polling data that show how Americans distrust financiers in the wake of an economic near-meltdown and unpopular bailout of the banking system. The real-estate bust wiped out trillions of dollars in wealth for middle-class Americans. The job market still suffers.The creative destruction that keeps an economy fresh creates and destroys thousands of jobs every month. It's a brutal fact of life. It doesn't make for a very appealing presidential campaign slogan, but if Romney is going to be honest with the public, he'll acknowledge this. And so will every other candidate for president.
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