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The Wall Street Journal, January 17,
2012
Newt's Bain Opportunism
Is Mitt's Opportunity
By Donald L. Luskin
Newt Gingrich's claim about Mitt Romney and Bain Capital
-- that its business model was "figuring out clever legal ways to loot a
company" -- is an egregious lie. Yet Mr. Gingrich is not stupid. He and the
other Republican primary contenders who have echoed his attack have
calculated that the only way to beat President Barack Obama, who uses the
words "millionaires and billionaires" as insults, is to join him. It's
unanimous, then -- capitalism is immoral.
At last, Mitt Romney finds himself
with an issue that can define him, an issue about which the 2012 election
can be a referendum. This is Mr. Romney's moment to distinguish himself by
proudly making a moral case for free-market capitalism.
A merely pragmatic
case for capitalism won't do. That's the phony expediency that Mr. Gingrich
employs when he panders to pro-growth Republicans, saying "the whole purpose
of investment is … job creation." Capitalism has indeed proven to be
excellent at creating jobs. But politicians -- from the bureaucrats who lent
federal money to Solyndra, all the way to the outright socialists -- claim
they can do that, too.
The enduring case for capitalism -- the moral case
that Romney must make now -- is that it is the only economic system
consistent with liberty.
Private equity -- the realm of capitalism in which
Bain Capital operates -- is an expression of that liberty. There's nothing
mysterious here. Private-equity firms are much like mutual funds that invest
in stocks. But when a private-equity firm invests, it typically buys the
entire company. Then the private-equity firm becomes actively involved in
the management of the companies it owns.
Sometimes that means trying to turn
around firms that have fallen on hard times. And if that doesn't work,
private-equity firms can't just sell their shares and walk away. They have
to take the responsibility for tough decisions: closing down factories and
stores, eliminating jobs. A 28-minute film produced by a Gingrich-linked
political action committee focuses on four such cases involving companies
owned by Bain, replete with tearjerker interviews with laid-off employees
intercut with distorted images of Mr. Romney looking vaguely satanic. The
movie's implication is that any money Bain salvaged from these companies
should have gone to these benighted workers.
The film is propaganda trash
worthy of Michael Moore, not an aspiring presidential candidate who styles
himself Reaganesque. For Mr. Gingrich to use this kind of irrationalism is a
bid to replace the rule of law with the rule of emotions.
Under the rule of
law, capitalists -- investors in real estate, factories, equipment, stocks,
bonds or whole companies -- have the confidence to invest because they know
exactly what their property rights will be under various scenarios of
success or failure.
So investors can knowingly take big risks, first when
they start or acquire a company, and then when they have to pay workers
before there are any customers or any profits. They understand that if
everything goes well, their investment will yield profits, and that someday
they may be able to sell the business itself for a profit.
And they
understand that if things go badly, and they have to shut down the business,
all they'll end up with is whatever they can fire-sale its assets for. That
could very well mean a loss. The workers whom they've employed all along
will lose their jobs, but they were paid their salaries and benefits all
along -- investors who rely on equity profits have no such guarantee.
This
is what the word "equity" means, legally. It is the residual share of value
left over once everyone else -- suppliers, lenders, the tax-man and
employees -- are paid. An equity owner such as Bain is last in line to earn
profits or salvage the remains if there is a failure. In compensation for
that lowly status, equity owners get the lion's share of the upside if there
is a big success.
The rules under today's politics are quite different.
Consider the federal government's 2009 bailout of General Motors. GM's
secured bondholders were contractually entitled to equity in the failing
company, yet the president stripped them of their rights, giving their
equity unfairly to the company's unions -- which had helped get that
president elected.
This is the new order that Newt Gingrich is advocating
when he attacks Mitt Romney and Bain: Equity should go to workers, not to
the owners who made the risky up-front investments that created it in the
first place. It's a vast new entitlement for labor -- one not embodied in
law but imposed at the whim of the nation's chief law enforcement officer
and now advocated by a man seeking that job.
Mr. Romney must stand up for
the rule of law that underpins free-market capitalism. It can't guarantee a
chicken in every pot -- and neither can any other system. But capitalism
does guarantee a fair deal. Investors in businesses, and the employees who
choose to work for those businesses, know exactly where they stand, and they
have the liberty to invest or not invest, and to work or not work,
accordingly.
Today the stagnant American economy is starving for investment
while trillions of dollars sit on the sidelines. If Mitt Romney can restore
the rule of law that free-market capitalism requires, those trillions will
have the confidence to come back into play. Very likely, that would result
in massive job creation. Surely it would result in liberty.
Mr. Luskin is chief investment officer at Trend Macrolytics LLC. |
