Paul Pillar

Romney, Corporations, and Government

The criticisms by Mitt Romney’s Republican opponents of his record as a private-equity artist may be motivated by desperation in trying to deny him a nomination that seems almost in his grasp, but that record is certainly fair game. Romney, after all, has repeatedly touted his business experience as supposedly a major qualification for the presidency. Since Newt Gingrich and the others have made this an issue in the primary campaign, they have tended to focus on whether companies under the control of Bain Capital slashed more jobs than they created. That focus is understandable in an election campaign in which unemployment is a major issue. But the lessons for how we view either the private-equity business or Mitt Romney’s ability to function as president go well beyond a balance sheet about jobs.

To the extent the claims and barbs of this election campaign cast light on what private-equity artists do, and on the larger effect on the economy and society of what they do, that is a good thing. Although to some extent what they do is part of the allocation of capital that is necessary for successful capitalism, to a larger extent what they do is exploitative and parasitic. It is essentially a process in which the financial clout that enables a private-equity firm to take complete control of a company is used in an exploitative mode, taking advantage of the heads-I-win-tails-you-lose relationship between the private-equity firm and the owned company. The nature of the result is reflected in companies that have received the private-equity treatment having a bankruptcy rate that is twice that of publicly owned firms that have not had that experience. Anything with a result like that is unlikely to be on balance good for the larger economy. If campaign-generated light shining on the private-equity business stimulates more debate about possibly needed regulation of the business or about how private-equity profits ought to be taxed, so much the better.

These considerations may be enough to draw some legitimate conclusions about what makes Mitt Romney tick, what motivates him and what he values most. But the relevance of his experience at Bain Capital for how he would function as president requires analysis that goes farther than that. I took a stab at such an analysis several weeks ago. I pointed out that an important distinction needs to be drawn between an executive who feels a stake in the long-term growth and health of a company and, in contrast, the private equity artist for whom a company is merely a temporary means from which to extract maximum profit and then be discarded—never mind the health or solvency of what is discarded. For a President Mitt Romney, the federal government would be one more company over which he had temporary control, to be discarded after four or eight years after extracting whatever would be for him the functional equivalent of profit.

Daniel Drezner offers this week some observations that echo mine, summarized in his headline statement that “governments are not corporations.” Not having monetary profit as a single measure of success is one obvious difference. Another major difference, most relevant to the contrast with the private-equity business, is that government does not have the freedom to get into lines of business that do well and to get out, or stay out, of ones that don’t. Government is expected to do certain things, no matter how difficult or “unprofitable” they may be. In fact, government does some of these things largely because the private sector does not see any profit in them or sees the risk of failure as too high. NASA, for example, does things for which the current state of the technology makes them too unprofitable or risky to be attractive to private enterprise. Once the government space program has blazed a technological trail, private enterprise may follow later. The suborbital trips that the nascent space tourism business is getting into now involve what government accomplished over half a century ago with the X-15 rocket plane. The space program may still present some getting-in-or-getting-out sorts of choices, but there are countless other functions of government that do not, because of political pressures or simply a firm expectation of what services government ought to provide. These range from the policing of crime to the provision of old-age assistance through Social Security to the management of difficult but unavoidable relationships with foreign states.

Mitt Romney took flak for equating corporations with people. A bigger worry in wondering how he would function as president is the notion of equating corporations with government.