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Economic Ignorance in the GOP Race

Posted By Ben Shapiro On January 12, 2012 @ 12:21 am In Daily Mailer,FrontPage | 14 Comments

The day before the New Hampshire caucuses, Mitt Romney’s opponents finally decided on a strategy to attack him – from the left.  Now, lest you think this is nuts in a Republican primary, remember that John McCain was our presidential nominee in 2008.  Which means that unless someone cuts into Romney’s “moderate” base, we will likely see him as the nominee.

Thus Newt Gingrich released the hounds on the frontrunner, telling audiences that Romney has “some very big questions to answer” about his time at Bain Capital, the investment firm at which he was CEO.  “I don’t have much respect if you rig the game so you end up walking off with all the money,” Gingrich told Bloomberg TV.  Gingrich cited one particular case in which Bain invested $30 million in a company, only to withdraw $180 million later, sending the company into bankruptcy.  The question, said Gingrich, was whether “these particular companies were being manipulated by the guys who invested in order to drain them of their money, leaving behind people who are unemployed.”

Is this attack fair?  In some ways, it is.  Romney has run on his record at Bain Capital, suggesting that he created some 100,000 jobs in his time there.  When asked by George Stephanopoulos whether this number was “net” – meaning that it took into account the jobs created minus the jobs cut – Romney answered that it was.  There’s only one problem: it clearly wasn’t.  In his 1994 campaign, Romney claimed that he had created 10,000 jobs; by today, that number has multiplied by ten.  What changed?  The companies he founded or invested in grew.  But that’s not solely due to Romney’s involvement of course – it’s like arguing, as my grandmother jokingly does, that all of our accomplishments are due to her getting pregnant with my father some 55 years ago.  Sure, it’s true technically.  But there have been a few intervening events in that time frame.

So Romney made his record on jobs at Bain an issue.  Thus, his actual job creation record becomes fair game.

That’s doubly true when you take into account Romney’s Super-PAC ads against Gingrich in Iowa, which were both brutal and slightly misleading.  Presidential races do have karma, and Romney brought the bad juju on himself.

The broader question is whether Romney’s success at Bain Capital should be judged on job creation in the first place.  It shouldn’t.  When Romney’s opponents suggest that his record at Bain Capital was all about cutting jobs, they miss the point: Romney’s job at Bain Capital was to turn companies profitable, or to dismantle them on behalf of his investors.  His job wasn’t to create jobs – it was to create profit.

This is one of the key pitfalls that conservatives keep running into on economics.  They know that for public relations reasons, they must talk jobs – but employment is an almost irrelevant byproduct of true economic health.  A company is not better run or more useful because it “creates jobs.”  A solid company is a solid company because it offers useful services and goods for prices people are willing to pay, and is able to continue offering those services and goods because it does not spend more than it takes in.

That’s why GM, which employed 92,000 people at the time of its collapse, was a rotten company; that’s why Microsoft, which employs approximately the same number but ran a profit of $14.6 billion in 2010, is a great company.  GM needed government bailouts; Microsoft didn’t.  With GM, we ended up paying to preserve the jobs of people at companies whose goods and services we don’t want to buy.  With Microsoft we didn’t.  Why?  Because jobs numbers are a terrible gauge of economic health.  Just ask the Soviet Union, where everyone had a job but nobody had a potato.

Profits, by contrast, are a wonderful gauge.  Liberals who judge the Clinton economy by the surplus he left behind should remember that the same holds true at companies: profits matter.  If you can create $10 billion from three employees, more power to you – you’re pleasing a lot of paying consumers, who obviously benefit from what you do.  If you’re $10 billion in the hole but employ 3,000 people, you’re a failure.

The evil profit created by evil corporations really isn’t evil at all: it’s just a snapshot of the health of a company.  And by that standard, Bain Capital was a glowing success.  During Romney’s tenure, Bain Capital was generating an annualized return of over 50%.

But what about all those lost jobs?  Did Romney really have to cut them to create so much profit?

Yes.  It would behoove conservatives to remember that Oliver Stone’s iconic take on capitalism in Wall Street is essentially a communist critique of the capitalist system.  Carl Fox (Martin Sheen), the union boss – the same guy who’s bankrupting the Blue Star because employees are getting paid too much – is the hero.  Gordon Gekko (Michael Douglas) is the bad guy because he wants to dismantle Blue Star airlines.  What makes him the bad guy?  As Gekko says, “It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.”

This is precisely wrong.  Blue Star is near bankruptcy.  If Gekko doesn’t come in and create profit for Blue Star’s shareholders, they end up shafted the same way GM’s bondholders were – they get a minute percentage on their holdings.  If Gekko buys stock, the sellers profit.  The buyers of the Blue Star equipment also profit, and so do consumers, who now get better service from the companies that were able to buy up Blue Star’s assets.  Dismantling bad companies is not only good business, it’s good for people.  Economics isn’t a zero sum game.  Some people obviously lose, but more people win.  Carl Fox deserves to lose his job, since he’s so obviously helped collectively bargain Blue Star into the ground.

Newt Gingrich may be politically right in his Carl Fox act, but he’s philosophically wrong.  What Romney did at Bain was good for the economy, and it was good for people.  That may be difficult to explain in a time where jobs are supposed to be the only things that matter.  But that says more about the state of economic ignorance in America than it does about Romney.

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