It’s Mitt Romney’s Economy

One of the major debates of the 2010 election was about whose bad economy this was: Did the mess belong to Barack Obama now, or was he still just mopping up after the disaster that was George W. Bush? Despite the merits of their case, the Democrats lost that argument, and most of Congress along with it.

As we move towards 2012, the cover article in the current New York Magazine (doesn’t young Mitt look like Mad Men‘s Don Draper?) raises an intriguing third explanation: Maybe it’s been Mitt Romney’s economy all along.

That claim seems like a stretch the first time you hear it, but it makes sense. Our 1% economy didn’t just come from government, it’s also the result of a revolution in the way corporations behave. And one of the most decorated veterans of that revolution is Mitt Romney:

Mitt Romney is the real thing. He was, by any measure, an astonishingly successful businessman, one who spent his career explaining how business might operate better, and who leveraged his own mind into a personal fortune worth as much as $250 million. But much more significantly, Romney was also a business revolutionary. Our economy went through a remarkable shift during the eighties as Wall Street reclaimed control of American business and sought to remake it in its own image. Romney developed one of the tools that made this possible, pioneering the use of takeovers to change the way a business functioned, remaking it in the name of efficiency.

There’s a lot to unpack here. Let’s start with efficiency. Whether or not you think a corporation is “efficient” depends on what you think corporations are supposed to do. Romney’s revolutionary cadre of young management consultants believed that the sole purpose of a corporation was to make money for its owners — a view that is orthodox in American business today, but wasn’t in the 1970s. (It still isn’t in many other capitalist countries, like Germany.)

Whenever you change the definition of efficiency, you’re going to look around and discover lots of inefficiency, because nobody has even been trying to be efficient by your new definition. That’s what Romney saw when he came on the scene in 1975. Corporations were inefficient in all sorts of ways: Too many were unfocused conglomerates, assembled more to gratify egos than to make money. They tried to do too many things and failed to make the most productive use of their resources.

But above all, they had too many employees and paid them too much. Efficiency demanded that this be fixed, and vast profits awaited whoever would fix it.

As the Economist points out, Romney can’t claim all the credit for this transformation — otherwise he’d be Buffett/Gates rich — but nonetheless he is typical of the class of people who can. Romney worked for the consulting group Bain & Company and in 1983 led their spin-off Bain Capital.

Every business story begins with a proposition, and the one that launched Bain Capital was the notion that the partners might do better if they stopped simply advising companies and starting buying and running the firms themselves.

One obstacle to efficiency at the taken-over companies was the loyalty that some managers felt towards their workers and middle managers, but Romney had a solution for that.

In 1986, Bain Capital bought a struggling division of Firestone that made truck wheels and rims and renamed it ­Accuride. Bain took a group of managers whose previous average income had been below $100,000 and gave them performance incentives. This type and degree of management compensation was also unusual, but here it led to startling results: ­According to an account written by a Bain & Company fellow, the managers quickly helped to reorganize two plants, consolidating operations—which meant, inevitably, the shedding of unproductive labor—and when the company grew in efficiency, these managers made $18 million in shared earnings. The equation was simple: The men who increased the worth of the corporation deserved a bigger and bigger percentage of its spoils. In less than two years, when Bain Capital sold the company, it had turned an initial $5 million investment into a $121 million return.

The poster child here is the paper company AmPad. Romney bought it, took it private, re-organized, and then took it public again.

By 2001, five years after the company had been taken public, it had filed for bankruptcy and liquidated its assets. But Bain Capital made more than $100 million from AmPad for itself and its investors.

In just about every way, Romney and Bain Capital were among the trailblazers of the new economy: They destroyed both blue and white-collar jobs, cut pay at the bottom and raised it at the top, and made money even on companies that failed.

How much further ahead of his time could Romney have been?

In 2002, he became governor of Massachusetts, where he turned his attention to health care. In a rational world, RomneyCare would be his political claim to fame. Working with a Democratic legislature, Romney crafted a program that has resulted in only 4.6% of residents under 65 lacking health insurance (compared to 26.5% in Texas). But RomneyCare was the model for ObamaCare, so now Republicans hate it and Romney can’t take credit for it.

But the choice of health care as Romney’s original issue gives a lot of insight:

But what separates Romney’s plan from Obama’s—and gives some clues about his potential presidency—is its almost-accidental origin. Romney did not begin with a philosophical quest to improve American health care. He began with the idea of himself as a problem solver and asked those around him for a problem that he might usefully solve.

The picture that emerges is a little different from the one his Republican rivals paint: It isn’t that Romney changes his principles when the wind changes. It’s that principles are not fundamental to his thinking. He exhibits

the clinical separation of decision-making from ideology, the detachment of those decisions from moral consequence, a persistent blind spot for people as people.

That makes him an odd choice for a Republican Party that is more ideological and moralistic than it has ever been. And yet (though he is persistently mired in second place in the polls — seemingly behind a different leader each month), the InTrade predictive market is giving him a 70% chance to win the nomination, compared to 5.4% for current poll leader Herman Cain.

The Republican electorate longs for an authentic conservative (Bachmann) who has both charisma (Cain) and gravitas (Gingrich). But given that there isn’t one, they may have to settle for an efficient problem-solver who will say whatever they want to hear.

Next summer and fall, there will be a battle of narratives about the economy. Both parties will say that the economy is bad, but they will disagree about why. Is it bad because it is the Obama economy, hobbled by deficits, taxes, and regulations? Or is it bad because it is the Romney economy — the economy of paper profits and no jobs, the economy of the 1%?

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  • By The System’s Game « The Weekly Sift on October 31, 2011 at 12:26 pm

    […] It’s Mitt Romney’s Economy. Vast inequality? Paper profits and no jobs? It’s all part of a revolution in corporate behavior that started in the 70s. And one of the major revolutionaries was Mitt Romney. […]

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