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Monday, September 3, 2012

Bain and Romney

I ran across the most fascinating article yesterday, written by one George Gilder, a famous supply-side economist. It's up at the American Spectator, entitled Romney, Bain, and Me. If you read nothing else from it, at least consider this paragraph:
Bain’s analysis means that tax rate reductions, deregulation, and stable monetary policy can move an entire economy toward a hugely higher level of learning, informational efficiency, and equity value. Every company can move further down its curve. Every entrepreneur and worker can enhance his performance by increasing his units of experience. Lower rates yield more revenues not because workers make greater efforts or investors pursue higher monetary returns, but because workers and investors alike gain more knowledge, experience expands at every level, and every company and capital asset increases in value.
That speaks well for both Bain and Romney. This article is very, very long. It is full of substance. It is the opposite of the hasty and unscientifically-based attacks common on Bain in the media. I've picked out bits and pieces, but if you have the time (and it's worth making the time) please read the whole thing. Here is the economist George Gilder explaining that his success largely came from his time meeting with Bain and Romney.
... every speech and book that I produced from then on bore the imprint of my conversations with people at Bain. I learned more from them than from any other audience or, if truth be told, from my four years of Harvard, which included little economics beyond disgruntled attendance at a lecture by Galbraith reading out loud word-for-word from his bestselling book.

What I gathered from Bain was the key role of learning and information in economics. Later I immersed myself in the works of Claude Shannon, MIT’s legendary inventor of mathematical information theory and conceiver of the information “bit” as a unit of surprise. But even before I received these theoretical underpinnings, the practical lesson in information economics that I gained 30 years ago with Bain was transformative. It replaced the stimulus and response incentive structure of original supply- side theory with the sound microeconomic underpinnings of learning, information, and entrepreneurial surprise.
Meaning, Bain's model works in the real economy. Here's a bit about where the past economists and models have failed us:
The elder [George] Romney was abashed by Ivied expertise, the great peril of establishment Republicans from the time of both Bushes through the presidential candidacy of John McCain. All cherish the illusion that leading Yale, Harvard, and Princeton economists possess some useful wisdom about the economy. They generally don’t. Their preoccupation with static macroeconomic data blinds them to the actual life and dynamics of entrepreneurship. Their preoccupation with liabilities and debt blinds them to the impact of their policies on the value of economic assets. Their GDP model, which measures everything as kinds of spending, pushes them to manipulative policies and redistributions inimical to business equity value and growth, innovation, and creativity. Believing that a weaker dollar is just the thing to spur a sluggish economy, by hyping the spending category of “net exports,” they miss the consequent devaluation of all the assets of the country. 
 That's a lesson we should take to heart. We have debt. GDP is down. We need a leader who knows what to do about it. Later on, he described Mitt Romney's successes:
ON THE SURFACE, Romney was an improbable conservative champion. But beyond all his round-heeled political compromises in Massachusetts, I knew he combined huge abilities as a leader with a fundamental grasp of supply-side theory excelling all other Republicans. When he spun out of Bain & Co. to form Bain Capital in 1984, he launched an Olympian record in private equity that was not effectively impeached despite many efforts during the political campaigns that followed. He capped it with a bold and utterly ruthless rescue of the parent firm when Bain & Co. ran off the rails as the founders attempted to cash out in the early 1990s. Romney cut the founders’ share by half, slashed compensation, fired half the people, shook or faced down the creditors, notably including Goldman Sachs, and saved the day for his future entry into politics. He doesn’t boast about it, but this flawless performance in the clutch expressed Romney’s extraordinary gift for crisis management, demonstrated again and again in his career and personal life.
A president who knows what do do in a crisis? We need one of those. Bush knew, for the most part, but the media didn't give him any credit for it. This section continues on to cover Romneycare, which was interesting but I won't include it here. Gilder also answers the vulture capitalism charge:
If Romney had been listening more attentively when I gave my speech back in 1982, he might have been more cogent in responding to the charges of “vulture” capitalism in later years. I showed that consumer spending is nowhere near 70 percent of the real economy (GDP leaves out all intermediate transactions in the supply chain) and is nearly irrelevant to economic growth (“supply creates its own demand”). I spoke on the centrality of venture capital and the power of entrepreneurs responding to tax rate reductions: “High tax rates don’t stop rich people from being rich; they stop everyone else from getting rich,” I said. “Progressive tax rates don’t redistribute incomes, they redistribute taxpayers…from factories and offices and onto foreign beaches and early retirements,” among other old favorites that still ring true looking across to Europe in 2012. And I made my case that capitalists thrive only by serving others. But at the time, in the early 1980s, I still did not really grasp the deeper sources of the power of venture capitalists and private equity players.

After my speech, I began an educational gauntlet at Bain, which set my course for years to come.
Yes, the bold type is mine, not his. Here's why Romney would make a great president at this particular time in our economy:
“Companies in trouble that raise their prices, on the other hand,” Bain explained, “all too often begin a spiral of decline.”The market darkens before them as they retreat from it into highly paid niches. Their technological progress slows as their volumes decline and rivals rush ahead into the future. Bain saw the U. S. under President Carter as a company in trouble that was raising its prices in response, with all the predictable bad effects, such as competitive reverses to Japan and Germany, lower real revenues for the government, collapsing equity values, and the famous “national malaise.” Mutatis mutandis, we see the same situation today under President Obama. 
 And the conclusion - why Bain and Romney represent hope for America:
Today, American politics is widely obsessed with the formidable data of debt and deficits that overshadow our future and sow despair. America’s liabilities indeed loom massively on the horizon. But the first edition of Wealth & Poverty, published in 1980, sprang from a period of essentially balanced budgets and trade surpluses under Jimmy Carter and helped launch a siege of deficits and trade gaps under Ronald Reagan. During the Carter years, the government was mostly in the black while everyone else was in the red. Under Reagan, though, the trillion-dollar rise in government liabilities was dwarfed by a $17 trillion expansion of private-sector assets released by companies such as Bain Capital under Mitt Romney. Over the decades following the Reagan revolution, government liabilities continued to expand, but once again private-sector asset values increased more—60 trillion dollars more.

Today we need leadership attuned to the revitalization of U.S. companies and opportunities. In order for businesses to move down their learning curves, gathering information, fostering creativity, lowering costs, and enhancing service, the government has to provide a predictable regime of low and simple tax rates, stable money, and prudent regulation. We need a turnaround in policy that can reopen the horizons of the American economy and engender a revaluation of Americas assets like that achieved during the Reagan era.

This is the essence of the Bain way, enhancing the equity assets of the economy. Combining his demonstrable gifts as a manager of crisis with his profound ideas on the effects of learning, Romney can become the first president with a full mastery of the dynamics of capitalism and the management skills to forge a new era of American leadership.

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