Jacob Sullum
President Obama accuses Mitt Romney of putting profits above people by striving to create wealth rather than jobs during his 15 years at Bain Capital. This critique of Romney's work at the private equity firm, which Obama says will be central to his re-election campaign, betrays a fundamental misunderstanding of capitalism.

While private equity firms are a "healthy part of the free market," Obama said at a press conference last week, "their priority is to maximize profits, and that's not always going to be good for businesses or communities or workers." By contrast, he said, "My job is to take into account everybody, not just some."

Anti-Romney ads amplify this theme, focusing on people who lost their jobs after GST Steel, a Kansas City, Mo., company acquired by Bain in 1993, went bankrupt eight years later. "His experiences were about creating wealth -- wealth for himself, his partners and his investors," Obama adviser Stephanie Cutter told reporters. "GST workers really lost out, and Romney and his partners did not."

Another adviser, Robert Gibbs, put it more succinctly on "Face the Nation" last Sunday. "He's very good at making money for his partners," Gibbs said of Romney, but "he's not so good at creating jobs." In fact, said former "car czar" Steven Rattner in a New York Times op-ed piece, "any job creation was accidental."

But as Rattner, who co-founded his own private equity firm, surely understands, that is true of every successful business. A company that sees job creation, as opposed to profit, as its goal will not stay in business long.

While the goal of making a profit leads a company to minimize costs, the goal of creating jobs means maximizing costs: rejecting every labor-saving innovation, shunning organizational efficiencies and hiring people just for the sake of putting them to work, even if the work is not worth the wage. A company operated that way eventually would employ no one.

Since a private equity firm makes money by buying and selling companies, it has a strong incentive to make those businesses more valuable. That might mean an expansion that requires hiring more people, or it might mean cost cutting that includes layoffs. Sometimes -- as in the case of GST, which was in serious trouble before Bain bought it and ultimately could not compete with low-cost foreign manufacturers -- turnaround efforts fail.

Obama wants to avoid the pain that inevitably accompanies this profit-driven, competitive discovery process. To get an idea of the alternative he has in mind, consider his $840 billion stimulus package, the success of which he measured by jobs "created or saved," regardless of whether those jobs were worth doing.

Jacob Sullum

Jacob Sullum is a senior editor at Reason magazine and a contributing columnist on Townhall.com.
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