Don't Abandon Capitalism

Posted: Jan 13, 2012 12:01 AM

It's bad enough when Democrats start playing class warfare, but when Republican presidential contenders begin using phrases like "vulture capitalism," it's time to be really worried.

It's easy to dismiss as sour grapes Newt Gingrich and Rick Perry's attacks on Mitt Romney and Bain Capital, which Romney co-founded. It's no coincidence that the attacks are getting nastier in South Carolina, site of the next presidential primary and perhaps the last chance one of the challengers has of stalling Romney's path to the nomination. But Romney's critics should be ashamed of themselves for promoting anti-business stereotypes.

The left has always treated wealth as suspect. If one person becomes rich, the assumption is that it is at another's expense, which is why the left believes government has the obligation to redistribute wealth.

But it isn't just the left that has a poor understanding of wealth creation or how free-market capitalism works. A growing number of populist conservatives are deeply suspicious of corporate America, too. You can hear it in their rhetoric about everything from the bank bailouts to immigration.

Corporations seem to be the new villains for everyone to hate. And no candidate in recent memory quite invokes the corporate image as much as Mitt Romney. He is the son of a car company executive. He looks like he just stepped off the pages of Fortune magazine. And it turns out that he made his own fortune heading up a private equity firm that specialized in corporate takeovers.

Bain Capital's model was to identify underperforming companies; tighten or replace management; and make them profitable as quickly as possible -- which often meant cutting jobs, at least initially. And since Romney and Bain are so closely identified, the implication is that Romney got rich by destroying jobs.

Bain also invested in younger and riskier enterprises than some other private equity companies, which meant a fair number -- about one in five -- ended up failing despite Bain's involvement. Nonetheless, Bain also helped create more than an estimated 100,000 additional jobs by providing the equity for companies such as Sports Authority. Yet some people seem to think it's immoral for Bain -- and Romney -- to make money if any jobs were lost.

But is it really fair to blame Bain Capital or Mitt Romney? Not every takeover will be successful, and even the successful ones entail pain in the beginning. Private equity companies that specialize in turnarounds don't usually get involved unless the company is already struggling. And like all companies, the purpose of private equity firms is to earn a profit for investors who have risked their own money.

The alternative would be to treat companies as if their primary purpose is to provide employment rather than turn a profit. That system might work for a while -- a very short while. But it would destroy innovation, reduce productivity and ultimately make everyone, including workers, poorer.

If a company isn't profitable, it won't stay in business, even if the owners are pure altruists. Companies fail for lots of reasons: Their products or services are inferior, they lose market share to competitors or they become bloated and inefficient. Turnaround firms like Bain Capital specialize in solving the last problem.

But in order to get a company back on its feet, someone has to make tough decisions by eliminating positions that are extraneous, cutting jobs that aren't vital to the bottom line and trying to produce more or better products and services with fewer people.

The country could do a lot worse than electing a president who knows how to do exactly that. After all, one of the biggest problems facing the new president will be dealing with the debt we've accumulated running a Leviathan federal government. Who better than someone who has cut costs for years in the private sector to bring those same skills to the job of president?

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