Economics 101: Change Happens

By Paul Greenberg
Monday, February 06, 2012

A presidential campaign is the health of economic illiteracy. Every four years, ignorance comes into its quadrennial own. There are voters to mobilize, resentments to stoke, dull gray truths to be replaced by shiny new shibboleths, and the gullible 99 percent to be fired up against the evil 1 percent.

Arise, ye disgruntled! We have nothing to lose but whatever we were taught in Economics 101.

It's been happening at least since Andrew Jackson declared war on the Second Bank of the United States, the last vestige of Alexander Hamilton's vision of a fiscal system worthy of a great and growing nation. With the bank's demise by executive order, it was replaced by wildcat banks and their worthless banknotes. A general malaise settled in; the Panic of 1837 would go on a lot longer than 1837. America itself became a bad risk.

Old Hickory proved more of an Indian fighter than economist, though he was equally fierce in both endeavors. His war against the national bank killed any hope of stability, let alone prosperity. But he'd brought down all those evil bankers, investors and speculators. Along with the rest of the American economy. Ah well, every war has its collateral damage.

Now those wicked capitalists are at it again. This time the villain is "private equity" -- a short name for high-stakes troubleshooters who buy companies in trouble, reorganize them, and hope they turn into great successes. Then those once troubled companies can be resold at a handsome profit. That's the objective of firms like Bain Capital -- Mitt Romney's highly successful private-equity firm. Which tends to place its bets on especially troubled companies, where the risk is great and the profit can be even greater.

And the taxes can be lower. For the income from these general partnerships is taxed at a lower rate for good reason: to give investors an incentive to put their money at risk to save and create American jobs. The administration says it's all for that goal -- till election time arrives and the temptation to badmouth those who do just that may prove irresistible. Call it election fever; it hits every four years, and its first symptom is demagoguery.

Another reason for lower taxes on income derived from capital investment, as opposed to the wages and salaries so many of us depend on, is that such income has already been taxed once -- as part of the 35-percent corporate tax rate -- before it's distributed as dividend income.

Add that 35-percent tax to the 15 percent paid on such dividend income, and the Mitt Romneys are paying closer to a 45-percent tax on this income. But you seldom if ever hear about double taxation in the television commercials designed to raise our ire. It would spoil a good story.

Private equity may be the upscale name on the door of such enterprises, but the business itself is a crapshoot. Jobs may be lost, jobs may be created, fortunes lost and won before the hurlyburly's done. An economist with an eye for reality and a flair for vivid phrases, Joseph Schumpeter described capitalism itself as "creative destruction."

It's easy to make the whole process seem an evil plot, which is what Newt Gingrich's allies did in a campaign film ("King of Bain"), a piece of agitrop worthy of Michael Moore. It's what Barack Obama's better-financed campaign will do on a much bigger scale as November approaches.

Never mind that the film isn't very factual. Workers depicted as having lost their jobs at one company were actually promoted, and did well later by using their experience to jump-start a company of their own. Call it creative destruction.

Despite all the conflicting claims, there's no way to tell with any degree of precision how many jobs are lost or created, how many companies are saved or sacrificed, when private capital is deployed to save failing companies.

Every reputable study indicates that in a dynamic economy such investments produce net gains in employment, at least in good times. But beyond that, all that economic activity puts a premium on productivity, on making the economy more efficient and innovative over the years. Some of these companies don't just survive the process; they thrive. And the economy as a whole grows bigger and better.

But change is hard. The same prophecies of doom being retailed this year were heard as the Rust Belt gave way to the Sun Belt, and mom-and-pops with high prices and limited selections gave way to discount giants like Wal-Mart.

Good results mixed with bad. The country's textile industry pretty much moved offshore, but Silicon Valley made America a leader in IT. The Japan that was going to dominate the world's economy stagnated under the weight of keeping things as they were. Jobs were saved, even guaranteed, but the economy stalled, and couldn't break out of the Lost Decade that now has become lost decades.

Yes, change is hard -- at the time. But it can be change for the better if enough capital can be found to finance it. If, if, if ... and here is the key if:

If only enough Waltons and Tysons and J.B. Hunts -- to mention three entrepreneurs out of Arkansas alone -- keep coming along to revolutionize American business and the American economy in general.

In the midst of all this creativity and destruction, today's villain can become tomorrow's hero. Back in 1997, when Apple was a sad case instead of an economic model, it chose to bring back a meddlesome, nettlesome type to take the helm. A supposedly discredited Steve Jobs was chosen to whip the company back into shape. The immediate result was chaos, another name for creativity:

The man went at the company with an ax. He fired more than 3,000 workers. He slashed the number of products it offered cutomers. He shut down pretty much its whole manufacturing operation, and outsourced almost all production.

Imagine what a Michael Moore could have done with a plot line like that. Maybe produce a film about Wall Street with an anti-hero named Gordon Gekko. In 1997, a chief executive like Steve Jobs could easily have been depicted as a real-life Mr. Burns of "The Simpsons," the very caricature of evil capitalist.

But the real-life result was that Apple went from losing more than a billion dollars a year to making a $309 million profit by 1998, the first harvest of many. Over the next decade, Apple and the world were transformed. It would create far more jobs than it had destroyed, only this time its work force consisted largely of engineers, their support staff and a vast retail network.

It was the kind of turnaround that investors like Bain Capital hope for but don't always achieve. When one of its founders runs for president, you can be sure he'll be painted in dark colors. No matter how bright the results might have been -- for his company or the American economy in general.

Every four years, the great American public is invited to find someone to blame for all its troubles, to use as a focal point for all its resentments. And this year's prime candidate for that role has been one Mitt Romney of Bain Capital.

Mr. Romney has been curiously hesitant to defend his success and the wealth it brought him. There were times when he seemed almost ashamed of it; he was certainly late in revealing his tax returns.

Instead of avoiding this touchy subject, Mitt Romney needs to give what in presidential campaigns is known as The Speech, the kind of tour de force that John F. Kennedy delivered in 1960 when he spoke about the relationship between church and state to an assemblage of Protestant ministers concerned about his Roman Catholicism. The kind of speech Barack Obama gave in 2008 when he broke with the fanatical minister he'd faithfully followed for decades in Chicago.

Now it's Mitt Romney's turn to make his guiding philosophy clear. He needs to explain some great ideas simply and clearly. He needs to take his stand in favor of free markets in a free country, and explain why you can't have one without the other. He needs to point out that a command economy commands people most of all.

Despite his recent electoral successes, we the people don't really know him. He needs to tell us who he is, what he believes, and why his goals should be America's. And he needs to do so soon. Before the real Mitt Romney is replaced by some caricature drawn by his rivals, some 19th-century cartoon version of a capitalist, the awful Money Power personified and vilified.

A presidential campaign should be more than a grand show, however elevating or downgrading, appealing or dismaying. It should be an education. Like the campaign speeches of Adlai Stevenson, or the fireside chats of Franklin D. Roosevelt, or the moving perorations of Ronald Reagan. We grow tired of being flattered, lectured, hectored, demagogued. We want to be educated. And in Mitt Romney's case we're still waiting.