Bain Capital and the social safety net

Mitt Romney has recently suffered attacks for his tenure as head of a buyout firm called Bain Capital. During Romney’s time there, Bain Capital purchased a number of struggling companies and laid off scores of workers in an effort to turn the companies around. This is, in essence, what buyout firms do. They take over existing companies, restructure them in various ways — often laying people off or busting up union contracts — and then sell them at a profit.

This is not the picture of capitalism that is promoted by its proponents, but it is the gruesome reality of it. Despite this, Newt Gingrich and Rick Perry have been sniping at Mitt Romney for his record at Bain Capital. Newt Gingrich accused Romney of looting other companies, and Rick Perry accused him of being a vulture that feeds off the carcasses of dying companies, and devastates local communities through layoffs. Each of the two were careful to add that they were not against capitalism; rather, they just disapprove of this kind of capitalist behavior.

But, as Romney is quick to point out, this kind of ruthless money-chasing behavior is exactly what capitalism is about. Firms like Bain Capital — and any other firm for that matter — do not seek to make jobs; they seek to make money. If firing thousands of workers will make money, then that is what they will do. The only people who would ever be surprised at what Bain Capital did are those who are confused about the way capitalism operates. Perhaps Perry and Gingrich have both bought into the fairy tale picture of laissez-faire capitalism that they often help to spread.

What is interesting about these kinds of buyouts is that real capitalists should not even be slightly embarrassed about them. Yes these buyout firms come in and lay off thousands of workers, devastating lives, families, and communities. But in aggregate, what these firms are really doing is clearing out sub-optimal allocations of capital resources. If Bain Capital is able to buy out a firm, lay off hundreds of employees, and make the firm more profitable in the process, the capitalist perspective on this is that they have done a good thing. In such a case, they have increased economic efficiency, which in the aggregate is better for everyone.

What Perry and Gingrich are correctly observing is that in the process of restructuring towards a more efficient economy, there is a human cost. A constantly innovating and changing capitalist economy lays off workers all the time, causes businesses to fail, and sometimes dooms entire industries to obsolescence. Even if this churning ultimately delivers more growth and prosperity, it undeniably causes serious human misery in the process.

For those wanting to prevent this human cost, there are two options: scrap capitalism or construct a robust social safety net. Socialists of all sort jump up and down about the unguided chaos of the market system that leads to layoffs and misery of this sort, and offer cooperatively and collectively planned economies as an alternative. Proponents of market economies on the other hand — at least those who are bothered by this issue — have historically countered with a government-run social safety net.

When you are laid off, your income is secured through unemployment benefits. To assist workers trying to find a new job, more robust social safety nets include government-funded retraining programs or the opportunity to pursue extra education. With these social programs in place, layoffs — a mainstay of capitalist innovation and restructuring — are not nearly as painful, and workers can hopefully get back into a job without losing anything. The irony here is that Perry and Gingrich oppose both approaches to solving this problem. Neither are socialists of course, and both are outspoken critics of the social safety net.

So when you unpack all that is going on in this Bain Capital story, you actually find a delicious contradiction. Those on the right — Perry and Gingrich especially — like to pretend that capitalist systems are utterly flawless and totally without fail. Meanwhile, they attack Romney for what is essentially a failing of capitalism, and then campaign against the social safety net that is supposed to correct that failing. In a more sophisticated political environment, these kinds of accidental critiques of capitalism and internal contradictions would pose a problem for GOP candidates. But as it is right now, I am sure it will all just blow over without consequence.