The Bane of Bain

The Bane of Bain Is Mainly in the Plane

by Bill Sardi

Recently by Bill Sardi: Would You Know Opportunity If You Saw It?

If you think the primary battle of the classes is between those ultra wealthy one-percent who pay a smaller percentage of taxes than their secretaries and can get tax write-offs for private planes versus the 99% who are envious of the rich and seek to gain greater public entitlements in welfare transfer payments, then you might want to tune into the royal public debate going on with Edward Conard, the former managing director of Bain Capital and million-dollar donor to the Mitt Romney Presidential campaign.

It is difficult to imagine why Mr. Conard is falling into the very trap that the Obama campaign has set for him, the pitting of rich against poor. As a FoxBusiness TV interviewer said on air regarding the Romney campaign: "He's just not selling it." Mr. Conard is on tour to promote his new book entitled Unintended Consequences (Portfolio/Penguin 2012, 310 pages). The book is apparently a warm up to what the Romney campaign will attempt to convince America of before the November election.

Conard says if America has more income inquality the 99% will be better off because the wealthy will have more capital to put at risk to find innovative answers to human problems. Whoa Nelly, how does Conard get himself out of his own mouth-trap.

Conard repeatedly admits Bain bought companies, then laid-off workers "to make these companies stronger," and then sold them at a profit. But exactly how does that sound to the millions of unemployed, under-employed and demoralized American workers? Squeezing all the profit out of a company at the expense of the workers who got them there is not going to be popular these days. Many American voters will think Conard echoes opinions Mr. Romney may well share but would not say out loud. And Mr. Romney says he is largely running on his record at Bain, not his record as Governor of Massachusetts.

The Conard debate really burst into the public eye on The Daily Show hosted by Jon Stewart. They had to extend the debate and break it into three parts. If you are into this kind of stuff, link to The Daily Show and enjoy the daggers of truth mixed with the laughs. Stewart, in his inimitable style, started the debate, saying he had read Mr. Conard's book, and his first question to his guest was: "Huh?"

Stewart is one of the few who can keep up with the economic complexities that Mr. Conard presents, and you don't want to miss a minute of it. Mr. Conard is an unashamed economic Darwinist — only the fittest will survive. The remaining will lose their homes and live in shelters. (I'm not mischaracterizing his language here. Mr. Conard repeatedly uses the survival-of-the-fittest Darwinian model in his explanations.)

Mr. Conard maintains the investor class won't put their money at risk to develop the innovations America needs unless there are spectacular financial rewards. Stewart replies with a question: "So rewards for the investor class aren't enough?"

At that moment Conard has to break the tension with laughter. He has no good answer there. Inside he knows what he is saying may sound right to him, but resonates poorly with the public.

This does not mean that Conard doesn't have some important points to make. He repeatedly points to the innovation at Apple, Ebay, Google, Amazon, Instagram, all American companies. He claims lower marginal tax rates in the US have been the driving force behind this innovation. None of it comes from Europe where people are over taxed. According to Conard, "the 10 percent of workers who create close to half our GDP have to create more value through increased productivity and risk taking." Translation: the financial elites will create the future for the rest of the population and they need to be incentivized. Tell that to small businessmen who create most of the new jobs in America, small businesses that likely started on a shoestring.

I don't quite see it this way entirely. I think innovators in Norway or Slovakia simply have a language barrier to the English language, which is the language of commerce in the world. And America is THE consumer economy of the world. Second, the people who started Google, Apple and Facebook also started these ventures "on a shoestring." They didn't need massive amounts of capital to be put at risk to develop their products and services. A lot of it was sweat labor.

Mr. Conard makes a real but hard-to-swallow point. That the cost of labor overseas is so low that even though manufacturing only represents 10% of the Gross Domestic Product (GDP) in the US today, the US needs to shift even this small remaining manufacturing capacity offshore because "making products for $17 an hour that we could be purchased for 75-cents an hour wastes resources that the nation can use elsewhere." Mr. Conard maintains the US will never return to a manufacturing-based economy no more than the US will return to employment largely based upon farming. OK, point made. But how do unemployed workers take advantage of the lower cost of goods achieved by cheap labor overseas?

CNN's Erin Burnett tries to back Conard into a corner. She asks if Bain, in its many corporate acquisitions, hasn't attempted to satisfy investors rather than customers. Mr. Conard lamely responds by saying the end-use customer is always of primary concern. He keeps pontificating about free trade and free markets. But America is largely a controlled marketplace today.

Oh, in the past we let Honda bring its 100,000-mile Honda Civic cars to the US and Americans learned that American automobile companies were gaming them with cars what wouldn't last 3 years. And America let Michelin bring its 100,000-mile tires to the US and this showed Americans they were being gamed by Goodyear and Firestone. But these are examples of overseas innovation being brought to America. Mr. Conard presents the American innovation game the other way around.

If consumer-driven free markets characterized America today, why hasn't Bain helped lead America out of its dependency upon petroleum and used its capital to substitute natural gas which is far cheaper than gasoline to fuel automobiles?

Why is America using uranium-based radioactive material to generate electricity that comes with all the problems seen in Fukushima, Japan, when thorium is a far safer radioactive material?

Why is America misdirected in its efforts to create clean renewable energy by promoting wind energy that is only cost effective with government subsidies and will only at best, along with solar, meet 2% of America's demand for energy, when it could install new technology composite power cables across the national power grid that significantly reduce line loss that wastes 7-20% of the power that is currently generated? Do this and hundreds of fossil-fueled power plants can be closed.

Thorium-based power plants, natural gas-powered automobiles and composite power cables are trillion dollar moves on a large economic chess board and represent just three of many new technologies that entrenched forces oppose. So let's not get the false impression that Bain has a magic wand to usher in true innovation. Mr. Conard makes it sound like nothing stands between innovation and implementation. There are many entities that resist change and hold to the status quo. They buy off government to hold onto their obsolete business models. The public is getting what industry says is good for them, not the other way around.

The public might just ask, why not just print enough money for everybody or why not ensure everybody has a job. As socialist countries do this they always have a certain portion of their capital tied up in unproductive or duplicitous labor. Russia used to brag of its full employment compared to western capitalism's inherent unemployment. But that was pure feather bedding. Then again, America, by not automating important segments of its economy, like the post office, was doing the same thing.

Mr. Conard makes another important point when it comes to unemployment. Higher productivity in manufacturing has accounted for two-thirds of the lost manufacturing jobs since 2000, not shifting of jobs overseas.

The problem for the public is in not seeing what happens in countries like Japan where full employment was a social policy and large employers bore the full cost of lay offs, that is until recently. This ends up with capital being tied up in less productive labor rather than being put at risk to promote innovation. Recently Japan has changed its full employment policy and now has unemployment.

The masses simply cannot understand this. Why can't everybody be given a job? Yes, precisely, let's put the welfare folks to work. But doing so puts them permanently on the backs of the remaining workers in the private sector.

Free enterprise, capitalist systems will always have a certain level of unemployment because in a free market private enterprise system, innovation is forever obsoleting a certain number of enterprises and replacing them with new ventures. Mr. Conard makes a good defense of capitalism on this point. That's why he deserves a spot at the debate table, even if he is not the best representative to defend a free market system.

Mr. Conard would like you to be distracted by so many of his up-front arguments in defense of capitalism versus socialism. Hey, no question, the income redistribution schemes coming out of Washington DC in the form of higher taxes simply do not represent what America needs, which is wealth creation. Any critique offered here of the Romney campaign is pale next to the disappointment Mr. Obama has been. Mr. Romney may be off the mark, but the incumbent is a total misdirection. It is sad to see a President polarize the population and lead them to think that too much capital in the hands of individuals is no good while too much capital in control of government better redistributes the spoils of American society. In fact, government removes 15% of capital for overhead. That is an incremental lack of competitiveness right there.

It takes great private wealth to fund many large projects, like Collis P Huntington had when he built much of the nation's railroads nearly a century ago. Put the capital in the hands of government and you end up with "friends of the President" receiving government guaranteed loans for ventures like Solyndra that never had a chance of being successful. It's crony capitalism at its worst.

There is so much missing in Mr. Conard's arguments over what went wrong in the American economy. Mr. Conard won't quite say no one should go to jail, but he does say "it's unfair to blame bankers, regulators and credit rating agencies." But then Mr. Conard, without jail time there is simply no accountability. Government fines simply represent hand slaps.

I thought Mr. Conard said Bain Capital relentlessly focuses on the end consumer. I must have heard that wrong. Didn't homeowners get lured, misled, foreclosed, robo-signed, shafted? Aren't savers today seeing their life savings squandered by inflation while being offered less than 1% interest on their banked money? I don't think Mr. Conard would recognize a bankster if he saw one.

Mr. Conard would have the whole central-banking/ print endless paper money/ fractional banking/ cheap money/ scheme continue in perpetuity. We wouldn't anticipate Mr. Conard would mention a renewed gold standard to permanently put a halt to the rubber money system, and he didn't. The savings class is losing hundreds of billions of dollars in the value of its saved banked money due to hidden inflation (7% to 10% says and that doesn't seem to bother Mr. Conard. It's the investment class that needs greater returns on their money, he says.

Mr. Conard sees nothing wrong with government bailouts of financial institutions. Mr. Conard says, since banks cannot possibly hold enough equity to stem withdrawals (bank runs), government must increase its insurance in the event of a panic so that risk taking and innovation will not cease, which he says is the case today. But Mr. Conard, we ended up with privatized profits and socialized losses, again. The greater the guarantees the more reckless were the lenders. Let them sink or swim on their own. Now that is survival of the fittest. It goes both ways.

Mr. Conard says, because of recent losses, savers and large lenders now demand short-term risk-averse investments. That stifles long-term capital requirements. Mr. Conard wants America's savings put back to work. But the bankers were using their floating average of funds received in checking accounts to fulfill there reserve requirements, and investment banks were leveraged 30-to-1, even 50-to-1, which was OK by the Securities Exchange Commission. How much more money could be put into play than this Mr. Conard?

Conard goes on to say that what happened in the real estate crisis is that large lenders, mostly hedge funds, were willing to take the risk and underwrite sub-prime real estate home loans where low-or-no down payment was required. But despite $15 trillion of explicit government guarantees, short-term savers got antsy and withdrew $1.5 trillion, a hidden bank run of sorts that is only now being revealed, which was five times more than the loan losses (~$300 billion).

So according to Mr. Conard, the financial sector took it on the chin for most of the losses in the real estate bubble, not homeowners. This tack completely frustrated Jon Stewart, who quickly said: "But only one of them can be out of a house!" Human suffering is not part of Mr. Conard's Darwinian equation.

The Best of Bill Sardi