A Foreigner's Perspective

In a recent edition of the London Times, Irwin Stelzer, business advisor and director of policy studies at the Hudson Institute, wrote an op/ed piece on the Republican presidential candidates. I found his opinions to be very interesting so following is a condensed version of his piece which also includes some of my own thoughts:

Politics makes for strange bedfellows. With the exception of Mitt Romney, all the candidates have decided that it is evil to take over failing companies in an attempt to restructure them so they can grow and create jobs. What these candidates have forgotten is that this so-called creative destruction has enabled risk-taking businessmen to create the capitalist system that has created the greatest material prosperity the world has ever seen. They are all saying that Romney's successful stewardship of Bain Capital disqualifies him from becoming the party's nominee to face Barack Obama in November.

Why? Because in the process of restructuring companies headed for the rocks two bad things sometimes happen: there are layoffs before the leaner company went on to success and the rescue effort failed.

This criticism is not coming from Democrats who have no use for the unpleasant aspects of American capitalism. This criticism is also not coming from European defenders of the social democratic system to which Obama wants to "transform" (his word) America.

This criticism is coming from candidates trying to get the support of conservatives who in their eagerness to derail Romney are advocating capitalism without risk or failure, which is akin to religion without sin: it will not work.

According to the Wall Street Journal, during Romney's tenure Bain gathered capital from investors and lenders and invested in 77 companies. Some 22% of those companies filed for bankruptcy or went out of business, some struggled along, some produced extraordinary profits for Bain's investors - roughly 50% to 80% annually. LIke oilmen who drill exploratory wells knowing that nine out of ten will be dry holes but the successful one will cover the cost of all ten and yield a profit, private equity firms gamble on the overall success of their portfolios.

It is unfortunate that the debate about American capitalism is being cast as a debate about the role of financial architects because one of the forces that drives capitalism forward is the private equity firm like Bain Capital that creates new, re-organized companies.

But there is more to capitalism than finance. There is investment by risk-taking, innovative entrepreneurs of the sort that populate Silicon Valley and garage laboratories all over America. John Maynard Keynes refers to "animal spirits" that reside in people possessed of a spontaneous urge to action than inaction, a group of people that Barack Obama knows nothing about and cares not to understand.

Romney, born to wealth, hardly qualifies as a hero of capitalism. He is a successful investor and good manager who, among other things, revived Staples which now employs over 70,000 and Domino's pizza with 145,000 workers.

Unfortunately, he opposes a president who has little use for bankers, an absolute distaste for "the rich", who he defines as "millionaires and billionaires" and any family earning more than $250,000 a year. It is Romney's misfortune that his Republican colleagues are giving so much ammunition to the Democrats.

If voters think government is simply a large business and the skill required to manage Bain is the skill needed to restructure government, Romney is their man. If they think that an entirely different world view from that of Obama is required, Romney also qualifies,no matter what one thinks of his Bain experience.

Two things are certain. First, running a private equity firm is not a disqualification for the presidency as might be the case for lobbying on behalf of Fannie Mae and Freddie Mac. Second, if Ron Paul decides to head the third party Libertarian ticket, he might siphon off as much as 6% of Romney's vote (assuming Romney is the candidate) and virtually assure Obama an extension of his stay in the White House.