Tuesday, January 31, 2012

A Thought About Romney's Qualifications

I quote from an article in The Economist, "Bain or Bust":

A recent NBER working paper looked at employment after 3,200 leveraged buy-outs in America. It found that private-equity ownership resulted in both more rapid job destruction and faster job creation than other forms of ownership. Two years after a buy-out, employment declines by 3% on average; if acquisitions, divestitures and new sites are included the losses are only 1% of initial employment. Other research has found that wages do not rise as quickly at private-equity-owned firms, probably because buy-out firms try to control costs after a takeover. But wages also don’t plummet, which may be why unions that used to oppose buy-outs have moderated their criticisms. 
In any case, it is not the mission of buy-out firms to create jobs. Their mandate is to produce higher risk-adjusted returns, and this is where private-equity firms should be judged more harshly. The industry has long boasted about its earth-shattering performance. Investors, and public-pension funds in particular, have piled into the asset class. But the bulk of investors’ capital has gone into funds that were raised when asset prices were at peak levels (see chart 1). Although fears of a bloodbath among bubble-era buy-outs have not yet been realised, returns for most of these funds are going to be middling at best.
What does this mean in terms of Mitt Romney's qualifications for the presidency? First, he was involved in a company that was not intended to create jobs, but to make money for its investors and its managers. If you are looking for someone with experience creating jobs, don't assume that Bain did so. I would also guess that Bain itself and the companies that it took over were small compared with the United States Government. If you are looking for someone who has experience running large organizations, don't assume Romney's Bain experience checks that box. Serving as governor of Massachusetts for one term might be closer, but it is only 14th by population of our 50 states, with two percent of the U.S. population.

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