Big Love believes in "creative destruction" that sees ineffective/inefficient businesses going belly-up. What a combination: magic underwear and neo-Hoovervilles in 2013. If this is (fair & balanced) political insanity, so be it.
[x The New Yorker]
Money Pol
By Louis Menand
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Once, when winters were cold and the world seemed large, creatures roamed the earth who were permissive on social issues and at ease with big government, yet remained ever faithful to the gods of business and finance. Their principles were abstract but broad-minded: tolerance, free trade, and a belief in something called the American Way. Their personal tastes were conventional. They were surprisingly allergic to indecorum, and disinclined to question the status quo. But they were not small-town or provincial; they were Wall Streeters, not Main Streeters. Their vista was international. They were private-sector types who answered the call to public service. They were liberal Republicans. Nelson Rockefeller was such a creature. So were Prescott Bush, William Scranton, Charles Percy, John Lindsay, Mark Hatfield, Elliot Richardson, and George Romney.
Then, one year, a powerful meteor struck the planet, and, virtually overnight, the entire species was wiped out. The meteor’s name was Ronald Reagan. Political paleontologists, looking back at the fossil record, can detect signs pointing to the organism’s imminent extinction that predate the Reagan era. Richard Nixon, for example, showed that a pro-business, big-government Republican, by appealing to suburban anti-Communism and white working-class resentment, could take a populist road to the White House. Men like Rockefeller and Romney despised Nixon; but they could never beat him. Liberal Republicans did not like to get into the political mud.
Everything in Michael Kranish and Scott Helman’s biography The Real Romney (2012) confirms the view that until 2005 Mitt Romney was a liberal Republican cryogenically preserved from the pre-Reagan era. He was a liberal on social issues, such as abortion and gay rights; a champion of government programs, such as universal health care; an anti-protectionist, “open door” internationalist; a private-sector multimillionaire who was also a personal square, completely uninterested in life-style “experimentation”; a reflexively patriotic, flag-pin-in-the-lapel sort of fellow; a wealthy man possessed of the slightly daft notion that although he had been born to privilege, every American has the opportunity (and the wish) to live as he does; a patrician with a deep sense of noblesse oblige. Since 2005, Romney has made himself interesting by getting a lot of people, including those who might vote for him and those who definitely will not, obsessed with whether, and to what extent, and in spite of anything to the contrary he might be saying on the campaign trail, he is still that person.
Kranish and Helman are journalists at the Boston Globe, and their book is based on reporting done by them and by other members of the Globe staff. Despite its title, which hints that an exposé awaits the buyer, the biography is balanced, informative, and not unsympathetic. It’s a well-written and useful resource for Romneyana great and small.
Many readers will be thankful, for example—certainly this one was—to learn exactly what the story was with that dog Romney is supposed to have strapped to the roof of his car, an incident that Gail Collins has mentioned in her column, at last count, forty-two times. It turns out that, yes, the dog (an Irish setter named Seamus, characterized, I hope fairly, as “hulking”) was in a portable kennel—not, as I had vividly pictured it, lashed to the roof with bungee cords for the twelve-hour drive from Massachusetts to Lake Huron.
The Real Romney adds the important detail that Romney had a strict rule on long car trips, which was that he stopped only for gas. His five sons (Romney’s wife, Ann, was granted an exemption from the patriarchal diktat) were expected to make any necessary rest-room visits during the refuelling. It seems that the rule was not explained to the dog, and the poor animal reminded the family of its presence by defecating, telltale evidence of which was sighted on the rear window by one of the kids. At the next service station, Romney borrowed a hose, washed down the dog and the car, and resumed the journey. “It was a preview of a trait he would grow famous for in business,” Kranish and Helman dryly note: “emotion-free crisis management.”
Romney has always spoken of politics as, essentially, pro-bono work—“a departure from my career, not a continuation of it,” as he puts it in his recent campaign book, No Apology: The Case for American Greatness (2010). He likes to say that he is running on his record “in the private sector.” This is partly an effort to deflect attention from his only experience in elected office, as a one-term governor of Massachusetts, but it’s also true that the way Romney looks at life derives much more from his time in the business world than it does from hanging around with politicians. Even when he was governor, Romney did not hang around much with politicians. “Romney blew in and blew out of here,” one Massachusetts legislator told Kranish and Helman. Another lawmaker said that Romney rarely knew the names of the legislators he worked with.
“It seems as if virtually everyone in America dreams of starting a business,” Romney says in No Apology, “We’re a nation of entrepreneurs.” This is one of those cheery generalizations offered by people who are opposed to economic reform, and who want voters to worry that taxes and regulations on business might stifle the native risk-taking that has made America great. Putting aside the question of whether most Americans, like most human beings, aren’t, by nature, risk-avoiders rather than risk-takers, the claim is hollow because it’s so frequently made by people who acquired a lot of money without taking any significant risk at all. Romney falls into that category. “I left my job and went to join, with some friends, a small business,” he said last year in New Hampshire, when he announced his candidacy. According to The Real Romney, that’s not quite how it happened.
The business that Romney was referring to is the private-equity firm Bain Capital, which he started up in 1984 and directed for fifteen years. Romney’s path to Bain began with his graduation from Harvard, in 1975, where he received a joint graduate degree in business and law. (His undergraduate degree is from Brigham Young, where he majored in English, as many gifted people do.) After Harvard, he took a job at the Boston Consulting Group. This was an outfit that prided itself on hiring only the top students, and the company had had its eye on Romney from the beginning of his time in Cambridge. Romney turned out to be a very good management consultant, popular with the firm’s clients, and in 1977 he was hired away by Bain & Company, a firm started by a former B.C.G. executive named Bill Bain.
Bain’s business model was heterodox, even heretical. The standard practice at places like B.C.G. and McKinsey is to parachute a team of consultants into the client firm. The team gathers and analyzes data, tons of it, and, after about six weeks, it presents its conclusions and recommendations to senior management. The team is then airlifted back to the mother ship and the relationship effectively ceases.
If this sounds high-handed and technocratic, there’s a reason for it. As Christopher D. McKenna points out in his enlightening history of management consulting, The World’s Newest Profession (2006), hiring an outside consultant to tell you how to run your own business might seem an extravagance, but it’s often cheaper to outsource the production of advice, because professional consultants enjoy an economy of knowledge. Telling people how to run their businesses is what consultants do, and, when they’re advising your firm, they draw on their experience with other clients. That knowledge is already in place.
As McKenna also explains, how and why companies hire consultants tend to be functions of the regulatory environment. If you run a hospital or a car company or an Ivy League university, antitrust law restricts the information you can share with other firms in your industry. For the Ivies to share certain kinds of financial-aid information, for example, would be unfair to all non-Ivies that are competing for the same students. Consulting companies must observe the law, too, but a company that has consulted with many firms in an industry, or in similar industries, can be presumed to have a knowledge of “best practices” that will inform its advice. This knowledge is worth paying for, since there may often be no other legal way to get it.
It was Bain’s unusual idea to flip this model on its head. He created a consulting company that would work for only one firm in an industry, or “competitive set”—the group of companies against which a firm measures its own performance. Bain & Company would have a long-term relationship with that firm, and it would work on a retainer, rather than for a fee. The advice it sold would be confidential and exclusive to the client—proprietary knowledge.
The plan worked fantastically well. C.E.O.s liked having a house guru, a firm whisperer, on call, and the nature of the relationship gave Bain an interest in something that other consulting companies had little reason to care about after they collected their fees, which was whether the advice they sold actually helped the company do better. There was evidence that after the management consultants left town many companies weren’t able to apply the strategies they had paid for. By offering a long-term commitment, Bain was assuring clients that they would have continued counselling during the follow-through.
What was the measure of “doing better”? The price of the stock. This was a relatively novel concept in 1973, the year Bain & Company got started. As Walter Kiechel III explains in The Lords of Strategy (2010), an entertaining history of the consulting business that has a lot to say about B.C.G. and Bain, stock price was not a useful benchmark of anything in the nineteen-seventies, because the market was stagnant. On November 14, 1972, the Dow stood at 1,000. By 1974, it had fallen to 577, and it didn’t get back to 1,000 until 1982. In the rising market after 1982, though, the idea that the fundamental purpose of a publicly owned business is to make money for its shareholders became a basic tenet of capitalist faith. This is when the idea of launching a private-equity firm became a gleam in Bill Bain’s eye.
If you’re a consultant devoted to the fortunes of a single company, forsaking all others in its “competitive set” and responsible for management decisions that make the price of that company’s stock go up, thereby enriching its shareholders and its management, what might you begin to feel? You might begin to feel that you deserved a piece of the action. Bain and his partners started, as Kiechel puts it, “to ponder how they might more effectively capitalize on the stock-market success they were helping others achieve.” Bain Capital was their answer.
According to The Real Romney, Bain called Romney into his office, in 1983, and outlined his plan for the new business. Bain Capital would invest in start-ups or would buy existing businesses that were distressed or underperforming; it would provide Bain-style advice to management (not manage the companies directly); and it would then either take the companies public or sell them, and pocket the profit. Bain and his partners would provide seed money for this new enterprise, and they would be among the investors as well. He invited Romney to head up Bain Capital. Romney said no.
It sounded too risky, he said. Bain (who was Kranish and Helman’s source for this account) replied that if the business didn’t work out he would guarantee Romney his old job back at Bain & Company, at the old salary plus any raises he would have earned. Romney was worried, though, that if the new business failed it might damage his reputation. Bain promised that if Bain Capital didn’t work out he would provide Romney with a cover story—something about his value as a consultant being too great to lose. So Romney finally took the job. As Bain told Kranish and Helman, Romney was facing “no professional or financial risk.”
Not that it mattered. Although, according to one study, many—probably more than a third—of the approximately one hundred deals that Bain Capital made during Romney’s tenure there either lost money or only broke even, the successful deals were astronomically successful. Bain invested about two hundred and sixty million dollars in ten major deals under Romney’s direction, and it made nearly three billion. Annual return to investors was eighty-eight per cent.
And that, of course, is the goal of a private-equity business: maximizing the return on investment. Jobs may be “created” in the process—although sometimes jobs are lost, a company goes broke, and the private-equity firm still makes money. But a firm like Bain is concerned exclusively with buying low and selling high. Any other outcome it might pursue at the expense of that concern cheats its investors. This is why talk of job creation or job destruction in the companies Bain invested in is beside the point. Bain was not about jobs.
According to Kranish and Helman, Romney was not very engaged personally with digging up business for the firm. “He was not at heart an entrepreneur,” they say. “He brought few investment proposals to the table, and when he did, they often flopped.” Nor did he have much involvement with the companies Bain invested in. Romney has made much of the success of Staples, one of Bain’s early start-up ventures; Kranish and Helman report that neither Romney nor Bain ran that company, and that Romney resigned from the board when he ran for governor, in 2001. As Romney concedes in Turnaround (2004), his book about taking charge of the 2002 Olympic Winter Games, in Salt Lake City, “I never actually ran one of our investments; that was left to management.” Romney did manage one company, though. He managed Bain Capital, and he did it very well.
No Apology came out in 2010. It is not entirely Romney’s fault that some of the book is out of date—stuff happens—but, by putting his ideas into print, he gave himself a lot to backpedal from. For example, the book uses the bailout of General Motors as its prime case of the folly of letting the government manage a company, which turned out to be a problem in the Michigan primary, since G.M. is now doing very well.
The book lays out a set of views that place the candidate at some distance from Tea Party and other conservative anti-government groups—the kind of people most likely to vote in a Republican primary. “I believe some people in my party are overly fond of bashing regulation as the constant enemy of growth and competition,” Romney writes. He says that he supports antitrust laws, occupational health and safety regulations, equal-opportunity-employment requirements, and mandatory unemployment insurance. He places some of the blame for the meltdown in the credit markets on a failure of government oversight. He thinks the stimulus money was misapplied, but he doesn’t say that the stimulus was the wrong policy, and he thinks that the Supreme Court should revisit its campaign-finance decision, because it gives too much power to wealthy donors.
Still, despite the multiple incongruities surrounding his candidacy, Romney’s campaign pitch will, in the end, almost certainly be the Republican pitch no matter who the nominee turns out to be. The pitch is that Obama and the Democrats believe that we’ve entered a “post-American” world, a world in which the United States is no longer the preëminent power on the planet but just one nation among many; and the Administration’s policies are designed to manage this decline in our status, not reverse it. Democrats have abandoned “greatness” talk; Republicans want to bring it back. “I believe in American exceptionalism,” as Romney says. This is the belief for which he offers “no apology.”
Here, too, there was a stumble. The premise of Romney’s argument was recently challenged by Robert Kagan, in an article in The New Republic subtitled “The Myth of American Decline.” Kagan is not only named in Romney’s book as “a vital national resource in matters relating to foreign and military policy”; he happens to be one of Romney’s campaign advisers. President Obama is said to have studied Kagan’s article closely, and with a pleasure readily appreciated, when he wrote his State of the Union speech.
In Romney’s version of the decline argument, the United States faces three external enemies: China, Russia, and “violent jihadism.” These are our enemies not because they are our economic competitors, since economic competition is always a good thing, but because they don’t play by American rules: they don’t respect individual liberties or free markets; they strive to compete by violence and oppression. A weakened United States, a United States lacking the confidence that it is God’s gift to the nations, means a less free and less prosperous world.
Romney’s program is logical (which doesn’t mean that it’s practical). He believes that if freedom is to be fostered and preserved around the world the United States needs a stronger military. For the United States to have a stronger military, it has to grow economically. For the nation to grow economically, American companies must become more productive. And, for American companies to become more productive, business has to be allowed to do business. This means that Americans have to tolerate, to appreciate, even to encourage what Romney calls (using a phrase borrowed from Joseph Schumpeter) “creative destruction.”
It’s a strange slogan for a politician to adopt at a time of high unemployment and economic uncertainty, but Romney invokes it in his book and he uses it in interviews, because it’s precisely what he means by business. To make the future, we have to be willing to destroy some of the present. “It takes a leap of faith for governments to stand aside and allow the creative destruction inherent in a free economy,” as Romney puts it. We can’t be sentimental. And everything can be thought of in this way, from the production of microchips to the education of children. If we want cheaper chips or better schools, we have to be willing to pay the transaction costs. The unwillingness to do so is what’s holding us back. (A famous saying about omelettes might come to mind here.)
Who or what stands in the way of restoring American productivity and American greatness? Romney lists some of the usual suspects, including multiculturalism (a “fraud”) and “the self-loathing of Western intellectuals” (an odd expression, since all the Western intellectuals I know think rather well of themselves). But readers of No Apology are likely to come away with the impression that the chief internal enemy the United States faces today is labor unions. Romney thinks that unions can sometimes work constructively with management but that, fundamentally, they are protectors of the status quo. They make it harder for the destroying part to work.
This is why Romney opposed George Bush’s efforts to protect the American steel industry by imposing a tariff on imports, and it’s why he opposed the Detroit bailout. Actions like those interfere with the natural business process in the name of saving American jobs. And it’s why Romney’s well-known infelicities—“I like being able to fire people,” “For an economy to thrive . . . a lot of people . . . will suffer,” “Corporations are people,” “I’m not concerned about the very poor”—are not really gaffes, even in the unfair, out-of-context form in which his opponents circulate them. They express something true to the way that Romney sees the world.
That way might be called Darwinian, except that in Romney’s universe the organisms that struggle to adapt, survive, and reproduce are not individuals. They’re firms. General Motors and Toyota are firms, of course. But Massachusetts and Texas are also firms. “When the state of Texas was an economic basket case, the partners in my private-equity firm decided to buy Texas businesses,” Romney writes in No Apology. “We knew that Texas had to come back someday.” China and the United States are firms, too, because “countries, like businesses, need strategies to survive and prosper. A nation’s strategy should be designed to propel it beyond its competitors and to increase the security and prosperity of its citizens.” The firm is the basic unit of Romneyan analysis, and it is the fate of firms to grow or die.
Romney’s record at Bain Capital holds obvious interest for his political opponents. Private-equity firms and leveraged buyouts, which is one of the ways Bain pursued its business, are, after all, pretty much capitalism parading around in its most naked state. But although running Bain Capital required a lot more brains and savvy than playing roulette does—a lot more brains and savvy than most of us could even pretend to possess—the job was not conceptually deep. Romney did not develop a model of the world from the business of private equity. He developed it during his earlier, nine-year experience, at B.C.G. and Bain & Company, as a management consultant.
There are several strains running through the history of management theory, and which paradigms are dominant, and at which consulting firms, depends on the economic times and the nature of the competition. At B.C.G. and Bain & Company between 1975 and 1984, data crunching seems to have been the main engine of analysis. Virtually everyone agrees that Romney was extremely good at this, and he operates his political campaigns in the same way.
“He’s not a very notional leader,” Romney’s campaign spokesman told an Iowa newspaper in 2007. “He is more interested in data, and what the data mean.” But it’s not just that Romney doesn’t have good political instincts. It’s that he was trained to distrust instinct altogether. In management consulting, gut feelings are what you work hard to take out of the equation. That’s the justification for all that painstaking analysis: the consultant who crunches a mountain of numbers to come up with an idea that the C.E.O. already has will not get far. It’s the counterintuitiveness of the advice that justifies the fee.
An analogy might be to the statistical revolution in baseball—the “moneyball” approach. Management theory replaces faith in gut feelings and hands-on know-how—a belief in clutch hitters in baseball or brand loyalty in business—with faith in the power of conceptually driven data analysis. But the baseball stats—the on-base percentage, wins above replacement, and all those other high-concept figures—are pointless if they simply verify empirically what the old-timers already intuit by chewing on their chaw. The whole point is to prove the old-timers wrong.
Whatever the case with sports might be, retail politics does depend a good deal on instinct. History doesn’t happen in six-week segments, and sometimes—most of the time—there isn’t much reliable data around to crunch. Romney likes to cite cases when, as governor, he used analyses produced by consulting groups to address problems in areas like public education, and he has said that if he is President he will “probably” hire McKinsey, or some other consulting firm, to do an efficiency analysis of the federal government. There’s nothing radical about this. Obama has an efficiency expert from management consulting working for him; George W. Bush, who graduated from Harvard Business School a year after Romney, surrounded himself with management consultants in the White House. Herbert Hoover applied the “scientific management” techniques of Frederick Taylor to government bureaucracy. The issue is knowing how far this approach can take you in governance.
A frequent criticism of some widely adopted management theories is that they take insufficient account of the people who work in the firms that consultants analyze. Peter Drucker, one of the founders of the field, emphasized the importance of a company’s human resources in his landmark book, Concept of the Corporation, in 1946. But in the nineteen-seventies and eighties consultants tended to figure employees as simply part of a firm’s costs. In the whirlwind of creative destruction, employees are subject to the “churn”—the turnover that is an inevitable by-product of the struggle among firms to compete. Globally, employees are pieces that can be moved around and replaced. Some remnant of this way of thinking obviously continues to haunt Romney’s mind. His political advisers must have spent many hours trying to exorcise it, but they appear not to have succeeded yet.
Like his pre-Reaganite ancestors—like, in fact, his father, who has always been his role model—Romney is not a culture warrior, and watching him try to imitate one can be entertaining, because it’s obviously completely counter to his training. On the evidence in The Real Romney, Romney has (or at least had through the first half of his term as governor) kept his values as a businessman and politician in a separate compartment from his values as a leader of his ultraconservative church. Romney thinks like a businessman, and, if you’re running a business, social issues are important only if they have an impact on the bottom line. It doesn’t matter if an employee is in a same-sex marriage, or is a philanderer or a single mother, has had an abortion, or holds radical political views. The only thing that matters is whether he or she is productive. That’s how meritocratic societies are supposed to work, and it’s why appeals to voters’ prejudices and fears were so repugnant to those liberal Republican dinosaurs. That stuff is distracting and inefficient. It cues up emotional reactions. It gets in the way of sound management.
Today, Democrats are enjoying the spectacle of the well-financed, well-endorsed, sometimes preeningly self-confident Romney getting beat up in primary contests by the ideological equivalents of what prizefighters call tomato cans. But, as is often the case in politics, what doesn’t kill him will make him stronger. Those political palookas are performing the service of identifying the anti-Romney voters as fringe voters—people who have nutty ideas about government, or who are just angry at modern life.
If Romney can dodge and feint his way past all his strange opponents, and discreetly shed some of the culture-war rhetoric he is finding himself obliged to mouth (which may be a challenge), he might arrive in November looking like a plausible candidate of the center, which is the way all Presidential candidates aspire to look. Then it might be the white-shoe Wall Street establishment of fifty years ago against the embodiment of twenty-first-century post-ethnic America. Fantasy politics, but for real stakes. Ω
[Louis Menand has been contributing to The New Yorker since 1991. He became a staff writer in 2001. Menand is the author and editor of several books. His book, The Metaphysical Club, was awarded the 2002 Pulitzer Prize for History and the Francis Parkman Prize from the Organization of American Historians (OAH). His most recent book is The Marketplace of Ideas (2010). He was an associate editor at The New Republic from 1986 to 1987, and was a contributing editor at The New York Review of Books from 1994 to 2001. Menand is the Anne T. and Robert M. Bass Professor of English and American Literature and Language at Harvard University. He has also taught at the Graduate Center of the City University of New York, Princeton, Columbia, and the University of Virginia School of Law. A graduate of Pomona College, Menand attended Harvard Law School for one year (1973-1974) before he received his Ph.D. from Columbia University in 1980.]
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Copyright © 2012 Sapper's (Fair & Balanced) Rants & Raves
