Many journalists, pundits and politicians have offered opinions about whether Mitt Romney’s experience at Bain Capital is an asset in his bid to become the next President of the United States. Joe Klein, who writes for Time magazine, may have the most misguided analysis of all. This weekend he was a guest on the Chris Matthews show and offered this assessment of private equity and profit maximization:
You know, it’s true that it’s kind of cheesy to go after Romney because some of these companies that he tried to change, you know, failed and jobs were lost. The real argument against Romney and that form of capitalism is that it was all about short-term. It was all about maximizing shareholder value. And what the president’s argument could be and should be is, `I’m not about short-term. I’m about long-term, and it’s going to take us a while to get out of this mess.’
Maximizing shareholder value is about the short-term? Does Mr. Klein understand that the market value of a company’s equity depends on the expectation of future earnings? Has he paid any attention to the debate about the price of Facebook shares in the wake of its IPO? If the shareholder value of a company only depends on the short-term, why is there so much disagreement and uncertainty about the appropriate stock price for Facebook? The uncertainty arises because the future profitability of the company is unknown. Future profits depend on how well Facebook will be able to sell advertising to its hundreds of millions of users, and how that may change as more Facebook users access the site through their smart phones.
Joe Klein knows little about the way private companies or the economy works. Increasing the shareholder value of a company requires changing expectations about the future stream of profits from a company. It is all about the long term.
Klein’s ideal Presidential candidate, other than Barack Obama, may well be the Kevin Kline character from the movie Dave. Dave was the manager of a temporary help agency before filling in for the President in the 1993 movie. Helping people find jobs sounds like the ideal experience for the Oval Office for movie-goers and voters who believe that Presidents create jobs. Dave’s last act as President was to initiate “a program to try to find a decent job for every American who wants one“ because “if you’ve ever seen the look on someone’s face the day they get a job — I’ve had some personal experience with this – - they look like they could fly.” Hollywood wouldn’t support a President that said “I’ve seen the look on investors’ faces the day they realized they had turned around a company and created a lot of wealth.” But, as Brit Hume of Fox News said over the weekend “the business of making a profit has jobs as a by-product. It’s not as if there’s some favorite industry out there called Jobs R Us, which is in business for the purpose of creating jobs.”
The President and the Congress establish and enforce the laws, taxes and regulations that impact the creation of wealth and consequently the creation of jobs. Running a business is not the same as governing, but private sector experience helps one understand the costs and benefits of government intervention in markets. President Obama believes that the Presidency is different than running a private company because maximizing profits is “not always going to be good for communities or businesses or workers.” The President also said: “When you’re president, as opposed to the head of a private equity firm … then your job is not simply to maximize profits. Your job is to figure out how everybody in the country has a fair shot.”
Voters should consider how each candidate proposes to change taxes and regulations to encourage more wealth and job creation and provide equal opportunity and a fair shot for everyone. Mischaracterizing the economic role of private equity firms and trying to count the number of jobs that were created or lost as Bain invested in start-ups or troubled companies is largely a waste of time. The Romney campaign believed that promoting Bain as a job creator would ameliorate the view that their candidate is an out-of-touch rich guy. The Obama campaign continues to push this unimportant issue and their best explanation seems to be that Romney was the first to mention job creation at Bain. Let’s hope that both campaigns get off this topic and turn to the important economic policy issues facing our country.