Washington Post columnist E.J. Dionne writes today, “In this election, we’re not having an argument that pits capitalism against socialism. We are trying to decide what kind of capitalism we want.”
One side, he argues, is Romney-Bain-Gekko-Lehman capitalism where Wall Street raiders target and destroy companies for the quick buck, “[s]ucking pension and health funds dry to aggrandize investors.” He then approvingly quotes Vice President Joe Biden: “You know the difference between an economy . . . that’s built on making things rather than on collateralized debt, creative credit-default swaps, financial instruments like subprime mortgages. That’s not how you build an economy.”
Then there is the other kind of capitalism, the sort Dionne approves of: “To borrow a term pioneered by Germany’s Christian Democrats, we can try to build a social market.”
1. Dionne spends absolutely no time explaining what he thinks that means or how a German-style “social market” economy would actually work in practice in the United States. But I would guess what Dionne is suggesting is really nothing more than an even larger social welfare state (paid for through even higher taxes) with stronger unions, both private and public. He probably also wants more regulations that would make it tougher for companies to cut their workforces. In short, Dionne wants a lot more government interference in the economy.
2. Dionne clumsily tries to link Romney to the financial crisis. What Bain did as a private equity firm had absolutely nothing to do with the financial crisis. Here is how private equity works (via City Journal):
Smart investors at private equity funds select poorly managed companies whose value can be increased by extending, reducing, or reshuffling their activities. After buying a significant number of shares in such a company, a private equity fund can redirect or replace its management structure. Private equity managers may terminate redundant workers to increase productivity; scale back or eliminate less profitable departments; or use the company’s existing business to extend its brand and reach. For instance, Bain Capital, the private equity fund founded by Mitt Romney, turned Staples from a local brand into a national office supplier.
In the simplest sense, private equity investors reallocate capital where it will be most effective—from less productive uses to more profitable ones. Private equity funds propel capitalism’s creative destruction: by promoting innovation and punishing obsolescence, they fuel economic growth.
At the same time, by speeding up processes that might otherwise take a long time—such as the decline of an old industry and the emergence of a new one—private equity funds make the social costs of creative destruction more visible. Those who defend free markets, creative destruction, and private equity must do a better job of explaining their genuine benefits while supporting effective social policies to help workers make smoother transitions from old industries to new ones.
3. I would also guess that Dionne, like President Obama, has a lot of economic nostalgia for the 1950s and 1960s with a very poor sense of the unique economic factors (including little global competition, delayed implementation of innovation during the 1930s and 1940s, a baby bust that boosted worker wages, etc.) that benefited those decades.
4. Dionne also seems to have forgotten how inefficient Corporate America was heading into the 1980s, and how badly it needed restructuring by firms such as Bain. Dionne: “Since the dawn of the leveraged buyout era three decades ago, many friends of capitalism have questioned whether loading companies with debt as part of these deals is good for companies and for the economy as a whole.”
Dionne might want to take a look at an analysis of the Decade of Greed by economists Bengt Holmstrom of MIT and the University of Chicago’s Steven Kaplan:
When large-scale hostile takeovers appeared in the 1980s, many voiced the opinion that they were driven by investor greed; the robber barons of Wall Street had returned to raid innocent corporations. Today, it is widely accepted that the takeovers of the 1980s had a beneficial effect on the corporate sector and that efficiency gains, rather than redistributions from stakeholders to shareholders, explain why they appeared.
4. As for Germany, it has fallen further behind the United States economically over the past 30 years, as the above chart shows. If Germany had merely held its own, its economy would be $1.6 trillion larger today.
5. It never occurs to people like Dionne that more statism might have a downside or two. As Prof. David Schmidtz of the University of Arizona said in a recent EconTalk podcast with Russ Roberts:
There’s always a reason, even a good reason, to create more power. There’s always a problem coming up that hasn’t been solved where we think we need a Czar or a committee or an agency—somebody—we need a Cabinet, to solve that problem. Like the reasons for doing it will probably never be without weight, without merit; and yet the result of creating more power in order to solve that problem is you create more power that gets bought and sold and auctioned off to the highest bidder, in effect, and used for whatever purposes that high bidder has in acquiring that power. …
So, you end up, the bills come out with nice-sounding names on them, and then you actually read the bill and it will be 4000 pages that have nothing to do with the thing that forms… And so even good purposes give rise to corruption, well-meaning purposes give rise to an increasing level of corruption; and as a country gets older, as its bureaucracy gets bigger, I’m sorry, but it escalates. It starts growing, if not exactly exponentially, but at least episodically there will be periods of exponential growth, growth and emergence of new forms of power that wouldn’t have been imaginable a generation ago will be accepted as just the next little step—if we didn’t object to the previous step it doesn’t make sense to pick this as the place.
What Dionne wants is a recipe for stagnation and crony capitalism in the United States.