As charges of vulture capitalism hang in the air, Mitt Romney's claim that he understands job creation because he's a "business leader" begs us to look deeper.
We ought not look to Romney, but to Peter Drucker, the father of business management, as we answer the cry that's unceasing from middle Americans: How will America produce decent jobs and opportunity? Drucker, a consummate champion of business, leveled a serious charge ten years ago. And his accusation is ten times more relevant today.
Three divergent interpretations of our economic reality are bringing focus to our political choices. Which view prevails will determine who is our next President and what policies we can expect.
View 1: Capitalism is rough, but in the end it creates jobs. In this interpretation, the Bains of the world seek opportunities to eliminate employees, units, divisions, departments, and whole companies. Not out of sick, evil intent, but out of the convictions that these individuals and groups are just not optimally efficient. Such sub-optimal performers might well have been eliminated by the market anyway. Bain interventions led to a new life for some. Others not.
Romney argued in the New York Times that this kind of private sector efficiency is what should have happened to Chrysler and GM in 2008. Let them crash, he said at the time, and let the market have at them (with a little public bankruptcy court assistance), and salvage whatever value there is. It would have been some terrifyingly "creative destruction," but the true free marketers, of whom Mitt generally counts himself (and Ron Paul with even less hesitation), believe that in the end more jobs get created than destroyed. In this view, if the "economic man" can't create something of great enough value to earn money/a job, then so be it. That's his or her moral problem and no one else's.
View 2: Modern day capitalism is no longer a net job creator, especially in developed countries like the United States of America. In this view, it's simply foolish to look to business people for the answer to creating jobs in America. It's like looking to NBA players to keep ticket prices down. "Ahh, sorry, not my job!" In this interpretation, business people are doing what they must. Bain excels at it. They seek efficiency to grow the bottom line. As they steward businesses, labor is often a huge share of their cost of doing business, and they fastidiously manage that cost center. To make profit -- or sometimes just to stay in business -- they hold wages and jobs down.
The one percent, of course, benefit greatly as investors. And as former Secretary of Labor Robert Reich points out, many in the 99 percent also like this cold-hearted, rational capitalism. In Supercapitalism, Reich argues that as consumers, we're thrilled that prices are held down by competitive cost-cutting; and as investors, including 401(k) and pension holders, we demand that our investments pay. My 80-year-old mom told me this week that she'll get her new Ford Fusion for less than the lease she signed three years ago, and it will have many more features. And she will buy it because demanding money managers have seen that the market has performed well for her.
But many workers simply can't find work, and millions more worry that their job could be the next inefficiency to be eliminated. The pure free marketers argue that over time they create jobs by making companies healthy. And they might surprise you with the results of the supposedly horrible first decade of this century, when for all the down-sizing, American businesses that operate abroad did not cut but added a net half-million jobs. But where did those jobs get added? They added 2.9 million jobs abroad while cutting 2.5 million jobs here. These weren't just cuts to jobs in manufacturing or textiles -- there wasn't an industry that was immune. Even Ernst & Young did a million American tax returns in India. Capitalism moves capital like gravity moves water -- to the low spots. And they simply aren't in America.
As my wife, former Governor of Michigan Jennifer Granholm, and I argue in our book, A Governor's Story, continuing productivity gains and the huge surplus of cheap labor abroad dictate that efficient capitalists, which Mitt Romney certainly was, can't be trusted to create jobs. After all, the driving purpose of modern American capitalists is to create wealth not jobs.
Do you think we would ever hear Romney say that he and his colleagues assessed acquisitions and start-up investment opportunities in his board meetings by determining which ones would create the most jobs? Of course not. Free market thinkers must answer for the fact that the big problem is not that the invisible hand is being crippled by government, but that it's now moving money like David Copperfield moves coins or Apple moves music -- at lightning speed. The developing world is in a major rush to attract our capital, and our capital is nothing but fluid.
Peter Drucker, a huge believer in market capitalism, was deeply concerned about what is now Romney's Bain problem. Drucker saw that business had become a huge force in American life. And as he argues below: where there is power, there must be some accountability.
Management books tend to focus on the function of management inside its organization. Few yet accept it as a social function. But it is precisely because management has become so pervasive as a social function that it faces its most serious challenge. To whom is management accountable? And for what? On what does management base its power? What gives it legitimacy?Drucker rightly noted, "These are not business questions or economic questions. They are political questions. Yet they underlie the most serious assault on management in its history -- a far more serious assault than any mounted by Marxists or labor unions." And what did Drucker see as that momentous threat? His three-word answer: "The hostile takeover." Drucker saw that owners like pension funds were "driven by the postulate that the enterprise's sole function is to provide the largest possible immediate gain to the shareholder. In the absence of any other justification for management and enterprise, the 'raider'... too often immediately dismantles or loots the going concern, sacrificing long-range, wealth-producing capacity to short-term gains."
There are those who wouldn't admit to these structural problems, but instead lay a third view at CEO Romney's feet:
View 3: Modern day capitalism can work, but some evil actors abuse it. In this view, CEO's and boards should create shareholder value, but they should also act responsibly regarding the fallout of their actions. Some don't. Newt Gingrich and Rick Perry are trying to pin this tale on Romney, with Perry labeling Romney a "vulture capitalist," who makes wealth by preying on the vulnerable. They postulate and Democrats will no doubt amplify the argument that Romney's no better than the Wall Street guys who bet against the very paper they sold, knowing people down the line who trusted them were going to get left holding a fraction of their investments.
If modern day capitalism is a healthy system distorted by bad actors, then we ought to at least create rules; for example, a separation between banks and investment firms to protect savers. And we ought to spend money to aggressively prosecute the rule-breakers. Yet the modern-day free market people resist nearly every "regulation" as an unnecessary burden (see the gnashing of teeth over Sarbanes-Oxley).
How does it all shake out? That's the conversation we should be having. Although we depend on private sector businesses to create wealth and in turn jobs, modern capitalism does not aim to create jobs. When it does, by definition it holds no preference for American jobs. And by historical reality it is certainly not creating lower-skilled jobs at (heretofore) livable American wages.
It's time for a new discussion of how the business sector can work with government not only to create wealth -- which continues to vastly benefit the already-wealthy -- but to build human capital and human opportunity.
Would that Peter Drucker were still alive to assist with that conversation.
Follow Dan Mulhern on Twitter: www.twitter.com/@DanMulhern
Peter Dreier: Occupying the GOP
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 |
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| Obama | Romney | |
|---|---|---|
| Electoral Votes (270 to win) |
332 | 206 |
| Obama | Romney | |
|---|---|---|
| Total | 65,899,660 | 60,932,152 |
| Percent | 51.1% | 47.2% |
| Democrats* | Republicans | |
|---|---|---|
| Current Senate | 53 | 47 |
| Seats gained or lost | +2 | -2 |
| New Total | 55 | 45 |
| Democrats | Republicans | |
|---|---|---|
| Seats won | 201 | 234 |
Capitalism can mean different things to different people. Economic prosperity requires a legal system that protects individuals and secures their property from expropriation, whether it be private theft or political predation. Advocates of this system of rules often call it “capitalism.” We’ll call it “free-market capitalism.” And it’s a good thing for government to let this kind of capitalism develop by protecting private property, sanctity of contract, and consensual exchange. This ensures individual freedom of choice—and not coincidentally, it is the only known recipe for economic prosperity.—Tyler Watts
In a free-market system, in order for one to get more for himself, he must serve his fellow man. This is precisely what Adam Smith, the father of economics, meant when he said in “An Inquiry Into the Nature and Causes of the Wealth of Nations” (1776): “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” …Free-market capitalism is relatively new in human history. Before the rise of capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man. Capitalism made it possible to become wealthy by serving one’s fellow man.--Walter Williams
Kai
1. Search for a US located privately held profitable company with net worth of $X million, and use Leveraged Buy Out (LBO) financing to take over and gain controlling interest of that business. Use as little of your own money as possible to purchase that required controlling interest.
2. Replace the existing officers and directors with your family members, friends and loyal associates.
3. Buy as much of the shares held by the other investors as possible.
4. Take that corporation public, and have the shares traded on the NYSE or NASDAC.
5. Take every action possible to inflate the stock prices so that you will create a record of ascending stock prices and ever increasing dividends.
6. There is absolutely no reason for any of the executives running this business (or any other business) to know anything about making the product that the business is in business to produce, but you must learn how to use creative accounting to increase the paper assets and therefore inflate “Net Worth” on the 10K form statements for your business that you are required by law to file with the SEC.
7. Have the board direct the corporation officers to mortgage and re-finance all of the businesses real estate and other assets as much as possible to raise as much cash as possible (maybe $.5X million) and start passing out that cash as increasing quarterly dividends to stock holders.
9. As you pass out this cash to stockholders as dividends this will inflate the value of your stock options, based upon the PE ratio histories that most investors use to select their stock investments. This will also to determine the prices that future investors will pay for your company stocks.
10. Pay performance bonuses to the company executives, to keep them on your side.
11. Create an Initial Public Offering (IPO) of $20X millions, with half of that stock committed to company officers as stock options.
12. Sell most of the remaining IPO stock certificates to raise as much as $10X millions capitol as possible offer the newly issued stock for sale to the public. and commit the other half of the stock certificated to your corporate officers and directors.
13. Stop/postpone and/or minimize maintenance and equipment replacement costs to increase profits, as much as possible.
14. Inflate the book SEC 10K filing Net Worth by inflating the value of the company real estate assets, goodwill, and other intangibles to offset the increase in liabilities such as mortgages and loans on assets that are then dispensed as dividends. This will make balance sheet look better, and further increase your stock trading prices.
BTW, interest rates are some of the most important prices that ought to be set by supply and demand, but which are manipulated by our central bank.
In fact, job DESTRUCTION is an important part of economic progress. The goal of economic activity is not to give people busywork, but to create the goods and services people want and need. If we can obtai the goods being produced by ten workers by replacing them with 2 workers and a machine, the economy is richer. But not only by the goods produced by those 2, but by some other goods and services that the other 8 are now free to produce. What we need is the economic freedom and flexibility to find other jobs for those 8. Minimum wage, union laws, unemployment benefits, and all sorts of labor regulation that increases the cost of hiring impede this process.
In history, when various jobs were eliminated by technology or other changes, there typically came into existence a new crop of jobs to support the new technology that could absorb the displaced jobs. Now, thanks to globalism, when that happens, those new jobs are as prone to go anywhere else but here. Or, technology innnovations continuously reduce the need for any human labor, with no replacement. So again, recognizing that current job creation may or may not benefit the US was a point of the article. If we're going to run an economy where the basics of life require capital, that for the majority is obtained in exchange for labor, then we need to ensure that labor is available for the majority, or the whole system will collapse on itself.
The more we produce, the more goods and services we actually want. There is no limit to the human desire and need for wealth, in both consumer goods and services. There will always be more jobs to create.
What is causing our unemployment is the currect recession (which I don't think is over even if it supposedly ended in '09), regime uncertainty, an increase in the minimum wage, and extensions of jobless benefits. Employers can't figure out what health benefits they are going to have to give employees in the future because of Obamacare. They aren't sure how much they will be paying in taxes in the future to pay for our present deficit spending. Workers have several more months to sit around the house collecting unemployment benefits before they have to get a job. All sorts of government efforts to keep wages high keep wages from adjusting to monetary shocks.
There are always more jobs to create, so long as people want things they don't have. Just ask around for things people would like to have but they cannot afford. Those are jobs to be created.
Follow your logic. You wrote: "What we need is the economic freedom and flexibility to find other jobs for those 8 [downsized American workers]. Minimum wage, union laws, unemployment benefits, and all sorts of labor regulation that increases the cost of hiring impede this process." If we did what you say, the 8 unemployed workers just need to drop their wages to become attractive to capital(ists) again, right? You'd cut unemployment compensation to make them desperate quicker so they'll sell their labor even cheaper. This is called "the race to the bottom." Want to go first?
Neither middle America nor most thinking business people want what we have. The continuing downward pressure on wages doesn't co-exist very well with the continued upward growth for the top 1-10%. Why should American voters keep rules that say to the wealthy: "go ahead and invest as much as you can in China," and, say to working people "just agree to work for as little as the people making cell phones at FoxComm in Shanghai?" That is utterly unsustainable as a matter of pragmatic politics. It is duplicitous for people to continue to suggest that supply and demand will help American workers, when we are NOT in a closed system. Money will flow to where it's best used, and as I wrote in this blog: that ain't middle America(ns).
Am I missing something?
Though because of population growth, if the supply of money remains stable, nominal wages may fall. This is no real problem if productivity increases, thus increasing real wages.
This is what happened in a time mistakenly called "The Long Depression". Productivity increased, though nominal wages stagnated. But the standard of living of the average worker increased.