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Bain Capital Socially Valuable, Even Layoffs, Break Ups, and Sell Offs

Mitt Romney has received much criticism over layoffs from some of his Bain Capital leveraged buyouts.  This criticism is unwarranted, especially from anyone who fancies himself to be a proponent of the free market system.  The legitimate goal of economic policy or managers of scarce resources is not to create jobs, it is to create prosperity, and the Bain case study perfectly demonstrates this concept.

A WSJ article contends that Bain actually increased employment on the whole when you consider its venture capital component that started such companies as Staples, or its leveraged buyouts that did not result in bankruptcy, such as the turnaround of the Sports Authority, or the expansion of a steel mill.  But this argument completely misses the main point.

Even if all Bain did was buy-up companies at less than book value, break them up, and sell off the pieces for more than they paid, laying off everyone in the process, they would still be playing a critically important, and socially valuable role in a market economy.  They would be playing a role very similar to pulling valuable pieces off a wrecked car at a salvage yard, a process that when you think it through, destroys jobs because every usable transmission or head unit that can be salvaged, is one less that some worker has to build from new.  Salvaging clearly reduces the demand for labor of those who manufacture that which is salvaged.  But I doubt anyone would call an auto salvager socially irresponsible.  Perhaps it is the grotesque compensation Bain received, and to the extent that Bain’s compensation came from government policies that limit competition, this is a warranted criticism, but that only means we need more companies that can do what Bain does to compete away their supernormal profits, not that Bain’s activities themselves merit criticism.

Bain essentially fired bad managers.  Sometimes they tried to replace them and turn the company around, and given the fact that most capital is a specific factor of production with limited transferability that must be discounted if sold, and most labor has a unique skill set that has the built-in equity of the time invested to train it, this would be the first choice. Labor saving restructuring (layoffs) happened, but getting more from less is the most basic definition of economic progress and is a major reason why life today is far more comfortable than life 100 years ago.  The problem is when the worker who is laid off cannot find a replacement source of income, and that comes from a deeply rooted, complex set of problems far beyond the scope of Bain.  

But sometimes the market simply did not want what the company was producing and the most socially responsible use of the company’s land, labor, and capital was to sell them to an entity that could make better use of them, and it is this sales component that most critics find offensive, but they shouldn't.  If the overall market is mostly competitive, then the sales of these assets is how the most people get what they want most, or in other words, how you do the most good for the most people.

For example, if United Widget Makers (NYSEARCA:UWM) has $10 million of fixed assets, but is currently operating at a loss, what that means is that consumers do not place enough value on the widgets to cover the fixed costs of owning those assets, plus the variable costs of operating them (such as wages demanded by workers).  More specifically and completely, it means society as a whole would prefer those workers and that capital be employed making something else.  Given that a worker’s ability to demand a wage is primarily a function of his other job prospects, if workers are unwilling to negotiate to a low enough wage level that price can exceed average total cost (NYSEMKT:ATC), then it is because they have better prospects elsewhere, which is to say consumers would prefer they produced something else.  The same concept applies to the hard assets.  If the creditors of the hard assets are unwilling to renegotiate lending terms to a cost that fits ATC under price, it is because they believe they would fair better in a default/liquidation sale scenario, but this conclusion is ultimately reached because of the desires of two separate groups of consumers, the consumers of widgets, and the consumers of capital goods.  A default/liquidation of capital happens because consumers value the capital good itself more than they value the consumer good it was making, and have some viable means of re-purposing it.

Given the assumption that our overall economy is still closer to the perfect competition side than the perfect monopoly side of the spectrum where consumer choice is allowed to function (and this is for at least the moment a reasonable assumption), then rational, self-interested actors who are parting out companies will facilitate a result that is most in-line with what society as a whole desires.  It is proper to criticize the maelstrom of regulatory, monetary, tax, and IP policy that ultimately limits competition from competing away Bain’s profits, as well as limit saving and wealth building for the average worker, and even work against and contribute to the failure of some of the smaller, and/or newer companies that Bain took over, but it is not proper to criticize trying to get more output from the same or less input, for while that does lead to layoffs, it also leads to real economic growth and progress which is the truly legitimate goal of economy policy and managers of capital, nor is it proper to criticize the break up and sell off of entities that society as a whole desires an alternative use of.

The parable of the earthen dam, replacing shovels with spoons:

There was an American businessman touring China who visited the work-site of an earthen dam being made by 100 workers using hand shovels.  The American asked his guide, “why not just have one man with a bulldozer do this in a day?”  The guide replied, “because then we would have 99 men out of work.”  The American responded, “I thought you were making a dam, if it is jobs you are making, why not take their shovels away and give them spoons?”