Mitt Romney seems genuinely stunned that President Barack Obama would question the value of his proudest accomplishment, founding and running Bain Capital for 15 years.
To Romney and others who work in finance, it's self-evident that what private equity firms like Bain do is beneficial to the economy. Private equity firms buy underperforming businesses and restructure them. With new management and investment, some of these firms thrive while others fail. As a result, investment is allocated more efficiently. This is creative destruction in its pure form and if you question it, they say, you must not believe in capitalism.
To Obama and most liberals, it's no less obvious that there's something faulty about this model of financial capitalism as it has been practiced over the past 30 years. Leveraged buyouts, which are what private equity firms do, load companies with debt, extract value for middlemen, and displace workers. As the gap between economic victims and executioners grows, the resulting society becomes more unequal and unfair.
Both positions in this argument — that Obama doesn't believe in capitalism, that Romney doesn't care about workers — are distortions. But Obama is winning the argument this week, and here are five reasons why his campaign wants Bain to stay front and center for as long as possible.
1 Obama is more eager to make his case about Bain than Romney is.
The president is comfortable attacking the negative consequences, if not the fundamental concept of free-market capitalism: outsourcing and offshoring, shuttered factories, cheap Asian imports, declining middle-class wages. Romney, on the other hand, doesn't much want to defend creative destruction. He boasts about building Bain, but won't discuss it in detail because it opens up a conversation about those same unattractive consequences: lost jobs, bankruptcies, private pensions dumped onto the federal government.
2 It's not clear that private equity — like other forms of financial innovation — is good for America.
You'd think that if private equity made businesses more efficient and valuable overall, there'd be clear evidence to support it, but there isn't. Private equity firms earn most of their money through financial engineering. A big share of their returns comes from "tax arbitrage" — figuring out how to exploit loopholes to pay less to the government. Because interest is a deductible business expense, debt financing means they often pay little or no corporate tax. Private equity's reliance on leverage can also magnify short-term earnings without leaving the companies they manage more valuable overall.
3 Bain shows how Wall Street is rigged in favor of the rich.
Private equity firms, like hedge funds, earn their money through a 2-and-20 structure, which means investors pay a 2 percent annual management fee, and give away one-fifth of their profits. According to one study, private equity firms managed to keep 70 percent of all investment profits for themselves, rather than paying them out. They've figured out how to be hugely profitable even if they aren't successful, and even where firms they own go bankrupt.
4 Romney's Bain career is a story about rising inequality.
It's telling that George Romney, Mitt's father, made around $200,000 through most of the years he ran American Motors Corp., doing work that clearly created jobs. His son made vastly more running a corporate chop shop in an industry that does not appear to create jobs overall. This difference encapsulates the change from corporate titans who lived in the same world as the people who worked for them, in an America with real social mobility, to a financial overclass that makes its own separate rules and has choked off social mobility.
5 Bain reminds everybody how rich Romney is, how different that makes him from ordinary people, and how this kind of advantage perpetuates itself.
There's no reason to think that Romney, in his heart of hearts, favors a version of capitalism that subsidizes financial engineering and ignores the victims of economic transformation. As governor of Massachusetts, he created a subsidized insurance system that filled the biggest hole in the safety net, and became the model of Obama's health care plan. Take away the political context, and one can imagine the two of them agreeing about a lot else as well. But in the milieu of today's GOP, Romney can never acknowledge the need for a better safety net. Without one, the vision of capitalism represented by Bain Capital becomes even less appealing.
Jacob Weisberg is chairman and editor in chief of the Slate Group and author of "The Bush Tragedy."
© 2012 Slate