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Republican Blows Whistle on Bain Cannibal, errr, Capital

Growing up in the late 70s and early 80s, I remember David Stockman well. He came from very near where I lived at the time in Southwest Michigan, was our local congressman, and when he was named budget director for Ronald Reagan, he came in promising a supply side revolution. After four years on the job, he resigned and wrote a book about why the whole thing didn’t work as promised. After that, he went in to private equity, the same thing Mitt Romney did, and he’s now explaining why Bain Capital was a destroyer of companies rather than a saver of them:

Bain Capital is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise.

Nevertheless, Mitt Romney claims that his essential qualification to be president is grounded in his 15 years as head of Bain Capital, from 1984 through early 1999. According to the campaign’s narrative, it was then that he became immersed in the toils of business enterprise, learning along the way the true secrets of how to grow the economy and create jobs. The fact that Bain’s returns reputedly averaged more than 50 percent annually during this period is purportedly proof of the case—real-world validation that Romney not only was a striking business success but also has been uniquely trained and seasoned for the task of restarting the nation’s sputtering engines of capitalism.

Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.

That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise. I know this from 17 years of experience doing leveraged buyouts at one of the pioneering private-equity houses, Blackstone, and then my own firm. I know the pitfalls of private equity. The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest-profit exit possible. Occasionally, we did invest in genuine growth companies, but without cheap debt and deep tax subsidies, most deals would not make economic sense.

This has all been explained before, of course, but the fact that it comes from a former supply-sider and Republican budget official lends it a bit more credibility. So how does he suggest fixing it? He spelled it out in an interview a few months ago:

Condon: Give me your prescription to fix the economy.

Stockman: We have to eat our broccoli for a good period of time. And that means our taxes are going to go up on everybody, not just the rich. It means that we have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that reflects the risk of holding debt over time. I think the federal funds rate ought to be 3 percent or 4 percent. (It is zero to 0.25 percent.) I mean, that’s normal in an economy with inflation at 2 percent or 3 percent.

Condon: Social Security?

Stockman: It has to be means-tested. And Medicare needs to be means-tested. If you’re a more affluent retiree, you should have your benefits cut back, pay a higher premium for Medicare.

Condon: Taxes?

Stockman: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15 percent, while ordinary income is taxed at marginal rates up to 35 percent.)

Condon: Why?

Stockman: Why not? I mean, is return on capital any more virtuous than some guy who’s driving a bus all day and working hard and trying to support his family? You know, with capital gains, they give you this mythology. You’re going to encourage a bunch of more jobs to appear. No, most of capital gains goes to speculators in real estate and other assets who basically lever up companies, lever up buildings, use the current income to pay the interest and after a holding period then sell the residual, the equity, and get it taxed at 15 percent. What’s so brilliant about that?

Comments

  1. slc1 says

    Stockman: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15 percent, while ordinary income is taxed at marginal rates up to 35 percent.)

    What say MH?

  2. lynxreign says

    He’s completely wrong about Social Security and Medicare. Means testing isn’t required at all, neither program is in any trouble at all for at least a decade and likely not after.

  3. raven says

    The whole business was about maximizing debt, extracting cash, cutting head counts, skimping on capital spending, outsourcing production, and dressing up the deal for the earliest, highest-profit exit possible.

    He forgot the mention shedding pension obligations. Those future retirees don’t really need that money anyway.

  4. leftwingfox says

    Agreed with lynxreign. I’d rather lift the SS/Medicare cap, and open Medicare/Medicaid to all for a more efficient pooling of resources. I just wish either of those were politically possible these days.

  5. Trebuchet says

    Great. This is the guy who was one of the primary creators of the mess. Has he had some sort of religious conversion or something?

  6. Ben P says

    He’s completely wrong about Social Security and Medicare. Means testing isn’t required at all, neither program is in any trouble at all for at least a decade and likely not after.

    That’s based on a series of assumptions, which may or may not play out.

    However, I think his statement is based on a fundamentally different assumption, which also has some truth to it. That is, in reality, we’ve long since ceased truly segregating social security and medicare funding from the general government budget.

    Yes, it’s separate on paper. But the reality is that almost all of the social security “trust fund” is owned as special government bonds.

    So when the Social Security Administration or the Medicare HI or SMI Trusts have to start drawing down their trust funds, they have to start cashing in or selling off the bonds they hold. When they cash in those bonds, that money comes straight out of the government general fund.

    Then when the “trust funds” are exhausted, the government has to make the decision of whether to fund the obligations of the SSA or Medicare directly, rather than merely indirectly. But frankly, having to issue debt to cover those versus direct apportionment is a fairly weak accounting barrier.

    and, I think its relatively undisputed that if things continue as they are the trust funds WILL be drawn down and eventually exhausted. The Medicare Trusts are already being drawn down and have somewhere between 12 and 18 years to the point where they’re exhausted.

    The Social Security Trust is currently still income positive, but demographic realities project it will start to be consistently drawn down somewhere around 2020 and will be exhausted somewhere after that. (the converse though is that it will return to profitability as the baby boomer “bulge” dies off).

  7. Ben P says

    And as far as fixing either Medicare or SSI, there are basically two options, although specific policies within those options abound.

    1. You can reduce the amount paid out, including means capping the payments, raising the age, or limiting benefits in some other way.

    2. You can raise the amount put in, through raising payroll taxes, removing the amount cap, directly contributing to the trust fund to make it self sufficient, or other methods.

  8. cry4turtles says

    I agree with this guy that income is income. There shouldn’t be two classes of taxpayers- the working stiff busting our asses and being taxed at working stiff’s rates and the wealthy errr… “job creators” who barely feel the pinch. That’s bullshit!

  9. lynxreign says

    Ben P

    The assumptions are essentially that the economy won’t stay at record low rates of increase for the next 25 years. Even then, only slight adjustments would be needed at that point.

    Of course, if you let Republicans run the econonmy, those 25 years of record lows becomes possible.

  10. says

    So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise.

    Of course not. It’s not like these bad policies were driven by lobbying from capitalist enterpises, or something…</sarcasm>

  11. Ben P says

    Even then, only slight adjustments would be needed at that point.

    I think the law of large numbers is in play here.

    Al Gore had it basically right in the 1990′s, that by setting aside a couple hundred billion dollars in the 1990′s, we might have been able to generate enough extra interest to forestall future shortfalls.

    The “trust fund” contains $2.7 trillion, last year it recieved $805 billion in income (including interest income), and paid out $736 billion in benefits.

    The estimate is that if and when the trust fund is exhausted, current reciepts would cover 75% of benefit obligations. Yeah, as a percentage that’s not huge. But that’s $184 billion dollars a year (and realistically it will be more like $200 billion in the future) that the government has to pay to meet SSI obligations. That’s about 5% of the total federal budget, but about 1/3d of the discretionary budget of the government every year. A lot of things have to get cut, or a lot of debt issued to cover that.

  12. lynxreign says

    Ben P

    Even if that were to occur, and that scenario plays out only with the worst prediction of economic growth, removing the cap on SS taxes plus a small increase in the SS tax would take care of it.

    Cut the military budget in half and no-one will even notice the extra payments for SS.

    And if it comes to it, issue debt! Who cares? If the government is issuing debt in such a way that more individuals have spendable money, it increases the long-term health of the economy. The debt becomes investments (bonds) for some and becomes income for others, which they spend, improving the economy.

  13. Ben P says

    removing the cap on SS taxes plus a small increase in the SS tax would take care of it.

    Most of the numbers I’ve seen say lifting the cap alone only gets you about halfway there. Lifting the cap + capping benefits as if only $106,000 were gets you substantially closer.

    Cut the military budget in half

    Or, you know, taxes raised.

    These are things that those of us being realistic call “politically difficult.”

    The Current “impoundment” defense cuts scheduled to take effect in january 2013 amount to about $500 billion over 10 years, or about $50 billion a year. That’s about 7% of the total US military budget every year. Yet republicans are crying and screaming and calling the cuts “the most dramatic and dangerous cuts in history.” And these are cuts they agreed to, or at least pretended to agree to.

    Even if Obama wins, I’d wager even money the cuts don’t happen at all, or are substantially reduced in exchange for concessions to other policies Obama wants.

    I’m not sure where you think political will for 50% defense cuts would come from.

  14. Johnny Vector says

    I too am interested to hear what Mr. Heath has to say about this. He has in the past provided enough evidence to earn my provisional assent that capital gains should be treated differently from “regular” income. What Stockman seems to be saying is that low capital gains rates result in a surplus of capital, much like lowering the maximum income tax rates.

    In a perfect economy, too much capital wouldn’t be a problem, but when the owners of that capital are unwilling to accept the resulting reduction in income, they turn to extracting wealth rather than creating it. Also, it is trivial to use the excess capital to purchase market distortions in the form of regulatory changes. So maybe capital gains are undertaxed.

  15. lynxreign says

    Ben P

    Since any possible crisis in SS won’t happen for decades (it always seems to be decades away and has been… for decades) we can build to a more sane set of policies and presto, the political will is there because the national dialogue has moved.

    And like I said, if you really have problems, just issue more debt to cover it. If we still have moderate unemployment and low interest rates (both current governement goals) by then, it won’t be a problem at all.

  16. Skip White says

    SSI benefits (as in, for the poor and disabled) are means-tested, and fairly strictly controlled. In other words, if you’re poor and disabled and have the audacity to inherit your elderly parents’ home when they die, your benefits will be reduced, because hey, that 1-bedroom ranch house worth $60,000 will pay all your bills the rest of your life. I worked in a group home for mentally ill people for a time,some of whom were on SSI, and their benefits would fluctuate sometimes month-to-month, based on what little income they made working a few hours a day at a sheltered workshop. Real means-testing would be more along the lines of what Stockman suggests.

  17. says

    This is the guy who was one of the primary creators of the mess. Has he had some sort of religious conversion or something?

    He’s having a “fuck you, I’ve got mine” moment.

  18. slc1 says

    Re Johnny Vector @ #15

    MH seems to be conspicuously absent today, at least on this thread. Of course, since he is shunning me, perhaps he disdains to respond to anything I say. Possibly he will respond to Mr. Vector’s query.

  19. Michael Heath says

    Johnny Vector,

    Just read your comment. I probably won’t have time to sufficiently weigh-in since I’m assuming an older thread has some responses from heddle on my constraints in challenging his belief the Bible is inerrant.

    A couple of quick comments:

    Stockman’s book on the Reagan campaign moving from fiscal policy arguments to winning election, to submitting its first budgets to Congress is a fascinating and disturbing read. There’s a reason the Reagan Administration perceived him as a traitor while the public benefitted from his work. In defense of the Reagan administration, they did improve their performance in this area, but as Stockman reports, they were essentially clueless on how they were going to put responsible budget proposals forward when first entering office while meeting their campaign pledges. They expected Stockman to use magic to make the math work, math they never bothered to insure would work during the campaign. That reminds me of two subsequent candidates, whom might they be?

    Somewhere up-thread someone claimed Stockman is no longer a supply-sider. I haven’t closely followed his career but I’d be surprised if this context is correct, for the Reagan years and now. Most people wrongly conflate the economically illiterate who promote modest tax rates get cut to increase tax revenue as supply-siders. While it’s true economist Art Laffer is a kook, actual supply-side economics was a respectable line of thought which like Monetarism, has now had its best features incorporated into mainstream economic thought. Bruce Bartlett’s latest book covers this history. I assume Stockman’s views are well beyond Laffer’s childish graph.

    I find Mr. Stockman’s view on the Fed and monetarism downright kooky. While he makes a lot of great arguments about fiscal policy in general, when he gets going on monetary policy one has to wonder if they can trust him on any economic issue. From this perspective he reminds me of Ron Paul who can be very eloquent on Middle Eastern policy quoting the best experts on the subject but when the Fed is raised, goes straight for the wingnut arguments. We expect people to be consistent in their application of critical thinking skills, but not these two.

    From a technocratic perspective, means-based testing for Social Security and Medicare is an awesome idea. However from a political perspective it’s dangerous because it opens the opportunity for conservatives to harm both programs in the same way they harm food stamps, Medicaid, or any programs that has the rich contributing beyond the return they enjoy from those contributions. They could demagogue it and slowly drain it of its benefits.

  20. spamamander, internet amphibian says

    Hey now, people receiving SSI are downright rich!

    I mean, aside from having to make sure that my ex-husband’s and my wills leave absolutely nothing to my daughter, lest she be penalized for having some kind of money (as if he and I have anything to leave, but I digress) it’s great! And the means-testing is completely reasonable. I work part-time at HellMart and get child support, so my daughter gets… $300 a month. A princely sum to be sure!

    (Yes, I’m a bit bitchy about means testing when it comes to the disabled, at least when the threshold seems terribly low.)

  21. some bastard on the net says

    I agree with Ing, this man saying what plenty of experts were already saying doesn’t make it any more credible.

    If anything, it just means that whenever someone vomits up a claim that Romney was a ‘job creator,’ pointing this out to them will make it harder for them to fall back on their pre-programmed talking point of ‘liberal bias.’

    Assuming it does get pointed out to them.

    (Not holding my breath).

  22. says

    So, David Stockman, one of the architects of the fraud that Team Raygunz perpetrated on the public back in the 80′s, “Supply Side” or “Trickle Down” economics–take your pick, they’re equally bullshittish–is blowing the whistle, NOW.

    I wonder how big a check from Mittmoroni’s campaign, for “consulting fees” it would take to shut him the fuck up.

  23. slc1 says

    Re Johnny Vector @ #15

    I hope that Mr. Vector noted that MH declined to comment on Stockman’s position on capital gains taxes. What a surprise.

  24. Michael Heath says

    democommie writes:

    David Stockman, one of the architects of the fraud that Team Raygunz perpetrated on the public back in the 80′s, “Supply Side” or “Trickle Down” economics–take your pick, they’re equally bullshittish–is blowing the whistle, NOW.

    I disagree a fraud was perpetuated, first off ‘supply side’ policies are now an integral aspect of mainstream economic thought. In fact the need to restructure our labor market to better match talent to job opportunities is a very compelling argument. Far better I think than the argument all we need is more demand to get the labor market healthy again, which denies how many are underemployed and workers at most income levels are not enjoying growth in their take-home pay or advancement opportunities due to stagnant growth and a more competitive global playing field.

    Even moderate economists generally agree with the policies of the 1980s after we consider how the Reagan Administration agreed to tax increases after the recovery in order to tamp down the deficit. The Reagan Administration preferred spending cuts on favorite liberal programs, but compromised with President Reagan being a key and vocal leader in defending a progressive tax rate which had him increasing tax rates and taxes on the top brackets and arguing it was the right thing to do. And the initial austerity policies in spite of a recession given inflation are now considered an enormous victory in a time when simplistic templates didn’t work given we suffering from both inflation and high unemployment. Not just for the country but in economic thought given the complexity of the situation.

    Yes there was falsehoods promoted and Mr. Reagan could dish cringe-inducing talking points, but he also mostly avoided those in the policy deals he cut where today’s Republicans take as gospel. In fact he also complemented Carter-appointee Paul Volcker’s monetary policy at the Fed nicely with his fiscal policies promoted to Congress. And that’s a key reason we recovered from a horrible economy in the early-1980s and saw enormous growth in the mid/late-80s and 1990s. However the rise of the tech sector deserves more credit than federal fiscal policy as implemented by the Dems in Congress and President Reagan.

  25. lynxreign says

    Micheal Heath

    first off ‘supply side’ policies are now an integral aspect of mainstream economic thought

    No, they aren’t. They’re a discredited aspect of mainstream economic thought. As another famous conservative said, it’s “voodoo economics”.

    Far better I think than the argument all we need is more demand to get the labor market healthy again, which denies how many are underemployed and workers at most income levels are not enjoying growth in their take-home pay or advancement opportunities due to stagnant growth and a more competitive global playing field

    All this says is that you don’t really understand where demand comes from or how you generate it. First, there hasn’t been “stagnant growth” as corporations are booking record profits and are sitting on record cash. If you get more money in the hands of workers, either through reducing unemployment or eliminating incentives for companies to keep people underemployed, they create demand which businesses respond to. A big part of why the economy is such a mess today is the complete failure of “supply side” economics.

    And the initial austerity policies in spite of a recession given inflation are now considered an enormous victory in a time when simplistic templates didn’t work given we suffering from both inflation and high unemployment

    Also not true, the failure of the initial austerity policies are what lead to the raise in taxes and increase in government spending which finally ended the recession.

    Once again, you show you have absolutely no understanding of economics.

  26. slc1 says

    Re MH @ #22

    From this perspective he reminds me of Ron Paul who can be very eloquent on Middle Eastern policy quoting the best experts on the subject

    Which “experts” are those, Stephen Walt and John Mearsheimer?

    As I understand his suggestions for the Middle East, aside from throwing Israel under the bus, he proposes to withdraw US military forces from the area. I would also like to withdraw US military forces from the area. Unfortunately, given that most of the world’s proven oil reserves are in the Middle East and denial of that oil by Iranian military or terrorist action would cause a catastrophic world wide depression, we have no choice, as the world’s strongest military power, but to keep large forces in the area to prevent any interruption of supplies. Congressman Paul’s position is totally irresponsible.

    As for US policy toward Israel, I will quote something George Will once wrote: “Israel is the only country in the Middle East in which the US can confidently expect to be able to land a plane six months from now”.

  27. Michael Heath says

    I wrote earlier:

    first off ‘supply side’ policies are now an integral aspect of mainstream economic thought

    lynxreign rebuts:

    No, they aren’t. They’re a discredited aspect of mainstream economic thought. As another famous conservative said, it’s “voodoo economics”.

    I’m discussing economics, you’re referring to talking points by politicians based on their abuse of one graph. You also appear to me to be either ignorant of history or denying it given the enormous growth we enjoyed during this period and afterwards. Given subsequent comments I think denial is the correct answer.

    Here’s an excellent book that explains how the successful aspects of supply-side economics has already been incorporated into mainstream economic though, by one of the most successful economic policy makers in U.S. history, Bruce Bartlett, The New American Economy: The Failure of Reaganomics and a New Way Forward.

  28. lynxreign says

    No, I’m referring to economics, you’re referring to wishful thinking. Please note the subtitle of the very book you’re referencing “The failure of Reaganomics.” Supply Side is crap, it doesn’t work. Had you done any actual reading instead of just swallowing what right-wing hacks promote to ensure they keep getting big paychecks, you’d understand that. Then again, based on much of your commenting here I wonder if you’re capable of understanding anything.

  29. says

    @32: I believe what Michael Heath was saying is that there’s a lot more to supply-side economics than Reagan’s rhetoric. Your response only makes sense if supply-side economics and reaganomics are synonymous.

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