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Posted by on May 21, 2012 in Economy, Politics | 9 comments

A Choice of Capitalisms

WASHINGTON — 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. It is a debate as American as Alexander Hamilton, Andrew Jackson, and Henry Clay — which is to say that we have always done this. In light of the rise of inequality and the financial mess we just went through, it’s a discussion we very much need to have now.

The back-and-forth about Bain Capital, Mitt Romney’s old company, is part of something larger. So is the inquest into the implications of multibillion-dollar trading losses at JPMorgan Chase. Capitalism can produce wonders. It is also capable of self-destruction, and it can leave a lot of wounded people behind. The trick is to get the most out of what capitalism does well, while containing or preventing the problems it can cause.

To describe this grand debate is not to deny that President Obama’s campaign has some, shall we say, narrower motives in going after Bain. Obama’s lieutenants need to undermine Romney’s claim that his experience in the private equity business makes him just the guy to get our economy back on track.

The Bain conversation has already been instructive. Romney’s friends no less than his foes have had to face the fact that Bain’s purpose was never about job-creation. Its goal was to generate large returns to Bain’s partners and investors. It did that, which is why Romney is rich.

Romney wants to focus on the positive side of his business dealings that did create jobs. He wants to brag about the companies Bain helped bring to life, among them Staples, Sports Authority and Domino’s.

That’s fair enough. But having made an issue of Bain on the plus side, he also has to answer for the pain and suffering — or, as defenders of capitalism like to call it, the “creative destruction” — that some of Bain’s deals left in their wake.

This leads naturally to the question of how creative the destruction wrought by our current brand of capitalism actually is. 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.

Does this approach cause unnecessary suffering among the employees of the companies in question and the communities that often lose plants and jobs as a result? Sucking pension and health funds dry to aggrandize investors seems less like a creative act than a betrayal of workers who made bargains with their employers in good faith.

More generally, while some of the innovations in the financial sphere have been beneficial to growth, it’s far from clear that this is true of all or even most of them. Some of them helped cause the downturn we are still trying to escape and created incentives for the dangerous risk-taking that led to JPMorgan’s troubles. And there’s little doubt that our new financial system has transferred wealth from other sectors of the economy to the people at the top of the financial business.

Vice President Joe Biden’s speech last week in Youngstown, Ohio, drew wide attention for its criticism of Romney as someone who just doesn’t “get it.” But when Biden moved beyond Romney, he offered an energetic broadside against the new world of finance, and he picked the right venue to make his case: a noble blue-collar town that has been battered by the winds of globalization and economic change.

“You know the difference between having an economy that makes things that the rest of the world wants, and having an economy that is based on financialization of every product,” Biden told his listeners. “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.”

Romney, by contrast, is wary of dismantling any of these nifty new Wall Street inventions, one reason why he wants to repeal the Dodd-Frank financial reforms.

We need to have this great national argument. To borrow a term pioneered by Germany’s Christian Democrats, we can try to build a social market. Or we can have an anti-social market. An election is the right venue for deciding which it will be.

E.J. Dionne’s email address is [email protected] (c) 2012, Washington Post Writers Group

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Copyright 2012 The Moderate Voice
  • kewlbreeze

    one thing this article leaves out, is how much the republican party i despised, after 8 years of “bush and his cronies” nobody wants a repeat of that, while this administation may no t be the best this is the first time i am not worried about our country getting attacked, by foreign countries, i am fifty years old and i can tell you this when bush jr was president i thought the world was coming to an end how any body even voted for him is beyond me actually it was fixed but anyways romney looks like he s his evil twin brother , what the hell we never want to see people like that run this country again we need to get back to the basics ..

  • ShannonLeee

    Dems need to stop attacking the role of Bain Capital and go after how Romney’s experience at Bain does not translate into Presidential economics.

    Bain is a vulture and just like in the wild, vultures are needed. That being said… we don’t need a vulture ruling the jungle.

    We need a Lion.

  • Rcoutme

    SL: in the end, your initial claim is right and your application is wrong. CEO’s make bad presidents because they are used to having Yes-Men around them and having dictatorial powers. The presidency is all about finding some way to get divergent parties to agree. That “would” be the reason that CEO’s are unlikely to make the transition.

    Meanwhile, Romney should not be running on his Bain experience. He should be running on his similar experience to the president (i.e. when he was governor). The problem he has with this is that he had to deal with a veto-proof majority of Democrats. Thus, he had to [get ready for the forbidden word in the Republican lexicon] compromise!

  • ShannonLeee

    RC… I think you have a bad impression of CEO’s 🙂 not to mention that many Presidents have enjoyed the Yes man environment while in office. I dont have a problem with CEO candidates as long as they realize that the country is not a business…which is something W did not understand.

    Romney’s problem is that his biggest accomplish as governor equates him with Obama. He cant run as anti-Obama with state run socialized medicine hanging around his neck.

    but hey, he saved the Olympics

  • Dr. J

    So where’s the “choice of capitalisms?” EJ criticized the one with Bain in it and then gave only vague hints about the other one.

    Apparently it “makes things,” it’s free of subprime mortgages (keep on renting, middle class), it has no mechanism for shutting down bad ideas, and the only entities “sucking pension and health funds dry” will be in the public sector. Sounds like heaven.

  • slamfu

    The missing capitalism is the capitalism of FDR, and Truman, of Eisenhower and Kennedy and Nixon. We had a plan, it was working. This new mantra of low rates, low taxes, and no oversight is letting these companies run roughshod over the rest of us. Nothing has really changed since the crash. The snafu JPM had last week, I read their people have $10 TRILLION in that market setup of credit default and insurance betting. That means if that thing takes a bath, we are truly screwed. They are still betting the house with these 2nd and 3rd tier derivative markets. Unless someone puts a stop to it we are just as vulnerable as we have been for the last 5 years to these guys.

  • Dr. J

    If you mean we should reinstate glass-steagal, slamfu, I’m with you.

  • merkin

    The purpose of an economy is to distribute resources throughout a society. By implication the distribution should be along a somewhat equal basis.

    Capitalism, to paraphrase Churchill, is a terrible way to do this. Unfortunately, every other way that has been tried is even worse.

    Capitalism sets up two economies. The real economy that provides jobs, feeds families, builds homes, roads, bridges and factories and produces all of the goods and services that society needs. There is another economy, a financial economy that is concerned only with money and which produces nothing else. It distributes its one product, money, to a very small part of society, and by the definition of an economy is a very poor economy.

    Money is wonderful stuff. It is the grease that makes the real economy go, it enables trade, makes it more convenient, it establishes relative value and shows the difference between the winners and the losers. But money is not the wealth of a country, it is only the way that the wealth is measured. The wealth of a country is in what it produces, in its natural resources, in its infrastructure and most importantly in its people, their knowledge and initiative.

    The real economy and the financial one have only a single point of required intersection. The financial economy creates the money that the real economy needs. That is all. The financial economy creates the money by making loans. Debt is money, money is debt. (No, in our current system the government doesn’t create anything but the money that they spend and currency that is used increasingly infrequently for small, consumer transactions, and yes, they pretend that they have some control over the money created by the financial economy but as we learned in the Great Financial Crisis and Recession, they don’t.)

    A smart society doesn’t let the financial industry do much more than this, create money for the real economy, maybe with some risk pooling, insurance, for the real economy.

    The financial industry loves creating money, they will, if not restrained, create money just for themselves, to become rich, at least in terms of money. They do this by loaning money to themselves and playing what are finally nothing more than zero sum gambling games where some rich people become richer and other rich people become poorer and some even richer people only become richer because they control the games and the rules of the games.

    A dumb society allows this, but tries to separate the financial economy from the real economy so that the financial economy doesn’t contaminate the real productive economy. This is hard to do and the separation can never be total, the games will eventually try to take over the real economy. They always hurt the real economy, they increase the costs of creating the money the real economy needs. They increase the return the real economy has to have to pay for the money. The financial games look to some to be more attractive and lower risk than investing in the real economy, the tail begins wagging the dog.

    A really stupid society lets the financial economy bleed over into the real economy, letting them tear down the barriers between the real and the financial economies. A suicidal society lets the financial economy run the real one. The US is currently transitioning from a really stupid society about this to a suicidal one.

  • slamfu

    What merkin said. That was the best metaphor for it I’ve heard in a long time.

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