What Does it Mean When Romney Says “I Understand the Economy?”

January 13th, 2012 at 11:31 pm

This whole dust up over candidate Mitt Romney’s tenure at the private equity firm Bain Capital has been surreal.  Obviously—I think it’s obvious—his R competitors who are attacking him, like Perry and Gingrich, are faux OWS’ers—it’s awfully hard to imagine they really have a problem with Bain and others like them.

But other than the fact that politicians can be hypocrites, is there anything voters can learn from this episode (and I suspect most of us already knew about the hypocrite thing)?

I think there is, and it has to do with how Gov. Romney thinks about economics.  He keeps stressing how he understands the economy, while President Obama does not.  But I submit to you that few people know what a person means when they claim to “understand the economy.”   I know I don’t.  Do you understand the economy like Arthur Laffer understands it or like Paul Krugman understands it?

For example, here’s an interchange that conveys a certain understanding—a not uncommon one, but a profoundly incomplete one.

A woman at a campaign stop complained that because her company moved out of state, she now faces a five-hour commute to work.   What, she asked, would Gov Romney do to keep good jobs in Iowa?

According to this account: “Sometimes it’s counterintuitive,” replied Romney, a former businessman, explaining that businesses often invent new, more efficient ways to compete.

“The term is called productivity. Output per person,” he said. “Our productivity equals our income.”

I’m not playing “gottcha” here—his response wasn’t a gaffe.  There are many in business, and many in economics, who believe this or something close to it—productivity is really output (or aggregated national income) divided by hours worked.   And more output per hour provide the potential for higher living standards.

But here’s the rub: for decades, for most American workers, that potential has not been realized.  Our productivity has anything but “equaled our income.”

In the decade of the 2000s, productivity grew 28% while real median household income fell 7%.  Since 1979, productivity is up 84% and real median compensation, including fringe benefits,* rose 12%.

To me, and not just based on this snippet, of course, it sounds like Romney probably really does understand the part of the economy he’s come to know in his business career.  It’s an economy whose metrics are return on investment, rates of profit, and particularly in the PE world, leverage, or debt financing, since a) profit margins for the PE guys are significantly amplified if they can borrow their investment capital, and b) there’s a huge tax advantage since they can deduct interest payments as a business expense.

You will note that the word “jobs” isn’t on that list.  And the reason for that is very simple: the metric of job creation is not how PE firms measure their success.   Grading PE firms on job creation is like grading chess masters on their ability to dunk the basketball.  It’s a non-sequitur.   Here’s one of Mitt’s former colleagues, quoted recently in the LA Times:

Bain managers said their mission was clear. “I never thought of what I do for a living as job creation,” said Marc B. Walpow, a former managing partner at Bain who worked closely with Romney for nine years before forming his own firm. “The primary goal of private equity is to create wealth for your investors.”

The economy that Gov Romney understands is the economy of Wall St., not Main St., and it’s by no means the only economy you want your president to understand.  In today’s America, the president needs to understand the economy measured by middle-class incomes, paychecks, the quantity and quality of jobs, rates of poverty, income gaps.

And sure, the president must also understand that part of the economy measured by productivity and profits.  But if he thinks understanding the latter is “understanding the economy,” he is dangerously wrong.

 

*It’s important to add benefits to this type of calculation so you’re not leaving off an important and growing part of the wage bill.  To construct median compensation for this calculation, I multiplied the median wage by the ratio of aggregate compensation to aggregate wages.  This essentially assigns the average benefit package to the median worker, which is too generous.  And you still get the large gap stressed in the text.

 

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9 comments in reply to "What Does it Mean When Romney Says “I Understand the Economy?”"

  1. Jean says:

    “Our productivity equals our income”? Don’t you mean, Mr. Romney, that OUR productivity equals YOUR income?


  2. rjs says:

    i dont think obama understands the economy, either; do you?


  3. markg8 says:

    I think what Romney and his Bain boys did to that steel mill in Kansas City is very similar to what the GOP has been doing to the US economy for 30 years. Borrow against the company’s assets loading it up with debt, quickly pay yourself and your favored investors – the rich campaign donors in the GOP’s case with tax cuts, hire inept managers who know nothing about the business or it’s sector, (an ex-Air Force colonel to run the plant? James Watt to run Interior?, Brownie to run FEMA?), loot the pension fund to cover costs just like Social Security, borrow another $300 million to buy the latest equipment and try to expand into new geographical markets, make promises you have no intention of keeping to the employees about their pensions and retirement health care, and once you’ve juiced it all up and have a great phony story to tell about best practices, fancy new furnaces, and new markets you’re on the verge of conquering, throw your IPO party, sell your shares, collect your winnings and get the hell out of Dodge before the whole scam which was collapsing in the face of cheap Chinese labor, Chinese government subsidies, and their nonexistent environmental laws eats into your profit.

    That didn’t happen with every Bain investment, some of the businesses they bought into like the steel mini mill in Indiana which was the idea of actual steel executives who saw a profitable niche, not a bunch of outside Bain MBAs have done rather well. But regardless of the circumstances, any mistakes or hubris, Romney proved one thing, whether any particular venture succeeded or failed there was always a way to make money off it. Even if it meant stealing the pensions of the employees, pawning them off on taxpayers, and conning the greater fool IPO investors who took the losses off your hands.


  4. PeonInChief says:

    What’s not in Romney’s construction of productivity is the five hours spent commuting–time that could be spent sleeping, being with her family and friends, engaging in a hobby (whether scrapbooking or a drum circle), reading, or doing any number of activities more conducive to a high quality of life than commuting.


  5. readerOfTeaLeaves says:

    Last week, I thought I must have died and gone to heaven when I watched the emerging conflict about *what* ‘an economy is’ and what constitutes economic success. I played far too much online video of Newt Gingrich than is good for me, because I’m so agog that this conversation is finally starting to emerge ;^}

    It was fascinating to see how panicked the GOP seemed to be about Newt and Santorum having the (ahem) ‘audacity’ to question the ethical nature of Romney’s version of ‘capitalism’. And watching Joe Scarborough in full Damage Control Mode in a tempest of fury at Gingrich — for trying to claim the economic moral high — ground was positively delicious ;-)

    I find it hilarious that the GOP is in a furor over anyone questioning the validity of Romney’s views of capitalism. But that’s precisely what needs to be questioned in 2012.

    Frankly, I never expected things to get this interesting.
    I don’t think Romney’s idea of ‘gardens’ is anything at all like Nick Hanauer’s. Ahem ;-)


  6. cliot says:

    Thank you for writing about this issue. It has bothered me in general but specifically in Romney’s case. The economy is not running a business. Krugman’s article as well now creates the beginning for this discussion. This is precisely why the guys in the Fed did not see that the Housing Market was going to bring the economic calamity. If they actually knew some of the people, or actually had to counsel some of the people facing personal crisis they would have been scared, really scared.


  7. Fred Donaldson says:

    The distinction Romney makes is between owners and workers. Government, for him, is to serve owners, who may or may not decide to hire workers. If Romney had a completely automated company, his only workers would be cronies who were paid to do virtually nothing.

    Being paid for nearly nothing is the in-crowd dream. Serve on a board of directors and meet eight times a year, two hours a shot, and collect $100,000.

    At the same time the cleaning lady who wipes the toilets after the big shots leave, takes home $6.25 an hour (minimum wage less FICA, etc.) Let’s call her Ruth.

    To make that same $100,000 “earned” by one of the directors for working 16 hours, Ruth will have to work 16,000 hours, or 400 weeks at 40 hours a week, or eight years at 40 hours a week.

    One works 16 hours. One works 16,000 hours. For the same pay.

    That’s America for you, and that’s the real economics. where people work their fingers to the bone, get nowhere, and watch the overpaid buy another house or recently in the news – a $600,000 rocking horse (about 48 years of Ruth’s labor).

    For most of us, money represents what we get for working, so we can pay for a place to live, food for the kids, clothes, gas to get to work.

    To economists and politicians, money is finance – numbers on a computer screen, spreadsheet wonders dancing before excited eyes of wealthy traders and investors – abstract, emotionless, cold facts – just like their view of the numbers of workers fired, their lives ruined, families destroyed, hope gone, never to return.


  8. Tom in MN says:

    I would go farther and argue that we need the reverse: We need CEO’s that understand macroeconomics. As Krugman pointed out:

    http://www.nytimes.com/2012/01/13/opinion/krugman-america-isnt-a-corporation.html?partner=rssnyt&emc=rss

    what is good for one company extended to the whole country can be very bad.

    The problem is that CEO’s appear to have a group-think lock-step management practices going on. As soon as there is a slightest downturn in the economy they all quickly start laying off people, which, of course, makes things worse. The fact that they all do the same thing means that they can no longer get away with what works for one company by itself when all companies do it and they are effectively decreasing demand for their products by laying off workers.

    As you have pointed out in the past, they do things much differently in Germany and the coordinated efforts of labor and management work to avoid this downward spiral by avoiding layoffs and doing things like training in slow times. This shows an understanding of macroeconomics and the way to work for the common good (although they seem to insist that it’s possible for everyone to run a trade surplus, so, as usual, no one’s perfect).

    So, no we don’t need a president that thinks the answer to a slow down is to fire workers. It’s not even working for companies at this point.


  9. jsj says:

    For someone in the 1% (or the .1%) such as Romney, however, an increase in worker productivity has, in recent decades, led to a rise in income, because the wages of CEOs and upper management have taken the income arising from that increase in productivity. Romney’s statement on the campaign trail shows just how out of touch he is, looking at the economy from his high perch and PE background.


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