In Defense of Romney – Discussion

On January 19^th I posted my commentary "In Defense of Romney."

In response thereto Pam Tisza of Branchburg, NJ wrote:

You did not comment on Senator Bernie Sanders bill to counteract the big money in the elections---or did I miss it ????

To which I replied:

No, I didn't and I am not sure what bill you are referring to. Do you mean his introduction of a Constitutional amendment to overrule Citizen United? If so, I am glad he did that, but it is not very newsworthy, since it is not likely to go anywhere. I expect it will not even get out of committee and if it does it will not get a majority, at least at this time around, and it need 2/3 of both houses in order to go to the states for ratification, where it needs 3/4 of the state legislatures (both houses) to become part of the Constitution, given that Democrats now control 35 total chambers while Republicans are the majority in 60 chambers. See here. There are three tied chambers with the addition of the Virginia State Senate.

Article. V. of the Constitution provides:

"The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress;…”

If you were referring to something other than the above, please advise. In fact please let me have your further comments in any case.

Her rejoinder was:

Thanks for correcting me. I went back and read the original e-mail I got on this and they mention "constitutional amendment”; but then go on as if it is a bill. Poor reading on my part. I agree with you. Nice idea--no hope.

I must add that despite the fact that at present there is no hope of enacting such an amendment, many liberal organizations are organizing petition drives in support of such an amendment, which is a good idea. It must be kept in front of the public.

Albert Nekimken of Vienna, Virginia challenged me on my views with respect to the activities of Bain Capital, writing:

I don't share all of your enthusiasm about Romney's version of private equity capitalism, but I agree with your view that all income from all sources should be taxed at the same rate. As for the corrosive effect of money on politics, the Harvard professor, Lessig, who (in his new book) proposes that ALL political campaigns be publicly financed through a $1 per taxpayer, voluntary contribution on his tax return, which seems like the most promising solution. 

You were correct to emphasize the dire issue of the high cost of education today--and rising. This is killing social mobility. Student debt (now inextinguishable even in bankruptcy) is the next huge bubble ready to burst. Indebted and unemployed students cannot repay these debts. So long as educational institutions are able to coerce/convince students to incur debt as a condition of enrollment, there are/will be no brakes on the rise in cost. When the bubble bursts, many schools will go with it.

To which I posed the following question:

I am interested in your views on "Romney's version of private equity capitalism.” Do you think it is destructive? Do you think parts of it should be illegal? If so what parts? If you can, please be as specific as possible.

And added:

As for Lessig's proposal, we already have a provision in the tax code for deducting, not $1 but $3 for Presidential campaigns. The tax code provides, for a Presidential Election Campaign Fund which helps pay for Presidential election campaigns. The fund seeks to reduce candidates' dependence on large contributions from individuals and groups and seeks to place candidates on an equal financial footing in the general election. Tax Return 1040 provides: “If you want $3 to go to this fund, check the box. If you are filing a joint return, your spouse can also have $3 go to the fund. If you check a box, your tax or refund will not change."

However this check off has come out of favor. "...participation in the tax checkoff program has declined each year, from a high of 28.7% for 1980 returns, to 7.3% for returns filed with the Internal Revenue Service (IRS) in 2010." See here.

There is a limit in how much one is allowed to spend to get matching funds. In 2008, presidential primary candidates who accepted public funding had a maximum entitlement of $21,025,000 (50 percent of $42,050,000). (Ibid) It was because of this limit that Obama waived the public funding in 2008 to much criticism. He felt he could raise and spend much more than the limit.

As I understand Lessig, all he is advocating is essentially to extend this system to Congress. I would favor this, but unless there is a limit on contribution and spending, it would end up the same as the Presidential fund. As long as Citizen United stands, and I am not hopeful of an overrule in less than two decades, we are stuck, money will rule.

On improving mobility, making decent education available to all, regardless of economic status, is the ultimate class leveler and vouchers can never achieve this. Here too we need to reverse the financing curve. The poor need more financing than the rich, not less. Even in school buildings many are antiquated. No corporation would or could operate in such antiquated buildings. But as long as money rules this will not happen. I hate to say this, but I am not optimistic.

Nekimken responded:

You likely saw the article in today's New York Times entitled “Taxes at the Top” and another one entitled "Romney’s Estate Tax Cut Would Save the Koch Brothers Up to $8.7 Billion Each" but I call them to your attention in case you missed them, it because they bears on the question at hand: Romney's wealth. 

To tell the truth, I have mixed feelings about the role of private equity in modern capitalism. On the one hand, I believe it does serve a useful tool of Schumpeter's "creative destruction" by feeding on weak companies like insects on the forest floor, paving the way for new growth. 

On the other hand, much private equity activity appears to be motivated, not by any long-term desire to turn around failing companies by making new investments and providing new management in order to make them successful and grow and, presumably, to create new jobs, but by a desire to create a transaction that results in a quick profit. 

On the contrary, most of this activity seems to be motivated by a short-term desire to strip assets from a failing company, reduce staff, and (often) to loot the company pension fund. Often private equity owners load a newly acquired company with fresh, unsustainable debt that can be made to "disappear" in bankruptcy, or in a future sale at an inflated price to a bigger fool. 

As a result, much of what private equity firms do falls into the category of "financial engineering" that serves no useful purpose except to make a few "engineers" very wealthy. Unfortunately, I can't think of any coherent and effective way to prevent this. 

The situation is so complex that I don't believe there is any way to regulate this area of finance in order to prevent them from plundering weak companies and destroying jobs. Better would be to reform tax policy (i.e., tax all income from all sources at the same rate), reform bankruptcy and pension laws, and protect employees more effectively, perhaps by making company owners pay severance and re-training expenses for employees who lose their jobs--as is the case in Europe. 

I hope this is helpful.

I concluded this discussion with:

I really don't know enough about how a company like Bain operates to agree or disagree with your description of "financial engineering." However, while your description of the European system of "making company owners pay severance and re-training expenses for employees who lose their jobs--as is the case in Europe" has appeal, I fear that it may be counter-productive. It has long been charged that these potential burdens make employers reluctant to hire in the first place, and I fear that there is truth in this.

Comments are welcome and will be distributed with attribution, unless the writer requests that he/she not be identified.