Is Private Equity Bad?


An assortment of United States coins, includin...

An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)


As the 2012 United States presidential election approaches, the candidates, their minions and the “unaffiliated” super PACs have been laying out the lines of battle. Obama’s people have decided to make Romney’s time with Bain Capital a skirmish point and this has already generated considerable controversy.

One obvious point of moral concern is whether or not it is acceptable for Obama to make this an issue. After all, even one of Obama’s supporters, Cory Booker, called the attacks on Romney regarding Bain as “nauseating” and made an analogy between these attacks and the attacks on Obama for his association with Reverend Wright. Not surprisingly, when Romney’s people seized on this, Booker had to engage in a a step well known by most politicians, namely the back peddle. While this political dance is interesting, my main concern is with the ethics of the matter.

On one hand it can be argued that the attack on Romney (and on Obama) is actually a mere guilt by association fallacy. After all, the mere fact that Obama had some association with Wright or the fact that Romney worked at Bain does not automatically entail that the men are burdened with any of the views or misdeeds of those they associated with.

On the other hand, it does seem reasonable to consider a candidates past associations and past actions when engaged in assessing the candidates. Naturally, the past associations should be considered in the light of what has happened between then and now, but these associations can still be relevant. Provided, of course, that the connection is more than mere association but is actually a substantial connection.

Both Obama’s association with Wright and Romney’s association with Bain are in the past. After all, Obama broke with Wright and repudiated Wright’s controversial views. Romney no longer works for Bain. As such, it might be concluded that going after Romney in regards to Bain would be on par with going after Obama (again) in regards to Wright (which apparently was being planned).

However, there is a rather important difference. Obama is not pointing to Wright and claiming that his association with Wright is evidence of what sort of president he will be in his second term (although some opposed to Obama have tried to make that claim). Romney, however, has been claiming to be a job creator and a businessman and has pointed to his time at Bain as evidence for his claims. As such, Romney has explicitly defined his association with Bain and this would certainly seem to morally justify assessing his record at and association with Bain. To use an obvious analogy, if I claim to be qualified to be a professor because of my association with Ohio State (that is, getting my doctorate there), then it would reasonable for people to look into that association if they had doubts about my credentials and qualifications.  As such, it seems acceptable for Obama, his minions and his allies to bring up Bain.

One interesting turn in the struggle to define this skirmish has been an attempt to cast criticism of Bain as an attack on private equity in general, as opposed to specific criticism of Bain. This is, obviously enough, a smart rhetorical move. After all, if Obama can be cast as attacking private equity, he would lose this skirmish since private equity is generally seen as good in the United States. As such, Obama’s side is endeavoring to clarify that the criticism is being directed at the alleged “vulture” or “vampire” capital approaches of Bain (and Romney) and not an attack on private equity.

This general approach is reasonable in that it is clearly possible to be critical of a specific practitioner of something without being critical of the practice. To use an analogy, my being critical of a person who uses force to get the sex he wants does not entail that I am against sex. Likewise, being critical of the practices of a specific private equity firm does not entail that someone is against private equity. The person could be for private equity but against the (allegedly) harmful acts of a company. As such, Obama and his fellows can attack Bain and Romney without attacking private equity, just as they can be critical of Romney without being critical of all Mormons or all males. Obama and his allies can, and surely will, avail themselves of the wealth of soundbites created by Newt Gingrich to attack Romney’s Bain connection during his own ill-fated campaign. Newt, of course, has taken a somewhat modified stance on the matter since becoming a Romney ally.

Obviously enough, Obama and his allies will struggle to resist the Republican’s attempts to cast his criticism of Bain as an attack on private equity. This is because, as noted above, private equity is taken as an unquestioned (and perhaps unquestionable) good in the United States. Of course, this does not entail that it is, in fact, good.

Naturally, a reasonably good tale can be told in favor of private equity. After all, creating and expanding businesses is so expensive that people who want to “grow the economy” and become “job creators” (or expand their creation) need to turn to those with money to get things going. As such, private equity enables the funding of businesses and this has a variety of good consequences such as employment and the creation of goods and services. Private equity also enables certain people to enjoy rich financial rewards. For example, as Mitt Romney has pointed out, he is unemployed but still brings in about $57,000 per day thanks, in part, to his time at Bain. That said, it is obviously not all flowers and cake.

One obvious concern about the private equity system in the United States is that it is one of the cogs in an economic machine that has concentrated the wealth into a tiny fraction of the population and has resulted in considerable economic harms (unemployment, foreclosures, destruction of companies and so on). The obvious reply is that this is but one cog among many and, as supporters of private equity might note, it is hard to assign blame to one cog. It is also fair to note that private equity could be, like a gun or any other tool, morally neutral and its goodness or badness could simply be a matter of how it is used.

While it would certainly be interesting to see the candidates seriously debating the ethics of the mechanisms of the economic machinery it seems unlikely that this will happen. After all, as noted above, the debate is not whether private equity is good or not but whether or not Romney’s time at Bain grounds Romney’s narrative or Obama’s.

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  1. I think the Obama campaign has latched onto a solid and defining issue in going after Romney and his career at Bain Capital. The debates it raises will show Obama’s dexterity and his ability to nuance on a level that common people can understand. In contrast, and as he tries to defense his actions, Romney will come across as neither being flexible or empathetic, traits that most likely will lead to his loosing.

    Obama is far more pragmatic than Romney, who has kind of painted himself into a corner on this issue and his hand in ‘creative destruction’. Where he is most vulnerable is that in his leadership at Bain he was more destructive than creative, even though he insists that in breaking up companies as he did was really being creative and good for America. Obama will make a better case about what is good for America and why breaking up companies is sometimes good and sometimes bad.

  2. swallerstein (amos)

    It seems to me that the cog in the system argument does not work, since almost all of us are cogs in the system, from a nurse or a philosophy professor to a hedge fund trader.

    Given that we (or almost all of us) are cogs, some cogs seem to have made more ethical choices about their careers or ways of life(even though they are still cogs).

    I would say that the decision to become a nurse or a philosophy teacher is more ethical than that to become a hedge fund trader.

    I agree with your last paragraph, that what really would be interesting is to see a debate about the ethics of the current capitalism system, about whether it is a just system.

    I also agree with you that such a debate is unlikely to be forthcoming during the current election.

  3. Private equity is fundamental not that different to the way other businesses are run.

    But, I guess is done with more greed, relative less sentiment,ethics and at a stretch, less morals. And as with most things, this does not apply to all private equity firms – though most of them have similar operating models.

    As for the politics,is fair play. If Romney chooses to run on his business acumen, he is sure to be probed to the nth degree – true or false, that is politics.

  4. Swallerstein,

    One interesting thing about the political rhetoric in the states is that the right often tries to bash Obama for being a socialist or a communist. When I point out that Obama is a capitalist and operates well within the confines of capitalism, I am often met with incredulous stares. The main economic debate is over what minor tweaks we will or will not make to capitalism as opposed to whether or not we will remain capitalist.

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