by Linda Beale
Romney’s Private Equity Magic Trick–equity manager’s gain, taxpayers’ losses (Reich Video)
Mitt Romney claims that his business experience at Bain Capital is a superb qualification for the presidency. He implies that this experience will carry over to his economic policies, with the suggestion that he will become a “job creator-in-chief” like all those one-percenters purportedly are in the private sector.
In reality, private equity experience is a recipe for disaster in the White House. Think about what private equity firms do. They take an ongoing business–usually one that is making decent profits and paying its workers decently–and they make it into one that can pay outsized “rent” profits to the private equity firm. Usually, though not always, this means cutting costs and adding debt.
The debt is an elixir for private equity firms. Because interest is deductible, it actually increases profits by lowering the company’s federal income taxes; yet because it isn’t required to be used by the firm to actually improve the products or services offered, it is often used instead to pay dividends to the private equity firms, paying off whatever actual investment the private equity firm made in the company.
Cutting costs is the way for private equity firms to extract even more gravy from their target company. Cost cutting is most often directed at
- firing workers and making fewer workers do the same work that more workers used to do (that’s called a “productivity” gain, garnered, of course, by the private equity firm and not by the everyday workers), and/or
- outsourcing jobs to other countries so that labor can be paid less than a going wage in this country (that’s often coupled with step one, since workers are no longer needed in this country–sometimes the US workers are even required to train their cheaper foreign counterparts before they are let go, and of course those “effiencicy” gains are garnered by the private equity firm and not by the remaining workers), and/or
- cutting wages and benefits for the remaining workers (and shipping those extra “savings” out as dividends to the equity firm investors), and/or
- innovating better administrative systems (this can be a good deal–for example, putting money that the company didn’t have until the new “investors” came in into digital record systems or improved communications systems, but it can also be a bad deal, if the firm uses its new technology to game the federal system on taxes, or Medicare reimbursements, or federal contracting or similar items)
- Consider the fact that Bain and other private equity firms purchased a for-profit hospital. One of the “improvements was to redesign the coding system for patient services to increase the reimbursements from Medicare and thus hike up the hospital system’s profits, which are garnered by the private equity firm. Julie Creswell and Reed Adelson, A Giant Hospital Chain is Blazing a Profit Trail, New York Times (Aug. 15, 2012), at A1 (noting that Medicare reimbursements for the highest classifications surged to $949,000 in 2010 from $48,000 in 2006 at one hospital, in a story about Bain Capital and other equity firms’ profit improvements at HCA, where nurses and doctors express concerns about profit-making that is driving decisions that shortchange patients through understaffing and/or shortchange the government, as in the new coding system that caused the Medicare reimbursements to skyrocket); see also Steve Denning,HCA: The unsustainable private equity bubble in US health care, Forbes (Aug. 15, 2012).
- As one commenter on the NY Times article noted, “To be more profitable as a healthcare facility requires … having more sick people to treat, or hav[ing] higher charges. Both are inhumane.” Munz, New York, NY. And as one former HCA employee commented, “patient safety and medication safety came in a distant 2nd to conformity and [the] draconian measures to make care more efficient.”
These kinds of activities go hand in hand with the increasing consolidation into mega-business enterprises (regrettably aided by the tax code’s “tax-free reorganization” provisions, that were also made much more flexible during the Bush years in order to facilitate such consolidations). Big businesses reap the productivity gains of their workers for the few managers and significant shareholders at the top, and either buy or compete with local and family-owned small enterprises to put those smaller and shallower-pocketed (and less well-connected) business out of the way, thus separating more and more businesses from the communities in which they are located. All in all, not good for America, and not the kind of skills one wants in the presidency, where we need someone who can see the relationship between the stability of small businesses, viable communities, and stable workers.
For a clear and understandable demonstration of the way private equity firms make their money and who wins (and who loses) from those methods, see Robert Reich’s video chat on the subject:
cross posted with ataxingmatter
by Linda Beale
Romryanomics–prosperity for the well-off fueled by austerity for the rest
I’ve put off writing about stilted robo-Romney’s choice of the perpetual-smily-Ryan as veep about as long as I can, I suppose. So let me talk about it in broad terms in this post. In the next posts, I’ll discuss more methodically the vacuous “Romney program” and the toxic “Ryan path to prosperity” with particular attention to what they have said specifically (or not, in Romney’s case) about what they want to do with the tax system.
Both Romney and Ryan come from well-to-do families with the privileges of financial support, status and connections that adhere thereto (see this story on Romney–by the way, a donated inheritance is still an inheritance and donations of that magnitude earn other privileges for the elite; and this story on Ryan–whose wife also inherited millions including oil and gas interests), yet support the neoconservative economic mythology that wealth is wholly based on merit and that the way to have a good economy is to make sure the wealthy, who are deemed to be the (mythic) “job creators” are happy. This leads them to support austerity for the middle class and seniors coupled with deregulation, privatization, militarization and tax cuts–Romryanomics 101.
Key to the Romney program (or what can be derived from a description of generalities-without-specifics that can’t be scored by economists plus Romney’s statement earlier that he would sign Ryan’s budget proposal into law if passed by Congress plus his Monday statement that “his own plan for Medicare is ‘very similar’ to Ryan’s”, per this NBCnews.com story ) and the Ryan so-called “path to prosperity” (see, e.g., the LA Times story) is privatization of, and spending cuts to, Social Security and Medicare, along with spending cuts to everything else that serves the public good (environmental programs, parks, etc.) and vulnerable minorities in this country and isn’t part of the military-industrial-financial complex. That is, social welfare programs that have made the difference between poverty and dignity for American seniors will be undone by some level of privatization and benefit cuts, to accomodate unmerited tax cuts for the wealthy and increased spending on the military (notice the echos of Bush’s Iraq-war buildup in the talk about being tough on Iran and extraordinarily friendly to Israel coming from the campaign).
Of course, this program of tax cuts, militarization, and deregulation has already been tried–those are the ideas that failed to deliver a robust economy under George W. Bush, who had an anemic recovery from 2001-2004 in spite of the $1.3 trillion in tax cuts over ten years enacted in 2001 and the continuing tax cuts carried out in 2003 and 2004. Nor did Bush’s imperialistic militarization through two preemptive wars deliver a robust economy. Instead, the rash of financial speculation and finanialization of the economy pushed us into a deep financial crisis and the Great Recession. Those ideas will upend the recovery from that recession that has been underway under Obama.
Both Romney and Ryan have personally benefited from the kind of government that recognizes the importance of public-private cooperation in institution and infrastructure building, yet pontificate that government is always less efficient than private enterprise. That rhetoric is used to justify stifling innovative programs like supporting experiments in environmentally sound energy development, but it doesn’t come into play as far as continuing to ladle out tax-code largesse to the profitable oil and gas extractive industry or coddling financial institutions through deregulation (Romney, for example, supports dismantling Dodd-Frank, an already timid effort to rein in financial speculation; Ryan voted for TARP and against Dodd-Frank, positions that garnered Republicans a haul of financial industry contributions). That approach will continue the George W. Bush trend of the financialization of the economy and likely land us in another, even worse, systemic financial crisis.
Both had ancestors that benefited greatly (in terms of prestige and in terms of economics) from their involvement in and with government. Romney’s father George, of course, was a well-known governor of Michigan –and a wealthy corporate CEO in the auto industry that benefited hugely from the government shift from investment in railroads to investment in roads. Ryan’s family reaped its riches at the public trough–involved in the kind of public-private partnerships that made the transcontinental railroads possible (and built enormous wealth for the railroad builders) and the interstate highway system possible (and built enormous wealth for the highway builders). See Libby Spencer, Ryan family fortune built on taxpayer money, DetroitNews.com (Aug. 14, 2012); Sally Kohn, Paul Ryan didn’t build that!Salon.com (Aug. 14, 2012) (noting that the Ryan family, starting with his great-grandfather building railroads, has profited from government contracts over more than a century, including “at least 22 defense contracts … since 1996”).
Romney likes to think of himself as a successful businessman who can lead the country by supporting business.
But Romney is mainly a vulture capitalist. His private equity firm bought companies that were doing well and providing good US jobs, loaded them up with debt so that outsize profits could be made for the Bain “investors” (himself included), and –if it helped them make even more outsize profits–enjoyed firing the “excess” workers. Private equity firms don’t produce anything. While the right applauds the so-called “creative destruction” that tears existing companies apart to sell off the pieces for more or to enable firing the workers and breaking a union contract, those activities don’t add to a sustainable economy. They mostly look for companies they can take over, with no regard for the workers’ lives or the communities in which the companies exist, in order to capture what economists refer to as “rent” profits, usually through loading the companies up with debt. Some of the companies thrive or just survive, but many of the workers don’t, since cutting workers is a favored cost-cutting measure. Some of the companies go bankrupt, leaving all the workers in the lurch and usually without promised pensions. Some of the companies turn to outsourcing workers in order to make enough to pay off the debt. There’s not much in vulture capitalism that bodes well for a vulture capitalist as president.
Ryan likes to think of himself as a principled thinker who will push for what he considers appropriate policies (no matter, apparently, their impact on vulnerable seniors or middle-class Americans). As Ryan’s 2005 speech to the Atlas Societymade clear, he has been an avid follower of Ayn Rand, the alpha-male praising, privileged-innovator(“producers”)-elite loving, anti-societal cooperation, anti-altruism, radical libertarian, free-trade “objectivist” author that has been called the “Goddess of the Market” (see Jennifer Burns, Goddess of the Market: Ayn Rand and the American Right). Ryan even told the Weekly Standard in 2003 that “I give out ‘Atlas Shrugged’ as Christmas presents, and I make all my interns read it,” he said. “Well… I try to make my interns read it.” Rachel Weiner, What Ayn Rand says about Paul Ryan, Washington Post (Aug. 13, 2012). Lately, though, he’s been trying to distance himself from Rand, perhaps because he finally learned that her brand of radical libertarianism derived from atheism rather than theism. Kate Sullivan, Veep nominee Paul Ryan renounces former fascination with Ayn Rand, NY Daily News (Aug. 14, 2012).
cross posted with ataxingmatter
Does, or did, Romney own shares in the Bain fund that is an owner of HCA (which appears to be engaging in Medicare fraud)?*
*The New York Times article explains:
by Linda Beale
The fallacy of privatization: anti-government screeds and the Romney agenda
As a prominent tax professor points out, Mitt Romney accumulated most of his additional wealth in a business that generally doesn’t do anything to increase national wealth.
Mitt Romney accumulated his wealth as managing director of Bain Capital, a leveraged buyout fund (LBO). LBOs are driven by tax savings. Tax savings are transfers from other people to LOBs without any increase in GDP or national wealth. An LOB replaces the stock of established companies with debt. Johnson argues that because interest is deductible, the replacement can increase the value of the surviving stock by two to six times without any improvement in operating income. The increase in debt harms the private economy because the companies become very fragile and the leverage encourages the owner to bet the company. Calvin Johnson, The Tax Explanation for the Romney Leveraged Buyouts, Tax Notes (July 30, 2012), at 579
Romney’s activities at Bain Capital are just one example of how the private economy can generate wealth for a few people at the top without doing anything to help the overall economy, GDP, or national wealth–or ordinary workers. With that in mind, we should then be rightly skeptical about the typical claims from the right that the private economy can always do a better job of any given task than government (the public economy). Yet if you asked that as a question of Romney, you’d get a canned “yes.”
For Romney, efficiency and competition are gods that only the private marketplace can worship and therefore all government functions would be better handled by private rather than public forces. That seems to be the gist of his statement in a recent interview, highlighted by Mark Thoma’s post on Outsourcing Government: What is Mitt Romney Talking About, at Economist’s View, that builds on Brad Delong’s post. Here’s the most relevant language from Romney on the idea that private is always better than public:
MITT ROMNEY: Well, clearly you don’t like to hear [about] anyone losing a job. At the same time, government is the least productive—the federal government is the least productive of our economic sectors. The most productive is the private sector. The next most productive is the not-for-profit sector, then comes state and local governments, and finally the federal government. And so moving responsibilities from the federal government to the states or to the private sector will increase productivity.
But that’s simply wrong. It is empirically wrong. It is theoretically wrong. And it is wrong-headed policy for America.
Mark Thoma also pointed out Paul Krugman’s earlier post, Outsourcer in Chief, New York Times (Dec. 11, 2006), providing a range of examples where privatization of public functions results in terribly incompetent performance.
[O]utsourcing of the government’s responsibilities — not to panels of supposed wise men, but to private companies with the right connections — has been one of the hallmarks of [George W. Bush’s] administration. And privatization through outsourcing is one reason the administration has failed on so many fronts.
Krugman lists, among others, the Coast Guard’s overrun for its privatized modernization program; the generalized outsourcing of Iraqi reconstruction to private contractors “with hardly any oversight,” with the unsurprising poor results; and Bush’s buddy at FEMA’s outsourcing of disaster evacuations to Landstar Express, which “didn’t even know where to get buses” when Katrina hit. As Krugman notes, outsourcing is an “antigovernment ideology” of today’s neocons, and it is one that leads to poor results in many cases.
Conservatives look at the virtues of market competition and leap to the conclusion that private ownership, in itself, is some kind of magic elixir. But there’s no reason to assume that a private company hired to perform a public service will do better than people employed directly by the government. In fact, the private company will almost surely do a worse job if its political connections insulate it from accountability. Id. (formatting changed)
Now, mix privatization = poor performance because of crony capitalism/lack of oversight with the tendency these days of businesses to exploit workers in order to harness all productivity gains they do achieve for the big bosses at the top.
(If you need information on the latter, look at the way workers’ wages have stagnated or plummeted while managers have skyrocketed. Or just Google Caterpillar to see how it is negotiating with its unions for cuts for ordinary workers’ wages and benefits, when it is nonetheless already making an enormous profit.)
What you get from this naive, jaundiced view of private versus public is a formula for a disastrous economy. Obama’s stimulus was somewhat less than it should have been, but it saved the U.S. economy from the worst we might well have expected from Bush’s disastrous reaganomics policies. Bush’s preemptive war costs combined with deregulation and tax cuts for the rich and for corporations resulted in huge deficits and ultimately caused the financial crisis, necessitating unprecedented borrowing that left an economy spiralling in free fall when Obama took office.
What Romney promises, then, is a return to the winner-take-all, failed economic ideas of the neocon right.
cross posted with ataxingmatter
The most quoted speech at CPAC this year was Mitt Romney’s, but my vote for the most significant goes to Grover Norquist’s. In his charmingly blunt way, Norquist articulated out loud a case for Mitt Romney that you hear only whispered by other major conservative leaders.
They have reconciled themselves to a Romney candidacy because they see Romney as essentially a weak and passive president who will concede leadership to congressional conservatives:
All we have to do is replace Obama. … We are not auditioning for fearless leader. We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget. … We just need a president to sign this stuff. We don’t need someone to think it up or design it. The leadership now for the modern conservative movement for the next 20 years will be coming out of the House and the Senate.
The requirement for president?
Pick a Republican with enough working digits to handle a pen to become president of the United States. This is a change for Republicans: the House and Senate doing the work with the president signing bills. His job is to be captain of the team, to sign the legislation that has already been prepared.
by Linda Beale
As I noted in several prior posts about the reasons that multiple years of the Romneys’ tax returns are essential to evaluating Romney as a presidential candidate, the fact that Romney has adamantly refused to release returns other than the 2010 actual return (and the 2011 estimated return) is a cause for concern. Since the established norm is that presidential candidates release 8-12 years of returns, Romney’s insistence on not disclosing other returns appears arrogant and disrespectful of voters and suggests that there may be one or more items in those returns that he doesn’t want voters to know about. The prior posts included some information about items that could be better assessed with more returns and related information to review, including among others: passive activity losses, questions of whether certain items are hobbies or can legitimately be classed as business expenses, foreign bank accounts, tax shelters, offshore companies, income from Bain Capital, and effective tax rate. Much speculation has centered on the fact that Romney has accounts in various tax haven jurisdictions (Cayman Islands, Bermuda, Singapore) as well as bank accounts in jurisdictions that have been noted for banking secrecy and the accompanying tax evasion possibilities.
Since the US began cracking down on Swiss bank account holders who had avoided their reporting responsibilities, this latter issue has gained considerable visibility. It turns out that many Americans had multi-million dollar accounts abroad that weren’t reported and on which they weren’t paying taxes. With the breakthroughs facilitated by whistleblowers that threatened an avalanche of information about other bankers, other accounts and other accountholders, many of those lawbreakers came forward to participate in voluntary disclosure programs through which most could pay a penalty and a settled amount for taxes and avoid criminal prosecution. So US taxpayers (and voters) want to know–did the Romneys participate in that disclosure program.
Ed Kleinbard (former chief of staff of the Joint Committee on Taxation and currently at University of Southern California) and Peter Canellos (former chair of the New York State Bar Association Tax Section and current private practitioner) have raised another important issue that would be revealed more clearly with additional tax returns–Romney’s participation in abusive tax shelter activity. See Kleinbard & Canellos, Romney’s Role in Tax Shelter Raises Questions, CNN op-ed (Aug. 8, 2012). The authors note that Romney’s limited release of tax returns doesn’t “dispel the legitimate concerns that arises from hints buried in his scant disclosure to wealth.” But they note that a “relevant line of inquiry” is “what exists in the public record regarding his attitude toward tax compliance and tax avoidance.” So they decide to see what that might be.
They find something troubling–his acceptance of abusive tax shelter activity by large multinational corporations when he headed Marriott International’s audit committee and approved the company’s involvement in a Son of Boss deal, a transaction undertaken purely for tax purposes to create artificial losses that would then be used to offset real gains from business activities and thereby substantially reduce the company’s tax bills.
A key troubling public manifestation of Romney’s apparent insensitivity to tax obligations is his role in Marriott International’s abusive tax shelter activity.
*** From 1993 to 1998, Romney was the head of the audit committee of the Marriott board.
During that period, Marriott engaged in a series of complex and high-profile maneuvers, including “Son of Boss,” a notoriously abusive prepackaged tax shelter that investment banks and accounting firms marketed to corporations such as Marriott. In this respect, Marriott was in the vanguard of a then-emerging corporate tax shelter bubble that substantially undermined the entire corporate tax system.
*** [T]he government initiated legal challenges that resulted in complete disallowance of the losses claimed by Marriott and other corporations. *** [T]he government brought successful criminal prosecutions against a number of individuals involved in Son of Boss. ***
In his key role as chairman of the Marriott board’s audit committee, Romney approved the firm’s reporting of fictional tax losses exceeding $70 million generated by its Son of Boss transaction. His endorsement of this stratagem provides insight into Romney’s professional ethics and attitude toward tax compliance obligations. (emphasis added)
So Romney as “businessman” (his claimed primary qualification for serving as President) was happy to sign off on tax scam transactions intended to benefit his corporation at the cost of ordinary taxpayers who are called upon to make up the difference in higher rates of borrowing by the federal government or higher taxes. Can Romney hide behind the excuse of–Oops, I was just an unsophisticated board member who relied on tax advisers and couldn’t be expected to understand such complex transactions and tax issues? No way. As Kleinbard and Canellos note in their op-ed:
In his key position as head of the board’s audit committee, Romney was required under the securities laws and his fiduciary duties to review the transaction. In fact, it has been publicly reported thatRomney was the Marriott Board member most acquainted with the transaction and to whom the other board members turned for advice. This makes sense because aggressive tax-driven financial engineering was a large part of what Romney (and Bain) did for a living. For these reasons, it is fair to hold him accountable for Marriott’s spurious tax reporting.
*** [Romney] had an insider’s perspective on the motivation and lack of substance in the transaction, as well as the financial sophistication to understand the tax avoidance involved. Romney failed in his duties to Marriott and its shareholders and acted to undermine the fairness of the tax system. (emphasis added).
These issues are critically important to Romney’s purported qualifications to serve as president. A man who is willing to bend/break the rules in order to make more money for himself and his elite buddies doesn’t belong in the White House.
cross posted with ataxingmatter
I just suggested to the Romney campaign that they do an ad highlighting the sheer arrogance of Romney’s “Trust me, and I won’t let you verify” theme, on his personal finances and on the specifics of his “plan” (see my post from yesterday, below) and how, exactly, it could be expected to grow the economy rather than crash it.
UPDATE: Occasionally I update a post of mine by adding all or part of an exchange between a commenter to the post and me when I think the exchange illustrates or adds something important. The following exchange between a reader named David Michel and me warrants it, I think: