Relevant and even prescient commentary on news, politics and the economy.

Does Romney Even Know What the Word “Plan” MEANS?

Romney released a new middle class economic plan [today].  [The] plan is called: “Mitt Romney’s new plan for a stronger middle class.” It contains ideas we’ve heard before: more access to domestic energy resources; cutting taxes and capping spending; repealing Obamacare.

Mark Hopkins at Moody’s Analytics tells me that it is mostly a set of assertions about outcomes Romney wants, rather than a set of policies on how to achieve them.

“There aren’t enough specifics here to evaluate the plan,” Hopkins said. “It’s not clear in most cases what specific policies underlie the assertions of outcomes he wants.”

— Greg Sargent, Washington Post, today

Indeed.  Hopefully Obama and more members of the media will point out the distinction between a stated plan and a mere statement of claimed outcomes of an unspecified plan.  Romney and his wife say that the public has all the information it “needs” about his finances in order to take his word for it that his finances have all been on the up-and-up, and he makes essentially the same claim about his planned economic policies: All the public needs to know is, Romney says so.

Which in a way is true—if you get my point.

Romney’s Weird Plan to Decouple Military Spending From National Security Needs and to Tie It Instead to … GDP??

Romney’s plan calls for linking the Pentagon’s base budget to Gross Domestic Product, and allowing the military to spend at least $4 dollars out of every $100 the American economy produces.”

In a post here two weeks ago I noted that peculiar proposal of Romney’s, and also mentioned my dismay that neither the Obama campaign nor (to my knowledge) any other mainstream-media outlet had mentioned it.  I titled the post Crony Capitalism and Its Variety of Flavors.  The occasion for the post was the Romney campaign’s then-newly-invigorated “crony capitalism” schtik featuring, of course, Solyndra. 

I said in the post that, given Romney’s open (if unnoticed) proposal to untether actual national-security needs from national-security spendingand attaching it instead to GDP, its purpose is utterly unrelated to national security.  It’s unabashedly “a stunningly perverse pinstriped-patronage version of Keynsian economics,” I said. 

My post got about as much attention as the May 10 CNNMoney report.  But now the Obama campaign has a new ad out highlighting the absurdity of Romney’s plan to increase defense spending—presumably (although the ad doesn’t say this) so that we’ll be prepared when Romney clumsily gets us into an unnecessary war.  (Current candidates as enemies: Britain and the Palestinians, in addition to Iran.)  The ad is excellent.  But it would be even better if it mentioned that Romney’s spending plan doesn’t even purportto be tied to defense needs, but instead to, um, GDP.

It really should point this out and should note the only possible explanation for that.  So should Obama himself.

Bull In a China Shop

Romney said a Polish leader told him during his visit that his country’s economic philosophy is, “You don’t borrow what you can’t pay back.” The presumptive Republican presidential nominee used the line to draw an implicit contrast with President Obama, saying the world — and, by definition, the United States — should emulate Poland’s economic and societal transformation toward smaller government.

“Rather than heeding the false promise of a government-dominated economy, Poland sought to stimulate innovation, attract investment, expand trade and live within its means,” Romney said. “Your success today is a reminder that the principles of free enterprise can propel an economy and transform a society.”

Well, the big debate among political pundits today is, of course, whether Romney’s bull-in-a-china-shop performance will hurt his election chances, given that, after all, it’s economics issues that will determine the outcome of the election.  The consensus seems to be that it won’t.  I think it will—given that it’s economics issues that will determine the outcome of the election.

The state of the economy, and its immediate prospects, certainly will be a key issue in most voters’ minds.  But so will the apparent competence of Obama’s challenger—and the likely effect of the challenger’s policy proposals on the economy and on the larger panoply of budgetary (taxing and spending) policies on both the near-term economy and on the very nature of American society. 
The supposed raison d’être for Romney’s candidacy, at least as advertised to the general public (if not to, say, the Koch brothers), is his claim that he would be a more competent steward of the economy that Obama has been.  But although most of the public doesn’t yet know it, that claim is based less on his role as a private-equity game player (and stellar tax avoider or evader) and on his role as savior of the Salt Lake City Olympics than on his policy proposals: to significantly increase spending on the proverbial military-industrial complex and dramatically decrease both domestic spending and tax revenue. Contrary to the punditry’s meme, Romney hasn’t been unspecific about his proposals. He spelled them out clearly during the primary season, e.g., in a speech last February to the Detroit Economic Club, leaving only the simple math computations to be completed by the media and the Obama campaign, and some members of the high-profile media finally have begun to complete them.  But Romney has been in successful Etch A Sketch mode since wrapping up the nomination, and thus far has been able to make the public think that what matters is his competence level—and that he’s competent.

No more, I suspect. In the Washington Post article I referenced above, a Romney aide named Stuart Stevens who is traveling with the candidate is quoted as telling reporters, “He has a tendency to speak his mind and to say what he believes, and whenever you do that, there will be those that disagree with you, and there will be those that agree with you.  That’s what he’s done in these situations. I think people like that. I think that this idea that you have to not speak your mind is something that’s not very appealing to people.”

One problem with this is that Romney has a habit of only rarely speaking his mind and, instead, of speaking what he thinks is the mind of the political constituency he’s targeting at the moment—and that on this trip he did both, and both revealed serious incompetence.  People find unappealing this idea that you have to not speak your mind.  But they also find unappealing this idea that you don’t know when it’s inappropriate to speak your mind, and that you don’t consider or don’t even recognize, the potential consequences of what you say and where, and in what context, you say it. 

I suspect that people will find it unappealing that if this candidate appears so lacking in judgment or so utterly self-interested that he either didn’t recognize or didn’t care about the obvious international implications of his comments, he is unlikely to possess the judgment to recognize the consequences of his decisions in economic policy—or to care about the broader consequences for the country.  His interests are narrow and they correspond to those of the Koch brothers and of the private equity set.  And, whether by design or unconcern or simple cluelessness, nothing else will matter to him.

In other words, you don’t borrow what you can’t pay back, except to increase military expenditures—in part to enable the wars that Romney seems to want to get us into or that he may accidentally precipitate, and in part as his preferred version of crony capitalism and Keynesian economics—and to ensure an ever-lower tax rate for the wealthy.  And Poland—which (surely) has a more progressive tax code than the U.S. does (what is Poland’s top tax rate, anyway?), and which probably has national universal health insurance, and which has a strong labor movement and surely more-regulated financial institutions than ours, and which didn’t experience a crazy housing and private-debt boom and bust in the last decade, and whose government likely spends a good deal on infrastructure projects—is a reminder that the principles of free enterprise can propel an economy and transform a society. 

Just like our country was, back in the era that Romney says was anti-free-enterprise.  Those high tax rates, and all that regulation of banks and industry back then, y’know.

Culture Indeed Makes All the Difference. (Just not necessarily in the way Romney meant.)

JERUSALEM — Republican presidential candidate Mitt Romney angered Palestinian leaders on Monday when he suggested here that the Israeli economy had outpaced the economy of the Palestinian territories in part because of advantages of “culture.” …

Romney said he had studied a book called “The Wealth and Poverty of Nations,” searching for an answer about why two neighboring places–the U.S. and Mexico, for instance, or Israel and the Palestinian areas–could have such disparate prosperity.

“Culture makes all the difference. Culture makes all the difference,” Romney said, repeating the conclusion he drew from that book, by David Landes. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”

Wait.  Culture makes all the difference?  I thought it was tax rates on the wealthy and on corporations that makes all the difference.   Oh, and not having national universal health insurance. 

But aren’t Israel’s tax rates on the wealthy and on corporations much higher than the tax rates here during the 1990s—the tax rates that Obama wants to reinstate and that Romney says would amount to socialism?  And certainly during the last decade?  And doesn’t Israel have national universal health insurance? 

Gosh.  Maybe it really is culture, rather than tax rates that so favor the wealthy and a minimal social safety net, that determines economic prosperity.  At least concerning tax policy, that’s certainly been true for the United States, whose economic prosperity seems directly negatively correlated to low tax rates for the wealthy and for corporations, and to deregulation.  And whose culture regarding tax and regulatory policy has changed dramatically in the last three decades.  


NOTE: I removed an earlier draft of this post in order to repost it with needed editing. (Funny, how the misplacing of two commas in a sentence can make the sentence say the opposite of what you intended.)

About Ann Romney’s—And Other MS Victims’—Darkest Hour (those who have healthcare insurance, those who have very high deductibles, and those who may lose their jobs and be unable to get new healthcare insurance. Or a dressage horse.)


The DNC has apologized for using Ann Romney’s London Olympics-bound horse in an attack targeting her husband.
The Hill explains that Democrats had used the dressage horse to illustrate its claim that the presumptive GOP nominee was “dancing around the issue” of his decision not to release his tax returns. (Dressage is a dance-like sport, but on a horse. Get it?)
The problem? The horse is used by Ann Romney for therapy related to her multiple sclerosis.
DNC spokesperson Brad Woodhouse told ABC News that the decision to use footage of the horse “was not meant to offend Mrs. Romney in any way, and we regret it if it did.” Woodhouse added that the group won’t “invoke the horse any further to avoid misinterpretation.”
For what it’s worth, the dressage horse, named Rafalca, apparently gets the Romneys a rather hefty tax credit. (Literally, fwiw: $77,000 a year.)
A headline today on ABC News’ website, about an interview there today with Ann Romney, is “Mitt Romney’s Wife, Ann, Calls MS Diagnosis ‘MyDarkest Hour’.”  Unquestionably, that was a dark hour for her, and one that anyone can empathize with.  And, yes, it’s great that dressage helps her regain some of the ability to balance she lost due to her MS.
But here’s my question to Ann Romney and her husband: How much darker an hour does she think it is for someone who’s given that diagnosis and either has no healthcare insurance or has a very high deductible, or who now dearly fears the loss of his or her job, either because of the health problem or for other reasons, and who, for resulting financial reasons or preexisting-condition reasons—or both—may never again have health insurance if the ACA is repealed? Or be able to get a dressage horse.
I don’t think Obama or the DNC should shy away from asking this question.  Or from doing an ad in which someone in exactly that position asks it.


UPDATE: Because of the emotional impact of this particular issue, I want post as part of the main post a Comments Section exchange between reader MC and me.  Here it is:

MC: I’m confused. Does owning horses or houses somehow make you a bad presidential candidate? And therapeutic horse riding is used for all sorts of medical conditions, so this is not unusual. Regardless of who I think should win the election, Ann Romney is drawing alot of attention to multiple sclerosis, which is a largely unknowable disease at this point. I have it. Its ruining my life. We need more awareness and research so we can actually understand what causes this disease and how to treat it with something better than a 33% success rate. I’m all for candidates hashing out their issues, but I agree with those who are calling for a cease fire when it comes to involving Ann and her illness. MS needs positive attention and deserves respect.
Me: Does owning horses or houses somehow make you a bad presidential candidate? That depends on how you got the money to buy the several dressage horses, each worth several hundred thousand dollars, and to buy the several houses, each worth several million dollars.  And on such things as whether or not you paid the full amount of taxes you owed, or instead hid or misrepresented the value of the assets in offshore accounts, including offshore IRA accounts, in order to evade taxes or even to avoid taxes using legal means available only to the very wealthy.  And whether your proposed tax policies, such as reducing yet again taxes on the wealthy, would benefit you (the candidate) extensively, to the detriment of a large percentage of the public.
And, of course, on what you (the voter, rather than the candidate) thinks is a bad presidential candidate. My view is different than yours, obviously.
As for Ann Romney’s MS and dressage therapy, it was Romney herself, not the DNC, that raised the issue, by going on television this morning and responding to the DNC ad by telling everyone that she uses the Olympic horse for therapy.  (She has several substitute horses when that horse is training or in, say, London for a competition.  She didn’t mention that, though, I guess.)  She also said that the MS diagnosis was her darkest hour.
Her husband is running for president partly on a platform of repealing the ACA, including the provision that requires insurance companies to accept everyone regardless of preexisting medical conditions, and, of course, the provisions that provide for expansion of Medicaid and for subsidies for premiums for some others.
You say that we need more awareness and research so we can actually understand what causes this disease and how to treat it with something better than a 33% success rate.  So true.  It’s true for so many other very series diseases, as well, that effect young people and middle-aged people.  ([Muscular dystrophy] comes quickly to my mind; someone dear to me died of it two years ago after having lived most of his life in a motorized wheelchair.)  But in this country, unlike in every other advanced industrialized democracy in the world, medical advances can be made use of here only by those who have access to employee-benefit medical insurance.  You’re obviously among them.  But not everyone else with MS or another debilitating chronic illness is.
Although I didn’t put this in my Comment response, I’d also like to note that under Romney’s proposed tax and budget cuts, which are extreme, there would be virtually no federal funds for medical research, either to the universities or to the NIH. So if you’re someone who places a high value on medical research—and I suspect that most people do—this is no small matter to consider when deciding whether Romney is a bad candidate or not.

What’s Romney Got to Hide? It’s past time for financial and tax transparency

by Linda Beale

What’s Romney Got to Hide? It’s past time for financial and tax transparency

As everybody who has followed anything about this election cycle knows, Mitt Romney–likely the wealthiest man to run for president, the only bankster/private equity fund founder (sole shareholder, CEO and manager) to run for president, and probably the only person with multiple multi-million dollar accounts stashed away in tax havens like Bermuda, Cayman Islands and Swiss banks to run for president–still thinks the kinds of information that one can glean from full disclosure of tax returns isn’t relevant to his attempt to gain the presidency.  He has reiterated his refusal to release more than the 2010 and (estimated, at this point) 2011 returns.

Yet there are many questions voters can legitimately ask about Romney’s finances and tax returns, questions that cannot be answered with certainty without seeing multiple years of returns.  Let’s consider the most obvious ones.

1. Offshoring of assets:   It is clear from the paucity of return information we do have that the Romneys hold a considerable portion of their assets offshore.  It is not unreasonable to wonder why someone who desires to be President of the US would find it necessary or even reasonable to put so much of his (or their) assets offshore, taking them out of the US.  Clearly, offshore assets are harder to trace, harder to account for, and possibly easier to hide from tax administrators but one would certainly hope that wouldn’t be the reason behind a very wealthy candidate’s use of offshore accounts.  Just as clearly, the fact of offshore multimillion dollar accounts does not establish tax avoidance, since Romney could be appropriately reporting and paying taxes on all of his foreign holdings.  Yet the fact that it is not illegal per se to hold assets offshore begs the question that does count– why is he holding so much in offshore accounts?  What’s the benefit to him?  If he is as patriotic as he claims, why doesn’t he show that by putting his assets in the US, in essence “putting his money where his mouth is”?  If he can’t clearly explain to voters what the reasonable benefit to him is of having assets stashed offshore, then voters may draw the conclusion that he has something to hide.

2. Hobby horses?:  Like many of the ultra wealthy, the Romneys have enough money to engage in whatever pastimes and pleasures they like–they can own an expensive horse, arrange for it to be pastured and cared for near one of their many multimillion-dollar residences, and even ship it overseas (costing tens of thousands of dollars) for participation in sporting events.  The question this raises for ordinary Americans is how do the Romneys treat this activity on their tax returns, and is that treatment justifiable under the rules? 

There are rules for activities that are “not engaged in for profit” under section 183 (generally called the hobby loss provision), that allow participants to deduct hobby expenses only to the extent of income from the hobby activity.  Activities engaged in for profit include active conduct of businesses and investment activities.  Everything else falls under this hobby provision, which amounts to a truly generous provision for mostly wealthy households who can afford to buy expensive toys that allow them to sometimes earn related income–Ie, this provision covers consumption that one engages in for personal enjoyment rather than for the potential profits.  There is a test requiring profits in 3 out of 5 years  (4 out of 7 for activities involving horses) to escape the hobby provision.  So voters can rightly wonder whether the Romney’s treat their costs for their horseshow competitions as a business.  (This is the same question tax experts had about Todd Palin‘s claim that his snowmobile racing was a business even though there appeared to be a good deal of circumstancial evidence that it was instead merely a pleasurable sports activity/hobby.)   To know whether not treating such activities as hobbies under section 183 is correct, one needs to see at least 5 consecutive years of tax returns:  there simply is insufficient information without that.

3.  Passive activities?  The same type of activities that raise questions about the categorization as hobby or business/investment also potentially raise questions about the passive activity rules. Section 469 limits the ability of taxpayers to use “passive activity losses” against other income, such as that from businesses actively conducted by the taxpayer (including salaries from the business of being an employee).  Generally, losses from passive investments are “schedularized”, meaning that they are generally allowed only against passive income (there are exceptions).  It would be useful, again, to see multiple years of returns in order to reach a comfortable conclusion about the way the Romneys’ various activities fall within these rules (or not). 

4. Retirement accounts?  One question making waves is how a retirement account for which strict contribution limitations apply could possibly have a value of more than $100 million today if only about $30,000 of assets was put in just a decade ago.  See, e.g., Felix Salmon, Opinion: Did Romney put Bain Capital shares in his IRA? Reuters, July 16, 2012 (noting comments by Bill Cohan, Nicholas Shaxson).  We all know that our retirement accounts (generally created with cash contributions from our salaries) have tended to lose money, not gain–and certainly most Americans’ retirement accounts haven’t gained at those astronomical levels.  So voters could reasonably ask what assets were added to that account that could have increased in worth so significantly in such a short period of time.  Without the release and more disclosure of such information, voters might reasonably be suspicious that assets were knowingly undervalued upon being added, with the knowledge that their actual fair market value would show significant amounts attributable to earnings within the account.

The Salmon article cited above mentions a theory that the retirement accounts were “pumped with risky A shares in Bain, that “often had aggressively low valuations when they were first issued” and could “create issues at an IRS audit.”   Salmon proposes instead that Romney loaded his IRAs  with his own shares in Bain, of which he remained sole owner and CEO until 2002.  Salmon seems to be suggesting it was not just at the beginning, when he could likely reasonably claim a zero value, but annually thereafter:  he notes that “Romney would have had every incentive to keep the official valuation of Bain Capital low for many years, since the lower Bain Capital was wroth, the more of it he could put into his retirement accounts every year.  Again, the IRS might well be interested in the valuation techniques Romney used for  the purposes of his retirement account contributions.  And then … when Romney left Bain, he would have switched from minimizing Bain Capital’s official value to maximizing it.”  Id.

Another theory mentioned in the article is the tendency of investors in partnerships to undervalue interests when first putting them into an IRA, under the argument [labelled as “dubious” by Salmon, since all securities represent future income] that partnership interests merely represent future income, not current value.  Salmon notes that an “aggressive tax lawyer” might make such an approach “possible.”
It is likely that the retirement accounts were funded early on with Romney’s shares in Bain, before it was obvious for tax purposes that it would be a hugely profitable enterprise.  Thus, it would seem that Romney would benefit measurably from transparency here, since there is otherwise reasonable cause for continuing speculation about potential intentional undervaluations of contributed assets.

There are many other questions voters could reasonable explore about the way such an ultra wealthy presidential candidate shares the burden of taxation with ordinary voters, such as how much of Romney’s income is consistently earned in carried interest, dividends, and capital gains, all of which enjoy an extraordinarily favorable preferential tax rate under the Bush tax cuts, or how much of Romney’s income is outright excluded under generous tax expenditure provisions governing certain financial products purchased primarily (or exclusively) by the rich, such as muni bonds.  A voter might also like to see how the 1999 through 2002 tax returns show income from Bain Capital, during the period that Romney remained CEO and signed off on important SEC and tax documents but now claims he was retroactively retired and therefore completely out of the loop on the very deals and decisions he was signing off on.  (Would you want to invest in that business if you knew that about it at the time?)

Romney says he won’t release any more tax returns.  His adviser says no matter how many he released, it wouldn’t be enough.  See David Muir, Romney Adviser: No Matter How Many Tax Returns, ABC (July 16, 2012).  That excuse for nonrelease is clearly just that–an excuse.  Nobody demands a lifetime of returns.  Romney’s father set a good precedent with 12 years, which would be especially reasonable here since it would show Romney’s returns for those disputed turn of the century years. 
Romney seems to be saying just “trust me” that everything is above board and everything filed correctly and that voters have no reason to be interested in any of the details of how he holds his assets or how he manages them or what he claims about his various activities on his tax returns. 

But that’s a little like his assertion that voters don’t have any reason to have questions about his “retroactive retirement” from Bain Capital, for which he signed federally required SEC and tax forms as sole shareholder and CEO for years after he now claims he had quit paying any attention to company decisions.  Clearly, voters should have an interest in assessing for themselves the extent of Romney’s offshoring, the way he has filed on his expensive hobbies, and whether those filings–even if they are entirely accurate, as hopefully they are– give him tax advantages that ordinary people have no access to. 

It is telling that even staunch right-winger George Will “slammed” Romney on this issue, saying “Romney ‘must have calculated that there are higher costs in releasing them.'” George Stephanopoulos, George Will, Matthew Dowd Blast Romney for not Releasing Tax Returns, ABC (July 15, 2012).
After all, in 2008 McCain apparently requested–and received–two decades’ worth of Romney tax returns as part of the Veep vetting process.  George Stephanopoulos, George Will, Matthew Dowd Blast Romney for not Releasing Tax Returns, ABC, July 15, 2012 (noting that Romney reportedly provided 23 years of tax returns to the McCain campaign in 2008). 

The fact that McCain commented today that his choice of Sarah Palin over Romney had nothing to do with anything on the returns but rather with Palin’s superior candidacy is irrelevant, since we cannot know whether the campaign could or did make a thorough analysis of those returns or how they weighed any issues they saw (or didn’t see).  See  McCain: Palin was better VP choice than Romney in 2008, CNN, July 17, 2012.   What any voter can reasonably say is this:  If it was reasonable for McCain to view more than a couple of years of tax returns to reach an assessment of potential issues that might affect the electibility of the man (presumably issues relating to character, honesty, business and investment skills, philosophy, and patriotism), then it is also reasonable for American voters to do the same.

Yglesias Misses the Point. Again. [with correction]

Rules requiring firms to restrict employment to their country of origin would be hideously inefficient if applied on a global basis, and they would be every bit as devastating to American employees of foreign firms as offshoring by American firms is to workers who lose their jobs here. (One might also ask where the borders of corporate patriotism ought to be. If it’s wrong for a Michigan-based car company to have a supply chain that extends to Mexico, why is Ohio OK? After all, it hardly makes a difference to a laid-off worker where exactly his job went—the bad news is that he lost his job.)

Over the long run, we’re all going to be more prosperous if we live in a world where firms are allowed to locate work where it’s most efficient to locate it. This is exactly why, despite some tough ads, the Obama administration has not proposed any policies to restrict firms’ freedom to shift work across state or national boundaries.

Romney’s unwillingness to make the case for outsourcing reflects, in part, political timidity. But more broadly, it underscores that although he’s been an eager participant in contemporary capitalism, he’s not willing to mount a policy response to its vicissitudes.

Offshoring Is Fine. Why won’t Mitt Romney defend Bain’s record?Matthew Yglesias, Slate, yesterday afternoon.

It’s surely true that rules requiring firms to restrict employment to their country of origin would be hideously inefficient if applied on a global basis, and they would be every bit as devastating to American employees of foreign firms as offshoring by American firms is to workers who lose their jobs here.

But, to my knowledge, the only one who’s equated the absence of* government policy (of necessity on this issue, statutes) that would restrict corporate employment to the country of the corporation’s origin, and a private equity firm’s investment in companies that specialize in assisting American corporations with offshoring employment, is Yglesias.  Even Romney apparently recognizes the distinction. Not sure why Yglesias doesn’t.

It’s one thing to argue that utterly unfettered globalization of employment by corporations worldwide ultimately has a positive effect on the American economy—as Yglesias does. But it’s another thing entirely to actually convince a majority of the public that this is so even in light of current trends and actual facts. 

And it’s one thing to argue that laws that forbid companies from relocating jobs from the company’s home country to another one would have a negative side to it because of possible retaliatory laws in other countries, and another thing to equate that with decisions by corporations themselves about whether to offshore or not. (And, setting aside the obvious constitutional bar to prohibiting a corporation’s relocation of jobs from one state to another, it’s a lot easier for families to relocate from Michigan to Ohio than from Michigan to Mexico.)

The thing that Yglesias doesn’t get is that Romney’s claiming that his private-sector career demonstrates his ability to create not just wealth for investors but jobs en masse for the public. There’s really no way for him to make that claim persuasively, because it plainly isn’t true. He can defend offshoring as a corporate strategy, but corporate strategy is a different matter than economic strategy.

Unless, of course, Romney wants to argue that encouraging offshoring by American corporations is good government policy. Hope he does.  But then, I’m a Democrat.

*Sentence corrected to insert the words “the absence of”.

Matthew Yglesias, Slate’s Boy With a Little Curl

Lost in the shuffle here is the question of what it is Romney is denying he’s responsible for. Stipulate that Romney somehow had nothing to do with running a company of which he was the CEO and sole shareholder. Does he think, in retrospect, that his subordinates did something wrong by offshoring jobs? Clearly he didn’t, which highlights the absurdity of his claims not to have been responsible. It’s true that he wasn’t running the country [sic] on a day-to-day basis, but he really was titular CEO and had Bain been doing something he deemed outrageous he could and should have stepped in to stop them. But he doesn’t believe that. And what’s more, all indications are that Barack Obama also doesn’t think Bain was doing anything wrong. [Emphasis in original.] As president he’s made no moves to make it illegal for companies to shift production work abroad and has publicly associated himself with a wide range of American firms—from GE to Apple and beyond—who’ve done just that to varying extents. And we all remember what happened to Obama’s promise to renegotiate NAFTA after taking office, right?

In my view both Obama and Romney are quite right about this. I’ll say more on this during the workweek, but one quick test is do you think there’s something immoral about the fact that Toyota and BMW have manufacturing facilities located in the United States? Should the Japanese and German governments be stopping Japan- and Germany-based firms from locating production offshore?

I posted a comment to it, saying:

Well, when Obama starts claiming that one of his key qualifications for reelection is that he’s helped create jobs in China—or when Romney starts saying that Bain invested in companies that specialized in moving jobs overseas in exchange for promises by German and Japanese companies to open, or keep, factories in this country—Yglesias’s equivalency argument might be less ridiculous. 

One of Obama’s spot-on arguments against Romney’s claim that his Bain experience was a successful jobs-creation experience rather than merely a successful wealth-creation-for-investors experience is that there’s a huge difference between experience in creating wealth for private investors, by any means available and at whatever expense to others, and creating good for the country’s overall economy and general welfare.  This offshoring issue is a classic case in point. Setting aside whether the federal government has the legal authority to prohibit private companies from offshoring—and I don’t think the government has any such legal authority, except in certain limited national security or foreign policy circumstances—there’s an obvious critical difference between not trying to stop this country’s companies from offshoring, for fear of retribution by other countries’ companies, similar to trying to avoid a tariff war, and aggressively aiding offshoring by American companies irrespective of any up-side for the general American economy. 

Add to that that, as several other commenters have pointed out, the German and Japanese companies that offshore in this country do so mainly in manufacturing products or parts for products that will be sold in North America, mostly in this country.  GM, Ford, Chrysler and some U.S. auto-components manufacturing companies have factories in Europe, but the products and components made there are sold in Europe.  Like the German and Japanese auto companies that Yglesias equates with Bain’s offshoring-specialist companies, the American auto-industry companies continue to make the parts and cars sold in their home country in factories in their home country. 

Which, of course, would not be the case any longer had the Bush and Obama administrations taken Romney’s advice and let Detroit fail.

That said—and for the same reasons—Yglesias is wrong in saying that unless Romney thinks there’s something wrong with offshoring, it’s absurd for him to deny responsibility for Bain’s investments in offshoring-specialist companies during the three-year period beginning in early 1999.  If in fact Romney was no longer associated with Bain during that period, he would have every right to correct the record, whether or not he thinks there was anything wrong with what Bain did during that time.  But the question of whether Bain did anything wrong in investing in offshoring-specialist companies—during the period between 1993 and 1999, when (at least as I understand it) it apparently was doing so at Romney’s clear behest, or during the following three years—depends on what is meant by “wrong.” 

It was not illegal.  But many voters think that, while it clearly was helpful to Bain’s investors and to Romney (who has continued since then to receive large payments from Bain), it was not helpful to the larger American economy and to the middle class.  It did not create jobs in this country; instead, it eliminated them.  And Romney is running for president virtually entirely on his claimed credential of being a jobs creator and of knowing how to create jobs—in America.

I’m hesitant to be too critical of Yglesias for his rather obvious conflations here.  He was, after all, not just the first pundit but also one of the very few even yet to point out a stunning, absolutely jaw-droppingproposition of law stated by four of the nine Supreme Court justices in their joint dissent late last month in the Affordable Care Act case, the part of the dissent concerning the issue of the severability of the part of the Medicaid provision in the Act that the Court’s majority struck down, in which the dissenters, while claiming that the majority was rewriting the Medicaid provision in order to save much of it, wanted to rewrite, rather dramatically, the Constitution’s separation of powers between Congress and the Court. Only four hours after the release of the opinion, when almost no one except the journalists covering the Court had yet read the dissent, Yglesias wrote:

As I’ve noticed previously, there’s lots of other stuff in the Affordable Care Act besides the new regulation of insurance companies, including a move to deregulate dental services. So I was curious to see why the dissenters in the Supreme Court thought that not only was the individual mandate and the provisions related to the individual mandate unconstitutional, but also all this other stuff.

The answer is that they appear to have made up a new Christmas Tree Doctrine under which legitimate acts of Congress are held null and void if Antonin Scalia thinks they were part of some kind of unseemly horse-trading:

Some provisions, such as requiring chain restaurants to display nutritional content, appear likely to operate as Congress intended, but they fail the second test for severability. There is no reason to believe that Congress would have enacted them independently. The Court has not previously had occasion to consider severability in the context of an omnibus enactment like the ACA, which includes not only many provisions that are ancillary to its central provisions but also many that are entirely unrelated—hitched on because it was a quick way to get them passed despite opposition, or because their proponents could exact their enactment as the quid pro quo for their needed support. When we are confronted with such a so called “Christmas tree,” a law to which many nongermane ornaments have been attached, we think the proper rule must be that when the tree no longer exists the ornaments are superfluous. We have no reliable basis for knowing which pieces of the Act would have passed on their own. It is certain that many of them would not have, and it is not a proper function of this Court to guess which.

That all seems fine except I would have thought it was the prelude to the opposite ruling. It’s not the proper function of the court to guess why different provisions were enacted, just to rule on the constitutionality of laws. Since there’s plainly no constitutional problem with regulating interstate chain restaurants, the law is the law until Congress repeals the law. Instead, Justices Scalia, Alito, Kennedy, and Thomas have decided that rather than pick and choose it would be better to strike everything.

This is far, far more newsworthy than the teensy bit of attention it has received suggests.  Four Supreme Court justices think legislative logrolling is improper and that therefore the Court can strike down full pieces of legislation that a majority of justices don’t like whenever they decide that some provision, however small, in the full piece of legislation is unconstitutional.  After all, y’know, maybe the rest of the legislation would not have been enacted without the quid pro quo votes.  Presumably, this also would apply to state laws as well as to federal laws—but, of course, as with federal laws, only to laws that the conservatives don’t like.

I’d been meaning to write about this truly radical part of the dissent in the ACA case, but hadn’t gotten around to it.  Now I have.

Was Romney’s Bain-Era IRA Tactic Really Legal In That Circumstance? [with UPDATE from Business Insider]

In a comment to my post yesterday titled “Romney’s VERY Private Equity,” which asked how Romney was able to metasticze his Bain-era IRA account to accumulate more than $100 million—Investment in Apple stock?  In precious-metals funds?  A quiet Louvre heist? I asked—reader Steve Hamlin wrote:


Re: Romney’s IRA contributions, there was a WSJ article in the past several days that talked about them – they were often a special share class of the PE deals that Bain invested in, where the majority of the value of the company was assigned to the other share class. There are examples of these “low-value class” shares making 600% in several years.

The tax strategy (made sense at the time, less so now) was to put these high(?)-risk, high-reward share classes in your IRA, and your mandatory allocation of the other (lower risk, lower reward) share class in to your taxable brokerage account.

The article quotes tax professionals who question the aggressiveness of the Bain share class valuations.


I wrote up a reply to Steve’s comment, but the Comments function won’t let me post it there because the comment is too long.  So, here it is:

Thanks, Steve.  When I read your comment, I remembered reading something about this in the Vanity Fair article (which I read only once, on Jul. 3), and just went back and reread that part of it.  Here’s what it says:

The Romneys won’t say, but Mark Maremont, writing in The Wall Street Journal, uncovered a likely explanation. When Bain Capital bought companies, it would create two classes of shares, named A and L. The A shares were risky common shares, to which they would assign a very low value. The L shares were preferred shares, paying a high dividend but with the payoff frozen, and most of the value was assigned to them. Bain employees would then put the exciting A shares in their I.R.A. accounts, where they grew tax-free. With all the risk of the deal, the A shares stood to gain a lot or collapse. But if the deal succeeded, the springing value could be stunning: Bain employees saw their A shares from one particularly fruitful deal grow 583-fold, 16 times faster than the underlying stock.

The Romneys won’t tell us how, or even if, they assigned super-low values to the A shares, but there are a couple of ways to do it. One is to use standard options models to price the shares—then feed inappropriate assumptions into those models. Romney could alternatively have used a model called liquidation valuation, which Kleinbard [Ed Kleinbard, a USC tax law professor whom the author contacted in researching the issue] says would have been “completely inappropriate.” Without seeing the assumptions used on Romney’s tax returns from the years when those lowball A shares were squirted into his I.R.A., we cannot know how he did it. Whatever methods he used, however, the valuations were, according to Andrew Smith, of Houlihan Capital in Chicago, “pushing the envelope.” (Andrea Saul retorts, “Why should successful investments be criticized?”)

I remembered that when I read those paragraphs last week, I said to myself in answer to Saul’s rhetorical question: “The relevant question here is not whether successful investments should be criticized, but instead whether illegalinvestments should be criticized.”  The investments themselves weren’t illegal, but the classification of the stock into two arbitrarily-divided classifications in order to give falsely low valuations on one class in order to create huge nontaxable profits, sure as hell sounds to me like it wasillegal.

Krugman says there possible legal ways that the IRA gains could have been so huge.  But the way described in the Vanity Fair article and in the WSJ article doesn’t appear to be legal in Romney’s instance, even though this tactic would be legal in other instances—i.e., when there is some actual tangible difference between the risk and value of the two classes of stocks, and when the stock placed in the IRA is given a legitimate, rather than fraudulently low, value.

The relevant paragraphs of the WSJ article read:

The tax-deferral opportunity stemmed from the way Bain often chose to structure the shares of companies after taking them over.

Even if the companies had only one share class, Bain frequently gave them two classes, usually called Class L and Class A, according to former employees, Bain internal documents and securities filings. Because Bain controlled the companies, it had flexibility in assigning values to the classes.

Class L shares, akin to preferred stock, were safer and had a higher initial value. They had priority if the company paid dividends, and holders of these shares were the first to receive proceeds from a sale or liquidation. The shares also accrued interest, often at 10% to 12%.

Bain assigned a much lower value to Class A shares, which were riskier but potentially more profitable.

If Bain sold or liquidated a company it had taken over for less than was owed to Class L shareholders, the Class A shares lost all of their value.

But once Class L shareholders got their money, Class A shareholders received the bulk of additional gains, often as much as 90% of them, according to the documents and former employees. In successful deals, the A shares could skyrocket.

Can it really be that all that was legally necessary was to simply separate objectively identically-valuable stocks from a single company into two classes of stocks whose only difference is the arbitrary value that the company assigns the stocks, rather than the actual tangible value of the stocks?


UPDATE: To my utter knock-me-over-with-a-feather astonishment, Business Insider’s Henry Blodget posted an article early this morning based partly on, and linking to, um … um … my “Romney’s VERY Private Equity” post from yesterday.  The link to my post is in the sentence “This ‘structuring’ has also likely taken advantage of offshore accounts, the contribution of hard-to-value securities at low valuations to Romney’s IRA (whereupon they exploded in value), ….” 

Cool! Thanks, Mr. Blodget! 

Then this afternoon, he posted a follow-up titled “Wait—MaybeTHIS Is How Mitt Romney Got So Rich…,” in he explains (based on the surprising revelation in the Boston Globe article that during the period of 1999 to 2002Romney owned 100% of Bain stock), how Romney’s IRA account might actually have acquired so much money legally. 

Since Blodget may well have figured out how that IRA came to be worth so much, without even having to channel Sherlock Holmes, I thought I should let readers know.  Although I think he may be wrong and that Bain really did stage a quiet Louvre heist.  Has anyone noticed whether Mona Lisa looks slightly more like a Bain CEO than she used to?

Romney’s VERY Private Equity (with UPDATE)

By now there’s been a lot of discussion in the media about the Vanity Fair and Associated Press exposés of Romney’s and his wife’s offshore bank accounts, to the limited extent that information about them is publicly available.  Romney is now likening overseas bank accounts and shell/money-laundering corporations to investing in real overseas companies—as if investments in overseas companies guarantee profit rather than loss in the same way that Bain and its executives usually were guaranteed profits, through financial-transaction fees and “consulting” fees they arranged for themselves irrespective of whether the acquisitioned company made money or instead collapsed under the weight of the debt Bain forced it to incur, in large part, in order to pay Bain those fees.  And as if personal profits from overseas investments aren’t taxable here in the United States unless those profits are stored in bank accounts elsewhere. 

Romney’s refusal to disclose enough specifics about these foreign bank accounts, where the money actually came from and under what circumstances, and how it has been invested gives new meaning to the term “private equity,” at least in Romney’s case.  And this refusal, too, has been and will continue to be widely discussed.

But there’s one aspect of the investigative reports that I think has not been given enough attention and analysis: that Romney’s IRA account from his 15 years as CEO of Bain Capital—a period of time when annual IRA investments could be no more than $2,000—now has assets of more than $100 million.  The Vanity Fair article quotes an expert that the author consulted as saying he believes that they only way that this could have happened would be if Romney significantly undervalued the actual value of the assets he was placing into that account.  Paul Krugman in his New York Times column on Monday discussed the IRA and said there were conceivable legal ways to accomplish this but, because of the secrecy, no way for the public to know whether these wealth was accumulated legally or not. 

Krugman didn’t discuss how this could have happened legally, so I’m wondering: what kinds of investments would there have to have been for this money to have so wildly metastasized?  Apple stock?  If so, how much Apple stock?  Precious-metal funds?  A quiet Louvre heist? 

But there’s another issue concerning Romney’s and Bain’s peculiar brand of investment—this one involving the realdefinition of private equity, not the pun one I used in the title of this post—that also hasn’t received enough media attention: the difference between Bain-style private equity and Silicon Valley-style venture capital.  That difference being the one I alluded to above regarding the investor’s forcing the invested-in company to borrow large sums from banks and use some of the borrowed money or some of its profits to pay huge fees to the investor.  Or, in Bain’s case, apparently, not to all the investors, just to the investment company itself and to its executives—thus eliminating, for them, the usual risk inherent in capitalist investment.  You know; the risk so vaunted by uber-capitalist-advocates like Romney.  Not to mention Romney himself. 
Slate writer Will Oremus has an article there today in which he argues that the real difference between the federal government as an angel investor in startups such as Solyndra and private venture capitalists is that the former can only recoup its investment, while the latter can make substantial—sometimes huge—profits.

But venture capitalists, unlike Bain and its executives, also can lose all or some of their investment, just as the government can.  ((Does Andreesson Horwitz load up the startups it invests in with huge bank debt and use some of the loan money to pay the venture capitalist firm huge financial-transaction and consulting fees?)*  Just as there’s a difference between Silicon Valley-type venture capitalism and Bain-style private equity—something that Obama should point out—there’s a difference between making off like a bandit and being one.


UPDATE: Well, as implied in my reply to a comment below, I was unaware that Romney was the sole owner of Bain; I thought Bain was a closely-held corporation in which Romney was the main, but not the sole, shareholder.  But a jaw-dropping Boston Globe investigative report today, titled “Mitt Romney stayed at Bain 3 years longer than he stated,” makes clear—among, um, other things—that Romney was the sole owner of Bain.

ALSO: On the subject of what types of investments Romney would have to have placed in his Bain-years IRA in order for it to have gained so much wealth, I just emailed Paul Krugman at his Princeton email address, told him about my post and about the speculation in the comments by Mike and Kaleberg, and asked whether he could write on his blog or even in his column about the various possibilities.  So … we’ll see ….

*Parenthetical added on 7/12 at 11:15 a.m.  Should have included it in the original yesterday.  Couldn’t resist adding it now.