Vultures and patriots

In his speech to the Democratic National Convention on Tuesday , former Ohio governor Ted Strickland contrasted what he called the economic patriotism of President Obama with what he described as Mitt Romney’s predilection for vulture capitalism in his role as the founder and CEO of Bain Capital.

Noting that some of the companies Romney and Bain had invested in were named "outsourcing pioneers", Strickland emphasized that Obama had saved good American jobs during the recent Great Recession by rescuing the Detroit auto makers even as Romney was calling for them to go bankrupt. After referring to Romney’s personal investments abroad, Strickland said Obama" is betting on the American worker" while Romney "is betting on a shell corporation in Bermuda".

This dichotomy does capture a significant element of the race. I know from conversations with the president in which I have been involved, that he does have an instinct for making it in America. I have heard him ask his top advisers: "why can’t we make batteries, wind turbines, solar cells, and high speed trains in America?" His Middle Class Task Force focused a lot of attention on how to revitalize manufacturing in the Mid-West and his administration has provided financing and regulatory support for a variety of innovative alternative energy job creating efforts.

Both Governor Romney’s career as a private equity business manager and his minimalist philosophy of government indicate that he is a true disciple of the modern shareholder value business doctrine widely taught to MBA students at places like Harvard Business School, of which Romney is a prominent graduate. For most of American history the ruling doctrine was stakeholder value. The idea being that the corporation is chartered by the state in order to provide benefits to the society as a whole as well as to the shareholders of the corporation. That being the case, it was thought that the corporation should be managed to assure the welfare of its various stakeholders such as workers, suppliers, customers, and local and national communities as well as shareholders.

Over the past thirty years, however, this view has been displaced  by the doctrine of shareholder value which holds that the shareholders are the residual risk bearers of the corporation and that it should therefore be managed to maximize their earnings. In practice, because earnings are measured on a quarterly basis this tends to mean maximizing earnings on the short term. Not only is this the general doctrine of the business schools today, but it is quintessentially the doctrine of Wall Street and especially of the managers of private equity operations. Romney, of course, would argue that by maximizing earnings through outsourcing or layoffs in some areas he was creating jobs in other areas. This may well be true in some instances, but it is, of course, not the same thing as seeking to assure the welfare of workers and other stake holders as the CEOs of the 1960s-70s did.

But if Obama has economically patriotic instincts, he has often ignored them and listened to conflicting advice. For one thing, giving health care legislation priority over job creation efforts was a huge mistake of his first term. Yes, he rescued Detroit, but he waited a very long time before doing so, and, as a result, the cost was far higher than it needed to be. Another mistake has been the failure to counter the mercantilist globalization policies of many U.S. trading partners who subsidize their exports as well as direct investment in their countries by U.S. corporations while penalizing U.S. exports in a variety of ways. A huge failure to change in a meaningful way has been the president’s easy adoption of then notion that geopolitics is more important than American economic competitiveness. During his first trip to China, Obama agreed that America would assist China in developing its own indigenous commercial jetliner. Why? Isn’t America the prime producer of jetliners? Why would it want to teach China how to make them? Well, the State Department said it was because we needed China to help us in dealing with North Korea and Iran among other geopolitical issues.

Even as I write, another round of negotiations is set to begin tomorrow on the Trans-Pacific Partnership free trade agreement. If concluded ,this deal would almost surely cost American jobs. I say this because the deal doesn’t cover currency manipulation, subsidies for direct foreign investment, or anti-trust issues. When I asked the White House why we are proceeding to try to conclude such a deal, I was told that it is to prove our commitment to our allies in Asia. That these allies may feel better about us will be cold comfort to middle class American workers whose jobs are uncertain and whose wages continue to stagnate.

Nor is the record of the Democratic Party terribly reassuring in this regard. Bill Clinton gave a highly-touted speech defending the administration’s economic policies last night. Well, it was Clinton who brought China into the World Trade Organization on the basis of the argument that doing so would open China’s markets and reduce the U.S. trade deficit. It was Clinton who gave us Bob Rubin (pure Wall Street and shareholder value) and the financial deregulation that resulted in the crisis and Great Recession of 2008-10.

So if Obama wants to convince workers and the middle class that he’s on their side , he’ll have to do more than have Ted Strickland talk about his economic patriotism.