Adam Ozimek Gives Three Cheers for "Outsourcing"; I Give Minus Three Cheers for Bain Capital-Style LBOs
DeLong On Outsourcing: The political battle between Obama and Romney camps on outsourcing has prompted a lot of commentary… litigating whether Mitt Romney was responsible for outsourcing done by Bain Capital. Most people engaging in this issue, including many who absolutely know better, seem content to let outsourcing be used as mud….
So let me rewind to 2006, when Brad DeLong chastised the media for another incidence of ignoring the economics of outsourcing and focusing on the mudslinging of it. Read his post for a reminder that this isn’t the first time the politics of outsourcing have eclipsed the economics, and as an example of the kind of criticism today’s debate deserves. The incident Brad is discussing is was when Greg Mankiw, then head of President Bush’s CEA, attempted to explain the economic case for outsourcing…. Here is a what Brad describes as “Greg Mankiw’s standard paragraph about outsourcing is very much like mine–like that of any neoclassical and neoliberal economists–and goes something like this”:
As with any change in technology that increases the volume of international trade in goods and services, the “outsourcing” of service-sector jobs creates winners and losers–but almost surely more and bigger winners than losers. Big winners are workers in poor countries who get better jobs working for firms that can now export services to rich core countries like the United States. The major losers are those who previously held the now-outsourced service-sector jobs in the United States, who must now find new and different jobs and almost surely find that their skills are worth less. But even in the United States the losses to the losers are outweighed by gains to winners: American workers who find their skills in industries in higher demand as foreigners spend their increased dollar earnings, American consumers who see the prices of what they buy fall, and American shareholders and managers who see the profits of their companies increase. We should worry about the distributional consequences of “outsourcing” and how policies can cushion and offset them. But we should never overlook that–as is almost surely the case with expanded trade–”outsourcing” increases the total size of the economic pie….
There is of course an important difference: back then Greg Mankiw was standing up for the truth whereas today both Romney and Obama camps are focusing on who is to blame for outsourcing. But I’m not asking for bloggers to defend either politician, I’m asking them to stop implicitly or explicitly pretending the economic defense of outsourcing doesn’t exist…. If your job is covering the political horse race, then I can’t really blame you for focusing on the horse race. But if your job (including self-appointed blogging jobs) is writing about economics and policy, and you’ve chosen to focus almost entirely on the politics instead of the economics, then you are falling down on the job.
Let me end with this, from Brad, on the priorities of some journalists back in 2006:
Saying who is one-up politically inside-the-beltway today–yes. Pleasing your editors so they’ll give your stories better placement–yes. Pleasing your sources–like Denny Hastert–so they’ll keep talking to you first–yes. Informing the public about the functioning of the economy and about the dilemmas of economic policy–what’s that?
I would qualify what Adam says by noting that it is somewhat harder to defend Bain Capital than outsourcing in general. Outsourcing in general shifts resources from import-competing manufacturing--where American productivity is low--to export manufacturing and services--where American productivity is high. Bain Capital's business model is, more often than not, shifting resources from manufacturing--where there are substantial positive externalities associated with production in the industry--to financial engineering--where there are substantial negative externalities. It is safe to bet that outsourcing in general raises U.S. GDP (but note that the distributional consequences of outsourcing in general may lead to a reduction in economic welfare.) It is not safe to bet that the Bain Capital-style LBO branch of Private Equity raises U.S. GDP, and its distributional consequences are such that in my judgement it almost surely lowers economic welfare.
Thus if I were running the Obama campaign, I would be talking about not outsourcing but how the Bain Capital LBO business model is yet more socially-destructive financial engineering. I would be arguing that we certainly don't need to be making it an even bigger part of the economy. We certainly don't need to be giving people more incentives to undertake it. And the big problem with Romney is that his experience at Bain Capital has led him to think that what America really, really needs is to transfer more resources into what made him rich: into financial engineering
But what is good for Bain Capital is definitely not good for America.
What is good for Bain Capital is definitely not good for America because Bain Capital is in the business of making it more difficult for businesses to commit to long-term labor policies via Shleifer-Summers breach of trust, increasing oligopoly via abuse of bankruptcy, expropriating workers' pensions share of equity and loading costs onto the PBGC, creating lots of very risky debt that is then sold to and held by investors who really should not be running such risks, etc. And if it replaces some less-than-competent managers by more competent ones in the process, that is a small source of Bain Capital's profits.
The Bain Capital-style LBO part of Private Equity has been, I think, on balance a trainwreck over the past three decades.
UPDATE: Paul Krugman eloquently gives the "you have a moral duty to cast the most accurate shadows on the walls of the cave that you can" defense of the Obama campaign's line on these issues:
There is, predictably, a mini-backlash against the Obama campaign’s focus on Bain…. Very Serious People… think[ing] that we should be discussing their usual preoccupations. But some of it is coming from progressives… uncomfortable with the notion of going after Romney the man and wish that the White House would focus solely on Romney’s policy proposals.
This is remarkably naive. I agree that the awfulness of Romney’s policy proposals is the main argument against his candidacy. But the Bain focus isn’t a diversion…. [A]ny critique of Romney’s policies has to make use of his biography…. [V]oters are not policy wonks…. Nor, alas, can we rely on the news media to get the essentials of the policy debate across to the public…. [T]he cult of balance still rules…. Remember, Republicans have already voted for a plan that would convert Medicare into a system of inadequate vouchers bearing no resemblance to the program we currently have — yet Factcheck declared Democrats’ claim that this ends Medicare as we know it “lie of the year”….
[R]un on the real issues — but do so by creating a narrative…. Romney’s biography offers a golden opportunity to do just that. His policy proposals amount to a radical redistribution of income away from the middle class to the very rich; he’s also being highly dishonest about budgets and just about everything else. How to make those true facts credible? By associating them with his business career, which involved a lot of profiting by laying off workers and/or taking away their benefits; his personal finances, which involved so much tax avoidance that he’s afraid to let us see his returns before 2010; his shiftiness over when exactly he left Bain.
You could criticize the biographical focus if it were being used to convey a false impression of where Romney stands, but that’s not what’s going on here…