Presidents and Busineesmen

Mitt Romney, whose reported net worth is somewhere north of $200 million, argues that he knows how to make all Americans wealthier.  In what is perhaps the deepest irony of this presidential season, Newt Gingrich echoes William Jennings Bryan -- who declared, "No one can earn a million dollars honestly."

Paul Krugman has attacked Romney's honesty in earlier columns. But on Friday, he dissected Romney's argument that, because he is a successful businessman, he knows how the economy works:

But there’s a deeper problem in the whole notion that what this nation needs is a successful businessman as president: America is not, in fact, a corporation. Making good economic policy isn’t at all like maximizing corporate profits. And businessmen — even great businessmen — do not, in general, have any special insights into what it takes to achieve economic recovery.

The solution to America's problems is not simply to increase corporate profits. That's a notion that those who have gained from globalization love to repeat. They have done well by slashing costs. However,

Consider what happens when a business engages in ruthless cost-cutting. From the point of view of the firm’s owners (though not its workers), the more costs that are cut, the better. Any dollars taken off the cost side of the balance sheet are added to the bottom line.

But the story is very different when a government slashes spending in the face of a depressed economy. Look at Greece, Spain, and Ireland, all of which have adopted harsh austerity policies. In each case, unemployment soared, because cuts in government spending mainly hit domestic producers. And, in each case, the reduction in budget deficits was much less than expected, because tax receipts fell as output and employment collapsed. 

During his tenure at Bain Capital, Romney and his partners purchased 77 companies. 22% of those businesses were shuttered. But Bain made money even when firms went belly up. Romney has said that, by the same logic, he would have let GM and Chrysler fail.  Besides the jobs at both companies, the multiplier jobs -- at auto parts plants, tire plants, steel companies -- would have also gone down the tubes.

Romney succeeded because of a narrow focus on profits. Countries are about more than making profits. Krugman reminds his readers that the last two presidents who claimed to be businessmen -- George W. Bush and Herbert Hoover -- left shipwrecks behind them.


This entry is cross posted at The Moderate Voice.