Friday, January 13, 2012

WSJ on Romney at Bain

The Wall Street Journal dug around a bit to find enough data to say something about how well Republican presidential candidate Mitt Romney did during his time at Bain.

Some quick thoughts:

1. This article reminded me of the reaction a group of us had to reading the famous early sociology book Suicide by Emile Durkheim. Durkheim knew he wanted to estimate a multiple regression, with suicide rates as the dependent variable, but because of when he was writing he did not know how, so he tried to approximate the multiple regression with a large number of pairwise correlations between suicide and various predictors of suicide. The Wall Street Journal author is in a slightly different position. I think the knowledge is there, but the data are lacking. What you really want to do here is to compare Bain's performance to that of other similar firms, holding constant things like the state of the firms when Bain invests in them and broader economic conditions such as the business cycle. The WSJ, like Durkheim, tries to get at this by sort of conditioning on each right-hand side variable in turn in its discussion.

2. I think the WSJ's decision to measure outcomes a fixed amount of time after Bain's initial investment is defensible as a way of avoiding the endogenous timing associated with measuring outcomes when Bain's investment ends. Though both are interesting and worth looking at.

3. One hates to harsh on the buzz, but firms have a legal and fiduciary duty to their shareholders to maximize their return on investment. They do not have an obligation, legal, fiduciary or even moral, to maximize the employment of the businesses they operate in the short run. One can debate this situation, but I think that even if one is a strong redistributionist, there is a good case to be made for what is popularly known as the Danish system of "flexicurity" in which firms face low hiring and firing costs and the social insurance and active labor market systems aim to reduce variation in consumption among workers over time (who can, of course, also accumulate precautionary savings to the same end).

4. Gingrich and Perry manage to position themselves as both ignorant and hypocritical. The are hypocritical because they are usually in the business of defending markets and are ignorant because the market-bashing positions they take in going after Romney's time at Bain reflect a deep misunderstanding of how economic growth happens. They should both be assigned some days off from campaigning and given a copy of Schumpeter's Capitalism, Socialism and Democracy to read.

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