God and Bain

When his fellow Republican candidates attacked Mitt Romney over his tenure at the private-equity firm Bain Capital, many Americans rushed to Romney's defense. There is nothing wrong, they pointed out, with firms like Bain taking over faltering companies and putting their resources to more profitable use. In fact, a dynamic economy requires that decision-makers have the freedom to shift capital and other assets from unprofitable to profitable enterprises. Bain Capital's line of work may not save every existing job, or even every company—but it creates lots of new companies with many new jobs.

I agree with this argument. My problem with Bain Capital is not really with Bain Capital; it's with U.S. government policies that artificially eliminate the risk on which true market-based profits are predicated. These policies are now deeply embedded in the operation of the federal government, and they are part of a network of regulations, mandates, guarantees, and incentives that together increasingly limit the honest operation of a market. There are still results that simulate the mechanisms of a market, but they reflect less about economic reality with each passing decade.

Some of the government's network of regulations and incentives levy requirements on business that makes it artificially unprofitable. These measures include things like high taxes, expensive forms of regulatory compliance (which disproportionately hurt small businesses), and state requirements that enforce the use of union labor.

But the government does other things that reduce the risk of investment, like using the taxpayers' money to give artificial guarantees. The market doesn't provide such guarantees—and they end up effectively making certain investments artificially profitable for private businesses and individuals, while imposing an unrequited cost on the public treasury.

Many readers will think of the "green" energy industry in this regard, because it is heavily subsidized by governments at the federal and state level. But firms like Bain have also benefited from government intervention in the economy. One example is an incident from the 1990s—widely cited during the "Bain" flare-up two weeks ago—in which Bain Capital profited on a failing business whose underfunded pension obligations required a bailout from the federal Pension Benefit Guaranty Corporation (PBGC).

A number of commentators pointed out that PBGC is an independent federal agency like the Federal Deposit Insurance Corporation (the insurer of bank deposits). PBGC insures pensions, up to a maximum benefit amount, and operates on fees from private pension managers, not on federal tax revenues.

But PBGC has been in an expanding deficit situation for much of the last decade. Its total obligations now significantly outstrip its assets. Only a government-sponsored agency can continue to operate on this basis without stringent intervention. If PBGC were a private insurance company, it would be courting a declaration of insolvency. But as a government-sponsored agency, it has the tacitly understood option of a bailout from the taxpayers—a solution now being discussed openly.

It's likely that many readers have never heard of PBGC (which was established in 1974). The federal government's network of guarantees and regulations is so extensive today that we have no idea what all of them are. The premise of PBGC is a well-meaning one: to ensure that pensioners don't lose their retirement benefits if their companies fail. But government-agency guarantees are not the only way (or necessarily the best way) to achieve that goal.

Meanwhile, one of PBGC's effects is to create a situation of artificial profitability for private-equity firms taking on failing companies. A company saddled with a huge unfunded pension liability would be unattractive to investors, and more likely to be carved up in a bankruptcy settlement than to yield any profit opportunities. But the picture changes if some or all of the pension liability is removed from the ledger through the magic of a government-agency guarantee.