God And Bain

"Like" the Patheos Evangelical Page on Facebook to receive today's best commentary on Evangelical issues. 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 un profitable. 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. When government enters the business of guaranteeing against risk, the first thing created is an opportunity for profits that free-market transactions would not generate. These profits need not be the result of cronyism or deliberate rent-seeking, but they share a characteristic with those practices, in that the profits come not from a voluntary supply-and-demand transaction but from a government decision to levy mandates on the people. A homelier example, of a different kind, comes from the increasing government intervention in health-care transactions in California, where I live. My optometrist described to me a few months ago what she faces with the expansion of MediCal insurance coverage for eye care. For many years, her sales of prescription eyeglasses have kept her small business in the black. Most of her patients paid cash or had private insurance. But that has changed over the last three years. Now most of her patients use MediCal—which has reduced not only her compensation for eye-care services, but her ability to sell glasses. The reason? MediCal's compensation for eyeglasses covers only certain retail outlets and brands. Their parent companies lobbied hard for the MediCal contract. Independent retailers are losing business, and the MediCal contractors are profiting from an arbitrary, taxpayer-funded mandate. What does all this have to do with God? One aspect of the issue is that the flip side of artificial profitability for businesses is wildly expanding debt for the taxpaying public. The same is true of artificial guarantees of jobs and salary levels for workers, and indeed of any kind of benefit that can only be "guaranteed" by making all citizens present and future responsible for it. The Proverbs warn repeatedly against the sorrows that come with taking on debt irresponsibly. Knowing that debt is an onerous burden, the Lord provided in the Old Testament Law for its forgiveness at 7- and 50-year intervals (see Dt. 15, Lev. 25). He makes clear that it is not good to live under a dark cloud of debt. Presumably God would not approve of governments that heap debt on their people. God also predicted from the beginning the kinds of demands earthly rulers would make on their subjects. When His own people asked for a king of Israel to rule over them, He had the prophet Samuel warn them (1 Sam. 8:13-18, NIV) of what they were in for—in unmistakably discouraging accents: He will take your daughters to be perfumers and cooks and bakers. He will take the best of your fields and vineyards and olive groves and give them to his attendants. He will take a tenth of your grain and of your vintage and give it to his officials and attendants. Your male and female servants and the best of your cattle and donkeys he will take for his own use. He will take a tenth of your flocks, and you yourselves will become his slaves. When that day comes, you will cry out for relief from the king you have chosen, but the LORD will not answer you in that day. Today we dress up our "redistributionist" arrangements with a less forthright, often sanctimonious set of political trappings. But when our governments levy mandates on all the people, and thereby create arbitrary conditions for some of the people to profit, they are essentially doing what God warned the ancient Israelites about. Governments ever since have sought opportunities to both guarantee against risk at the people's expense, and impose mandates as a means of generating short-term profits for those they favor. Very often, governments piggyback on the ordinary things the people have to do anyway, arranging to extract a flow of income from them—not by providing a service but by collecting arbitrary fees, and imposing regulations that spin off compliance industries of their own. In some cases, government itself realizes the "profits" in the form of revenues; in others, the profits go to businesses, unions, favored investors, and other specific beneficiaries. In this light, the closest biblical parallel to government's ingenious income-extracting arrangements would be the moneychangers in the Temple, whom Jesus rebuked with righteous anger (Mt. 21:12). The monetary transactions were not evil in themselves, just as profit is not evil. But the moneychangers in the Temple took advantage of the requirements of the Law: worshipping and sacrificing at the Temple were a spiritual obligation to the Lord, exploited by the moneychangers for their own gain. Just as governments seek to extract income flows from the basic obligations and daily needs of their citizens, so the moneychangers sought to extract income flows from the obligations of righteous Jews under the Law. Jesus' reaction to this indicates that God thinks poorly of such opportunistic rent-seeking. When it was done in the Temple, it was an offense to God's own righteousness and holy prerogatives. But I do not think He takes a more approving view of the practice when the venue is changed. Bain Capital and other private companies have no means to compel the people to guarantee profit opportunities for them. They operate within a set of conditions arranged for them by the government. Those conditions may actively hinder profit or artificially guarantee it; virtually all of them distort the natural incentives of a risk-based market. Bain and other companies may well lobby for certain government-arranged advantages, just as unions and other special-interest groups do. But only the government itself can turn them into mandates or guarantees, co-signed by the people. It has become a great weakness in our philosophical approach to government that we take interventionism for granted, and spend all our time attacking or defending its various beneficiaries, while bewailing the plight of those who have to pay for it. I have no animus against Bain Capital or Mitt Romney for doing what made sense, given the environment of government incentives and regulations in which they operated. They did not create the rules of the game. What needs to be different is not the nature of the profit motive, but the interventionist bent of today's federal government.

God and Bain