What's wrong with private equity? Debt. What Mitt Romney and Sam Zell have in common.

A lot of the debate over Mitt Romney's time at Bain Capital has been focused on how many jobs he did or didn't create, did or didn't destroy. That's understandable, given that we're in a time of sustained high unemployment, but I'm not sure that tallying lost jobs really gets to the heart of what might be objectionable about Romney's business practices.

The problem is debt.

In the case of the shuttered Kansas City steel mill at the center of the debate, the chain of events is pretty clear:

• Bain Capital bought the steel mill in October 1993, putting up just $8 million of its own money to gain majority control—even though the total purchase price was $75 million. 

• The next year, Bain had the company issue $125 million in bonds—debt used to pay Bain itself a dividend of $36 million in 1994. Understand again: Bain made a quick profit on its investment, but it wasn't by helping the steel mill earn greater profits—but by having the mill take on a chunk of debt.  

• Now: It's true that Bain used $16 million to buy another steel mill the next year—it's not as though executives were using all the cash to light cigars with $100 bills—but this is also true: The Kansas City mill took on another $125 million in debt to pay for the acquisition and merger. 

• All of which means that the Kansas City steel mill in 1995 had $378 million in debt. Its profit that year was $32 million. You can see where this is headed.  

• When it finally filed for bankruptcy in 2001, the combined company had debts exceeding $500 million. The plant's workers lost their jobs, and ended up with reduced pensions because the retirement funds had been under-funded.

In the wake of the bank bailout, there was a lot of talk about our economy privatizing profit and socializing risk. The problem here is just a bit different: Bain Capital kept the profits to itself, but largely externalized the risks of its business practices. That's smart, on one level, but it certainly belies talk of investors being "risk-takers" and "job creators."

I think I'm a little sensitive on this topic because journalists have been hurt by this kind of activity. Sam Zell bought the Tribune Company a few years back by investing $315 million of his own money—not chump change, I suppose, but a pittance compared to the overall $8 billion purchase price, most of the money borrowed from the employee pension fund. The company went into bankruptcy soon after, and the workers were screwed.

It's a little bit like me buying from you the car your son uses to get around, forcing your son to lend me the money to make the purchase, crashing the car, and getting to keep the insurance check without repaying your son the money he lent in the first place.

The steel industry in America has been dying for years. But Bain's practices hastened the Kansas City mill's demise—and it wasn't Mitt Romney nor Bain Capital that got stuck with the fallout from those practices.

Romney is running for office based largely on his business acumen. So let's be clear: Finance is a necessary component of a market economy, and while a market economy isn't necessarily utopia, it's often the best way of raising the living standards of the most people. Not everything done in the name of the market economy is wise or even good, however, and criticism of those bad acts and bad actors isn't—as some would have you believe—socialist.

There's a problem—for society, for morality—when a company can profit from its bad decisions while sticking the little guy with the consequences. It's wrong, plain and simple.

In defense of Mitt Romney

Mitt Romney may indeed have unkind feelings about America's poor, but I don't think this quote is proof of that:

“I’m not concerned about the very poor. We have a safety net there,” Romney told CNN. “If it needs repair, I’ll fix it. I’m not concerned about the very rich, they’re doing just fine. I’m concerned about the very heart of the America, the 90 percent, 95 percent of Americans who right now are struggling.”

This isn't a "screw the poor" moment. Romney is clearly saying that the safety net has covered the poor, so he wants to focus on getting the middle class moving again. It may be awkwardly phrased, but it's actually a pretty Clintonesque formulation.

Now: It's not been so long since Romney's campaign had great fun taking a quote from President Obama wildly out of context, so if this new quote dogs him in the campaign, it'll be hard to be sympathetic. But an honest evaluation of his comments doesn't really come out quite as anti-poor as it initially seems.

What about Ron Paul?

A libertarian friend of mine is very disappointed in me for semi-endorsing Mitt Romney for the GOP nomination over Ron Paul. After all, he points out, Paul's anti-imperialistic views of the presidency—both in war-making and in executive power, generally—are closer to my own than any other GOP candidate. Heck, on those two areas, I like his views better than President Obama.

So why can't I support Paul for the GOP nomination? Easy. I think he'd be a disaster for the country.

Put aside his dubious explanations for the racist newsletters. Put aside the fact that he'd have nearly zero support for his agenda in Congress. Let's look at the agenda itself. (I take all the following statements from his website.)

He'd cut $1 trillion in government spending in the first year of his presidency, on the way to a balanced budget by Year Three. The debt is a problem, I agree, but I believe yanking so much money out of the economy would probably deepen our the Great Recession into something more of a Depression.

He'd eliminate the income, capital gains, and inheritance taxes on his way to keeping the government in its strict Constitutional limits. (Also, to make it easier for you to buy silver and gold coins: His website actually uses that as a rationale for eliminating the capital gains tax.) Maybe that would be replaced by a single flat tax, but mostly he'd eliminate. I'm not really sure how we'd pay for the government that is left.

He'd repeal the gasoline tax. How would we pay for roads?

He'd make it harder for unions to organize.

He'd "abolish the welfare state."

He'd make it impossible to rationally deal with the illegal immigrants present in the United States. (UPDATE: Specifically, he wants "no amnesty" for such immigrants. Which sounds fine, I guess, except the U.S. isn't going to deport the 11-12 million such folks who are here. Combine that with the abolishment of birthright citizenship, below, and Paul's policy would create a permanent underclass of non-citizens doing our menial work without the protections or responsibilities of citizenship. Yuck.)

He'd abolish birthright citizenship for the sons and daughters of immigrants.

So I generally—but warily—agree with Paul's instinct to be restrained in the use of American force abroad. But my impression of his overall agenda is that it would produce a crumbling country, meaner and more Darwinian. I'm not a libertarian, even though I have those instincts in certain areas. Some of what I've described above sound like features to my libertarian friend, I'm sure; it sounds like bugs to me.

If effective, Ron Paul would be a disaster. But given the unlikelihood of cooperation with Congress, I think he'd be merely ineffectual. Either way, why would I support him?

What kind of president would Ron Paul be?

This year, for instance, Paul has sponsored 47 bills, including measures to withdraw from the United Nations, repeal the federal law banning guns in school zones and let private groups coin their own money.
None has moved, and 32 have failed to attract a single co-sponsor.
“He’s somewhat of an introvert [and] a little quirky, so he doesn’t work the legislative process like most do,” said former congressman Zach Wamp (R-Tenn.), who served with Paul from 1997 to 2010. But Wamp said Paul, as president, might succeed where Paul the legislator had not.
“When you’re president, they can’t just ignore you,” Wamp said. “Because you have a mandate.”

via washingtonpost.com

I had a period of about four hours a few weeks ago in which I considered whether supporting Ron Paul was the right way to go: The performance of the president on civil liberties issues has frustrated me that much.

But Paul has too easily lent his name—if not his mind—to racist sentiments and crank conspiracy theorizing. And as the above article suggests, he's wholly ineffectual at operating within the system. And that's probably for the best! But the president *runs the system.* He's not quite Lyndon LaRouche with a portfolio, but he's not far off that mark either.

UPDATE: My Philly Post column is about Ron Paul's appeal to racist voters.