Sometimes the editors at the New York Times get it right, even when they’re wrong. In a May 26 editorial they opined that Democratic attacks on Mitt Romney’s career as head of Bain Capital are fair game: “Private equity, rarely by design, has created many jobs. But the practice of leveraged buyouts, in which Bain was a big player, has also contributed significantly to the growth of the income gap, moving wealth from the middle class to the top end.”
Let’s leave odd notion of creating jobs “by design” aside. More significant is the claim they make about leveraged buyouts, a revolution in American finance during the 1980s that significantly changed corporate culture. The Times is right that this revolution renewed the wealth of the upper quintile of American workers. But they’re wrong to think that’s because financial instruments like junk bonds “moved” wealth. The story is more complicated—and more interesting.
The backstory. To remedy the economic dysfunctions brought on by the Great Depression, the economic policies of the New Deal sought to manage and coordinate private enterprise. World War II accelerated this trend. The War Production Board established in 1942 allocated raw materials and coordinated industries in order to put American economic resources toward military purposes. The state oversaw labor relations, rationed food and fuel.
When the war ended, most forms of direct government control over the economy were set aside. However, the general trend throughout the 1950s and 1960s was toward corporate consolidation. The automotive industry shrunk to the big three. AT&T ran as a government-protected monopoly. Many other large firms, though not officially monopolies, settled into relatively stable positions within their industries.
This was the era of professional management, epitomized by Robert McNamara, one of the so-called “Whiz Kids.” They took over as young executives after World War II, applying modern principles of planning and financial analysis to modern corporations. In 1960, McNamara became President of Ford Motor Company, the first from outside the Ford family.
McNamara’s ascent typified the trend. During an earlier era, the owners of capital typically ran the companies they owned. Carnegie ran his steel company. Ford his motor company. Or, as was the case with General Motors, charismatic leaders like Alfred P. Sloan dominated. In the postwar years capital ownership became more and more dependent on professional managers.
As this professional class of managers and executives settled into its role, corporate America came to revolve around their interests, the most important of which was economic security. Recessions came and went. Factory workers were laid off during bad times. But members of the managerial class never lost their jobs. That was the implicit white-collar social contract: lifetime employment with regular promotions.
The Revolution. Economists use the term “rent-seeking” to describe our efforts to find ways to extract more wealth from organizations than we contribute. The social and economic arrangements of the first three decades after World War II allowed the managerial class in America to get “rents” from the corporate system.
How they did so was legion. But it meant that the large corporate structures of our postwar economy began to accumulate a great deal of profit-making potential that was either inconvenient for the managerial class to exploit—or in some cases positively at odds with their self-interest. What CEO wants to divide his company into five pieces, none of which will have the high status (and high pay) of the big conglomerate?
The Reagan administration embarked on de-regulation, and although the range of industries was limited, it sent a larger signal: Washington will not defend the corporate status quo. Meanwhile, Michael Milken pioneered the use of junk bonds to aggregate huge new pools of capital. Financial analysts of the sort Mitt Romney oversaw at Bain Capital began to analyze the profit-making potential of companies: not as they were being run by current managers, but as they could be run if reorganized and run by somebody else.
“Reorganized” is one of those anodyne words that mask harsh realities. You don’t reorganize a well-organized operation. As the leveraged buyouts proceeded, a new class of hard-driving managers came on to the scene, often cutting layers of management. This marked the end of white-collar social contract. No more lifetime employment. No more smooth escalator rides up the ranks of management.
The result. The upper middle class world responded to the leveraged buyout revolution by upping their commitments to education and economically oriented self-discipline. The old white-collar social contract subsidized three martini lunches and all they represented. Junk bonds put an end to that culture. And the white-collar parents who suffered from that sudden and severe change in corporate culture told their kids that it’s a very tough, competitive world out there, one with no guarantees.
I’ve seen the difference this makes. As college students in the late seventies and early eighties, members of my cohort still presumed the old social contract, which unbeknownst to us was already being broken. We didn’t worry very much about majoring in something practical or lucrative. We coasted along in the decadent final years of post-sixties heedless hedonism, enjoying the youth-culture equivalents of three martini lunches.
That’s changed. In The Organization Kid, David Brooks described the hyper-focused teenagers and twenty-somethings who throw themselves into the meritocratic competition for success. They are Belmont residents, as Charles Murray calls them in his new book, Coming Apart, a very important and fundamental study of the real and deep inequalities in our society. One word best characterizes them: neo-bourgeois.
So, yes, the editors of the New York Times are right. In some small way Mitt Romney and Bain Capital contributed to income inequality in America. The leveraged buyouts of the 1980s destroyed an informal but powerful system of upper middle class subsidies, ones that allowed for habits and mentalities that lead to unproductive behavior. Once that system was dismantled—something Michael Milken deserves credit for—habits and mentalities changes. Well-to-do families and elite institutions adjusted, shaping a generation of go-getters.
But that’s not the whole story. Why hasn’t middle class America been able to keep pace with the top twenty percent? The Times consistently insinuates that the success of the top twenty percent has somehow been stolen from the rest of us (“moving wealth”). A better explanation: the policies favored by the Times that subsidize unproductive behavior, leaving most Americans disarmed in the face of a rapidly changing and harshly competitive global economy. It seems a paradox, but it’s not: guarantees of economic security have a way of transferring wealth—or at least wealth-creating virtues—away from their beneficiaries.
R.R. Reno is Editor of First Things. He is the general editor of the Brazos Theological Commentary on the Bible and author of the volume on Genesis. His previous “On the Square” articles can be found here.
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