The Advantages of Accidental Job Creation

Writing in The New York Times, Steven Rattner, who oversaw the Obama administration's car industry bailout as a Treasury Department official, defends his former boss's attacks on Mitt Romney's record at Bain Capital. Rattner, who co-founded his own private equity firm, the Quadrangle Group, after working as an investment banker, is embarrassed about appearing in a Romney ad that shows him defending the presumptive Republican nominee's former line of work. To atone for that, he criticizes Romney's boasts about the value of that work, noting that the former Massachusetts governor wants to take credit for every job added at businesses in which Bain invested while he was there, even if the employees were hired years after he left Bain, yet disclaims responsibility for jobs shed at those companies if it did not happen when he was running Bain. More to the point, Rattner says, creating jobs was not Romney's job:

In fact, Bain Capital—like other private equity firms—was founded and managed for profit: ideally, huge amounts of gain earned legally and legitimately. Any job creation was a welcome but secondary byproduct.

The language in one prospectus seeking Bain Capital investors was clear: "The objective of the Fund is to achieve an annual rate of return on invested capital in excess of the returns generated" by other investments. Any job creation was accidental.

But that is true of every successful business. A company that sees job creation, as opposed to profit, as its goal will not stay in business long. It will keep hiring and employing people even when the cost is not justified by the return. While the goal of making a profit leads a company to minimize costs, the goal of creating jobs means maximizing costs: rejecting every labor-saving innovation, shunning organizational efficiencies, and hiring people just for the sake of putting them to work, even if the work is not worth the wage or not worth doing at all. A company operated that way eventually would employ no one.

Rattner knows all that, of course. Regarding Bain Capital's efforts to make companies more efficient (which often means employing fewer people), he says, "That's not wrong; it's part of capitalism. Whatever its flaws, private equity has made a material contribution to sharpening management." But Rattner echoes the Obama campaign by contrasting Romney's work at Bain with Obama's work at the White House. While creating jobs was not Romney's job, he implies, it is the president's job. Here is how Obama put it on Monday:

"If your main argument for how to grow the economy is, 'I knew how to make a lot of money for investors,' then you are missing what this job is about," Mr. Obama said, stressing the words "this job" in his answer.

"It doesn't mean you weren't good at private equity," Mr. Obama added. "But that's not what my job is as president. My job is to take into account everybody, not just some."

Mr. Obama said he views private equity firms like Bain Capital as a "healthy part of the free market" designed to "maximize profits." He said there are "folks who do good work" in that line of work.

But he made clear that he views those who work in private equity — and Mr. Romney in particular — as limited by a view of the economy that prioritizes profits above all else. The president said that view was too limited at a time of economic struggles in the country.

"Their priority is to maximize profits, and that's not always going to be good for businesses or communities or workers," he said.

Referencing the videos his campaign has released in the past two weeks that featured workers laid off by Bain companies, Mr. Obama said: "I've got to think about those workers in that video just as much as I'm thinking about folks who have been much more successful."

In other words, Romney's job as Bain's general partner was to wring inefficiencies out of the economy (one company at a time), while Obama's job as president is to put them back in. Obama's job fetish—as reflected in the way he measured the success of his stimulus package and in his embrace of the broken planet fallacy, which sees global warming as a boon to the economy—prizes waste. As far as Obama is concerned, the more people it takes to accomplish a given task, the better. Given his background, Romney probably is not used to thinking that way, but he already has conceded that boosting employment is one of the president's most important functions (one that nevertheless is mysteriously absent from the Constitution), arguing that voters should choose between him and Obama based on how many jobs they promise to create. Hence Romney is not well positioned to present an alternative view: that the government's job is not to create jobs but to create the conditions in which jobs are apt to be created—not by employment-maximizing central planners but by self-interested, profit-seeking individuals who create jobs by creating value.