Newt and Co. abandon their principles to pile on Romney

Over the last few months, we've grown accustomed to people on the Left attacking capitalism in Occupy camps across the nation. Proclaiming themselves "the 99 percent," these protesters seize public land — and in some cases, private land — to pitch tents and shout about the inequities of government bailouts and Wall Street "fat cats." For a while, Occupiers became quite a fad.

Who knew that Republican presidential candidates would be joining them? In New Hampshire this week, Newt Gingrich led fresh attacks on Mitt Romney's past Wall Street experience with Bain Capital, a firm that used leveraged buyouts to take control of struggling companies. Gingrich was soon joined by fellow GOP presidential aspirants Jon Huntsman and Rick Perry, all of whom accused Romney of being a Gordon Gekko-style corporate raider that profited by destroying jobs, rolling in dough while average Americans suffered.

If Republicans can't stand for conservative principles among themselves, what confidence can we have that they will stand for them in a general election, or in office?

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At the center of this attack is a new 27-minute film (being promoted by a super PAC that supports Gingrich) about Romney's experience at Bain. The film will get distribution thanks in large part to a $5 million contribution from Gingrich supporter Sheldon Adelson, who is active in conservative causes. Adelson owns the Venetian/Palazzo casino, entertainment, and retail complex in Las Vegas, the only non-union shop on the Strip. (Full disclosure: Last year, I stayed at the Venetian at no cost at the request of the casino while covering a Salute the Troops weekend that honored and entertained wounded combat veterans.)

This funding is rather ironic considering the attack on Bain, and by extension, capitalism. Bain's business was and is, essentially, gambling on businesses. Romney and other speculative capital firms like Bain sought out struggling companies that showed promise of future growth, and placed very large, significant bets on their future by buying them outright or purchasing a controlling interest, to restructure them for survival. That process will often result in downsizing to generate more efficiency and a more competitive organization.

This process — generally referred to as creative destruction, a term coined by economist Joseph Schumpeter — is not painless. It's also not limited to private-equity buyouts, but happens whenever one company buys another, as anyone who has survived, or more to the point, not survived, a merger or acquisition knows. One of the first strategies employed is the elimination of duplicate functions, which usually results in lost jobs, and the defunding of profitless efforts, which also results in job losses. That's especially true if the purchase involves bond sales, which are loans provided by investors in the business. The larger the sale, the more pressure there is to increase efficiency to meet debt payments and provide investors a healthy return.

None of this, by the way, is terribly esoteric. This is a basic process in capitalism — the use and redistribution of capital to the most efficient uses. When done properly, the result is stronger, more efficient companies, more secure employment, and profit that can get invested in other ventures to create even more jobs. When done poorly, investors lose their shirts and more jobs get lost. When not done at all, struggling companies fail — and those jobs still get lost, while assets in personnel and infrastructure go to waste, and less capital exists to invest in other startups.

How did Bain do in private equity turnarounds? According to The Wall Street Journal, about average. Of 77 Bain ventures on Romney's watch, 17 filed for bankruptcy within eight years of Bain's investment (although several of those took place after Bain sold its interest and others took control). That 22 percent bankruptcy rate was slightly higher than the 15 to 20 percent rate common during that period. The difference can be attributed, the Journal notes, to the aggressive acquisition policy of Bain, which targeted riskier, smaller firms. Clearly, the business model of Bain was not "looting the companies," as Gingrich accused this week, and the profits from Bain's ventures helped fuel its investments in companies like Staples and Domino's Pizza, which employ tens of thousands of people today.

As Fortune reported Monday, the man who started this line of attack really should know better — and not just because he launched a stirring defense of capitalism when heckled by Occupiers a few weeks ago on the campaign trail. After leaving Congress, Gingrich joined an advisory board for Forstmann Little, which happened to be one of Bain's competitors in the leveraged-buyout industry. The New York Times reports that Gingrich invested in Forstmann Little portfolio companies. It's hard to imagine that Gingrich would have advised Forstmann Little to eschew the creative-destruction process, especially while he invested in the process itself.

Until recently, Republicans used to cheerlead this very system as providing economic growth and innovation, at least until this week when they became shocked — shocked! — to find gambling in the capital casino. As the Gingrich super PAC uses casino money to proclaim that shock, perhaps another question should be asked of the Republicans joining the outrage. They have all pledged to reduce the size and scope of federal government. Perry, for instance, pledged to eliminate three entire Cabinet-level departments, and Gingrich has made the size of the federal budget a priority, too. Exactly how do they plan to accomplish those goals without cutting jobs — perhaps hundreds of thousands of them? If the arguments for downsizing the federal government are based on red ink, inefficiency, duplication, and waste, perhaps they should explain why those arguments work for the public sector but don't in the private sector.

Presidential contenders face enormous pressure to win, and the temptation to go all in on a promising line of attack is overwhelming when nothing else appears to be working. However, voters want a candidate that champions economic growth and innovation, not the same kind of class warfare and demonization that has brought us stagnation and misery. If Republicans can't stand for those principles among themselves, what confidence can we have that they will stand for them in a general election, or in office? And if they argue that downsizing to rescue struggling organizations is a disqualification, what confidence can we have that they will have the nerve to reduce spending and the bureaucracy that Republican voters want right-sized?