Inequality, upward mobility and the problem Bain capitalism creates for Republicans

by Ryan Streeter on January 26, 2012. Follow Ryan on Twitter.

Tyler Cowen offers welcome thoughts on an illuminating and productive debate that’s been going on the past few weeks over the relationship between inequality and upward mobility.

He writes:

I  see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top…If we could fix these problems, that would mean a smaller financial sector, less moral hazard, better allocation of capital, and for most/all income classes rates of income growth comparable to the 1948-1972 period, chop it up as you wish.

The debate he’s responding to was prompted by Scott Winship’s critiques of Alan Krueger’s use of data to construct his “Great Gatsby” chart showing that countries with the highest inequality (like ours) have the lowest levels of upward mobility. This “Great Gatsby” view of the world, obviously, has been central to Obama’s attempt to reinvent himself as a warrior against inequality going into the 2012 political cycle (I have been too busy to cover this debate as it unfolded, but Scott’s latest post is here, and it contains links to various critics and past posts in which he lays out his objections to Krueger’s claims).

The reason I think Tyler’s words are important to digest is that across the spectrum of the interlocutors involved in this debate, most would agree that the evolution of finance capitalism in the past generation has created a larger class of extraordinarily wealthy Americans while middle class families have not experienced proportionate gains  (even if, as Scott has been arguing, they haven’t experienced shrinkage or insecurity in the way Krueger, his allies, and Obama want to claim).

This reality – which we routinely hear described as “stagnation” in the middle class compared to the gains accruing to finance since the 1980s – is a dilemma policymakers and politicians have to confront in our generation. Like it or not.

And it is for this reason that Romney’s defense of his years at Bain, and the many arguments of those who have defended him, are largely falling flat. Their arguments are incomplete. One can acknowledge that Bain-like capitalism has been a necessary phase in our economic history and has contributed positively to growth while still admitting that such capitalism has either created disruptions in the economy and labor force or at least hasn’t directly helped fix those disruptions.

Making only the first part of that argument (Bain capitalism, in virtue of being capitalism, has been an unmitigated force for good!) doesn’t make you any more of a free market purist than the person who argues both points. Wanting to understand how governments, demography, and institutions might be slowing income growth and limiting opportunity is at least as  worthy job for free marketeers as defending the evolution of finance capitalism.

This is especially important because, if we’re honest, the jury is still out on just how positive an effect Bain and its private equity peers have had on job growth. It’s clear they’ve contributed to GDP growth, and it’s hard to argue against the positive effects they have created by clearing out inefficiencies in the marketplace that slow growth. But that’s different than saying they’ve improved the economic prospects of Main Street.

For instance, I still have yet to see a persuasive case that Bain-style capitalism has led to the creation of new, fast-growing entrepreneurial firms – which create most of the net new jobs every year. Personally, I hope there is a connection. But Bain’s defenders haven’t been persuasive on this point. And until they are, they will sound as though they are merely defending the rearranging of capital by the few in ways that ultimately benefit investors the most. And if they aren’t persuasive soon, Romney will continue, as Ross Douthat recently wrote, to display “a tone-deafness that could cost him the presidency.”