To Barack Obama and most liberals, it's no less obvious that there's something faulty about this model of financial capitalism as it has been practiced over the past 30 years. Leveraged buyouts load companies with debt, extract value for middlemen and displace workers. Heads-I-win, tails-you-lose practices in the financial sector, regulatory loopholes and tax advantages produce runaway winners like Mr. Romney while middle-class workers lose ground.
Both positions in this argument -- that Mr. Obama doesn't believe in capitalism, that Mr. Romney doesn't care about workers -- are distortions. But Mr. Obama has the upper hand for reasons that go beyond the truism that when one guy wields the hammer, the other guy looks like a nail. Here are five reasons the Obama campaign wants this subject -- what Mr. Romney did at Bain -- to stay front and center.
• The president is comfortable attacking the negative consequences, if not the fundamental concept of, free-market capitalism: outsourcing and offshoring, shuttered factories, cheap Asian imports and declining middle-class wages. These have been familiar resonant notes for Democratic candidates for 25 years. Mr. Romney, on the other hand, doesn't much want to defend creative destruction. He boasts about building Bain, but won't discuss it in detail because it opens up a conversation about those same unattractive consequences: lost jobs, bankruptcies, private pensions dumped onto the federal government.
• It's not clear that private equity is good for America. You'd think that if private equity made businesses more efficient and valuable overall, there'd be clear evidence to support it, but there isn't.
Private equity firms earn most of their money through financial engineering. A big share of their returns comes from "tax arbitrage" -- figuring out how to exploit loopholes to pay less to the government. Because interest is a deductible business expense, debt financing means they often pay little or no corporate tax. Private equity's reliance on leverage can also magnify short-term earnings without leaving the companies they manage more valuable overall. One legal but dubious practice that private equity firms engage in is paying large "special dividends" out of borrowed money.
There's some anecdotal evidence that the well-regarded Bain has been a better owner than most. But there's no real way to evaluate that either.
• Bain shows how Wall Street is rigged in favor of the rich. Private equity firms, like hedge funds, earn their money through a 2-and-20 structure, which means investors pay a 2 percent annual management fee and give away one-fifth of their profits. According to one study, firms like Bain get two-thirds of their earnings from the fees, rather than from the share of profits. According to another study, private equity firms manage to keep 70 percent of investment profits for themselves. They've figured out how to be hugely profitable even when firms they own go bankrupt. And because their gains come as "carried interest," private equity owners are taxed at 15 percent, rather than the top corporate rate of 35 percent.
• Mr. Romney's Bain career is a story about rising inequality. It's telling that George Romney, Mitt's father, made around $200,000 through most of the years he ran American Motors. Doing work that clearly created jobs, the elder Romney paid an effective tax rate that averaged 37 percent. His son made vastly more running a corporate chop shop in an industry that does not appear to create jobs overall. In 2010, Mitt Romney paid an effective tax rate of 13.9 percent on $21.7 million in investment income.
This difference encapsulates the change from corporate titans who lived in the same world as the people who worked for them, in an America with real social mobility, to a financial overclass that makes its own rules and has choked off social mobility. The elder Romney wasn't embarrassed to explain what he'd done as a businessman or to release his tax returns.
• Bain reminds everybody how rich Mr. Romney is, how different that makes him from ordinary people and how this kind of advantage perpetuates itself.
Five years ago, he was already worth $190 million to $250 million, not counting up to $100 million in trusts for his children and grandchildren and not counting real estate worth tens of millions more. It's not clear how he turned a maximum contribution of $450,000 over 15 years at Bain into an IRA worth between $21 and $102 million (where it grows tax free). What is clear is that he massively exploited a tax break meant to encourage middle class people to save more.
There's no reason to think that Mr. Romney favors a version of capitalism that subsidizes financial engineering and ignores the victims of economic transformation. As governor of Massachusetts, he created a subsidized insurance system that filled the biggest hole in the safety net and became the model for Mr. Obama's health care plan. Take away the political context, and one can imagine the two of them agreeing about a lot else as well.
But in the milieu of today's GOP, Mr. Romney can never acknowledge the need for a better safety net. Without one, the vision of capitalism represented by Bain Capital becomes even less appealing.