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Mitt Can Win by Battling America’s Debt Addiction

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
February 3, 2012
Financial Times


Florida's Republicans have spoken and Mitt Romney has regained his frontrunner status. But like George H.W. Bush – another decent, diligent, dynastic Republican – Mr Romney has an enemy more terrible than any mortal rival: he has a problem with the Vision Thing. Despite the fuss about his tax returns, his trouble is not that he made millions as a private equity baron. It's that managerial credentials are all he has going for him. His campaign is devoid of an animating idea.

So here is a modest suggestion for Mr Romney – one that allows him to be both staunchly capitalist and stirringly radical, pro-business and yet mad as hell. Mr Romney should declare war on the central flaw of modern American capitalism: its addiction to debt. Government debt, household debt and especially bank debt should become his whipping boys. Equity-based capitalists – entrepreneurs who are willing to take the risk of owning things – should become his heroes.

It is a good message for Mr Romney, and not only because it's on the mark. It would allow him to knit together technocratic insights that he espouses anyway. And it would give him the opportunity to blend his biography with his campaign pitch, playing up his strength as an equity investor while connecting with popular fury about the hangover from the credit bust.

When critics attack his record at Bain Capital, Mr Romney should meet them with firmness (which shows character) and contrition (which shows he is not a teetotalling robot). Look, he should tell people, private equity guys buy companies, shake them up, destroy unproductive jobs and create better ones: I won't apologise for that. But yes, he should continue, I have learnt the painful lesson of the credit crisis. Private equity funds often load companies with crushing debt burdens. This leverage can be too much.

Mr Romney could attack debt in the public sector, and he'd find it easy to do that. Between 1789 and 2008, 43 US presidents piled up a national debt of $6.3tn. The Obama administration is on track to borrow more than that in just four years. Admittedly, the president had no choice but to borrow in the short run, given private-sector deleveraging. But his failure to tackle the long-term deficit leaves Mr Romney ample scope for attack.

Next, Mr Romney could take aim at household debt. Sticking to his capitalist principles, he could point out that the mortgage bubble was encouraged by government tax relief for home loans; appealing to the struggling middle classes, he could point out that these subsidies serve to coddle millionaires. What's more, the subsidies fail to drive America's rate of home ownership above that of comparable countries. Mr Romney should take on the mortgage-industrial complex, confident that the facts are on his side. Finally, Mr Romney could attack debt in the banks. However much bank bosses shriek that leverage limits are "anti-American", banks could support job creation with far less debt and far more equity. A lender's capacity to hold assets is independent of its mix of liabilities: a bank that wants to lend $100 can do so by raising $1 of equity and $99 of debt, putting the entire economy in jeopardy, or it can raise $20 of equity and $80 of debt, sparing taxpayers the risk of a bail-out. Mr Romney's pitch to Main Street should be: trust me to clamp down on Wall Street. I understand business. I know that when bankers say they can't operate without that wacky leverage, they are making stuff up.

You can anticipate the pushback: if banks could do their work with much less borrowing, why do they claim otherwise? This question is a gift to Mr Romney, since it gives him a chance to showcase his pro-capitalist side. Banks gorge on debt because of government distortions, he could argue: the implicit promise of a bail-out constitutes a subsidy for heedless borrowers, and the tax code idiotically favours leverage by taxing equity more heavily than debt. A system that levies a seemingly modest 15 per cent tax on dividends on top of a tax of up to 35 per cent on corporate profits exaggerates the sense that private equity barons pay a scandalously low tax rate; but Mr Romney doesn't need to say that. He should simply point out that favouring debt over equity makes no more sense than favouring coal mines over wind power.

Of course, Mr. Romney may feel this is all too radical. Having mocked Newt Gingrich for his grandiosity – the man proposed a moon colony! – he may feel he is better off without a big idea. But the next US president must be ready to make bold arguments and win them and to do so in the face of Washington's maddening gridlock. The American people may not be ready for Gingrich and his 51st state featuring citizens in spacesuits. But they don't love empty suits, either.

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