There is no doubt that the tools of this efficiency movement helped to build the economy of the nineties, and this fact makes Bloom’s social question somewhat more complicated. That booming decade, with unemployment declining by 3.5 percent and real GDP growing by nearly 4 percent each year during the Clinton administration, depended heavily on a spike in productivity, which itself had hinged on the wide deployment of computer technology to displace more expensive forms of labor. Economists believe there was a clear connection between the labor-market changes in the early nineties and the great profits that soon followed. “Could we have had the productivity boom without displacement? My answer would be no,” says Frank Levy, an MIT economist.
The trouble, Levy believes, was that this new shareholder-value-driven system had no built-in mechanism of regulation, and its incentives geared CEOs toward shortsightedness and recklessness. “Any profit-making organization was going to take advantage of the opportunities to lower costs and become more efficient by taking advantage of foreign producers and installing technology, both of which meant losing jobs,” he says. “But decision-makers fully exploited at every turn the market power that they had. The question is, why were we so willing to exploit everything?”
The obvious answer is financial reward. But there may have been a cultural component, too. By the time Mitt Romney left Bain Capital for good, in 1999, American CEOs looked very different from the predecessors he had met in the seventies—the genial paternalists, spending their careers at a single company. More and more, they were pure meritocrats—well-educated, well-compensated, moving frequently between jobs and industries, trained to look ruthlessly for efficiency everywhere. They look a great deal more, in other words, like Mitt Romney.
If you trace the public controversies over Bain Capital over time, you can see how the obsession over shareholder value and efficiency proved not just inequitable but destabilizing. A half-decade after Harold Kellogg showed up in Boston, Bain Capital and others were sued by shareholders of Stage Stores, a Texas retailer, charging Bain of helping to manipulate the stock. The lawsuit accused the company of giving misleadingly optimistic performance projections, which sent the retailer’s stock soaring past $50 a share, at which point Bain Capital unloaded virtually all of its stock. When more realistic earnings projections were released, Stage Store’s stock plunged 58 percent in a single day. The lawsuit was later dismissed. But then, shortly after Romney left came the KB Toys fiasco, in which, another lawsuit alleged, Bain Capital and KB executives took a dividend recap of over $120 million two years before the company collapsed into bankruptcy.
No court found that Bain Capital did anything illegal in these cases. But these episodes still give a glimpse of the evolving problems of the shareholder-value model, and some consequences of the trade-off we made of stability for growth. In some economic moments, a program of radical efficiency can be good for society; at other times, when there is less fat to trim, the same instincts can lead a company to cannibalize itself. “We’re living in a crueler capitalism,” Fligstein says. By some measures, he adds, “we’ve gone really quite a long ways. And nobody really knows what the tipping point is, or how you go back.”
When Romney was elected governor of Massachusetts in 2002, one of the members of his transition team was Tom Stemberg, the founder of Staples. The two men were talking one day, and Romney asked Stemberg if he had any ideas for how he ought to govern. Stemberg, thinking off the top of his head, had two ideas. “One was to blow up Logan airport and start over.” That didn’t make it far. The other one did.
Stemberg served then (as now) on the president’s council of Massachusetts General Hospital, and he remembered a conversation hed had with a doctor named Peter Slavin, who has been the chief executive of that hospital system for most of the last decade. “[Slavin] mentioned this huge problem,” Stemberg told me, “which is all these uninsured people clog the ER.” The hospital had to treat them. “There was a law that said that all the insurance companies had to fund the free care. That system made absolutely no sense. “It was, as Stemberg told Romney, “the least efficient way to serve them.” The conversation moved on, and Stemberg figured his ten-minute-long career as a policy maven was over. “I figured that’s the end of that.” But Romney’s staffers, consulting with experts, began to work out a fix, requiring almost every citizen in the state to carry insurance, and providing subsidies for those who couldn’t afford it. Eventually he was heading down to Ted Kennedy’s office in Washington to explain the program, PowerPoints in hand. Three and a half years later, Romney introduced his universal-health-care plan, and in the press he credited Stemberg with suggesting it.