Thursday, September 16, 2010

The unfortunate structural issue with Mitt Romney

Being at heart a business man myself, there is much to like about Mitt Romney.  He's articulate, smart as hell, and knows how to sell.  His resume is of course, perfect.  He returned to Bain and saved the elite consulting company when it was staring at bankruptcy.  His successful track record has much to recommend him.

All things being equal, I am predisposed to listen whenever he speaks.  There is no doubt in my mind that he could enter a room of either Harvard sociologists and economics professors espousing the evils of our present culture, or the Cato Institute, and induce either group to feel comfortable and favorably disposed towards him.  That is an essential trait of being a consultant.

But therein lies the issue for many voters.  His selling ability, so effective in the corporate world, does not necessarily translate well in politics.  People want someone they can trust.  His artfulness for many is construed, accurately or not, as a lack of moral fiber.  More on that in a moment.

Romney instituted Obamacare Light in Massachusetts when he was governor.  For devotees of the free market, that is a problem.  To counter that concern, Romney could have said he was governor in a blue state that insisted on universal coverage, so he gave one to them that at least tried to use market forces to contain costs.  Unfortunately the numbers show the inherent difficulty in doing so.

That would be his best cover story IMHO.  It might even be correct.  But Romney is not saying that. He insists that it's a viable alternative and defends what is very close to Obamacare without clearly enunciating the differences.

The biggest issue is that Masscare is NOT meeting its goals.  Health care costs are rising quickly and the program is in the red, and getting redder.  Citizens will have to pony up more taxes or revamp the system.  Romney's response is that in the end, that is the system Massachusetts wanted, and if their citizens are fine with paying high health care costs, it is their decision.  This is admittedly a reasonable and sound rejoinder.  But it leaves many conservatives with an unsettling taste in their mouths when it comes to pulling the voting lever.

Romney's response to Obamacare, regardless of its similarity to Masscare, is very consistent.  He insists that health care is at most a state solution, allowing 50 experimental labs in democracy and governance.  In this, he is also correct and in line with the Constitution.  He has said that while Masscare was right for that blue state, other states may choose a more market oriented solution and the effectiveness of each can be compared.

Unfortunately the Left smears Romney with a much simpler message: Masscare=Obamacare therefore Romney must like it.  And on the right, Romney's refusal to freely admit that it is very difficult to contain costs hurts him in any debate or interview, raising the suspicion that the Left is correct.

But ultimately for Romney, Masscare is only representative of the deeper trust issue.  He represents to many people the slipperiness and moral vacuity of big business.  All the large consulting agencies like Bain and McKinsey, supposedly the stalwarts of business and free markets, are making HUGE fees on government expansion and the prospect of health care reform and global warming.  They are quietly reigning in hundreds of millions in fees getting next to Al Gore and the big banks who all sniff a huge paycheck in increased regulation and bureaucracy.

Consultants may reasonably respond that if customers, including the government, wish to spend money, it only makes sense to take advantage of it.  And that is true.  It is also an insincere oversimplification and ultimately false.

In fact, many consultants are indeed progressives.  The well worn image of business people using market tactics to take advantage of the government and the populace is a popular one, but fundamentally incorrect.  Large consulting agencies are not on the whole merely taking advantage of new customer demand; they are actively shaping it.  A short review of McKenzie's website could not paint a clearer picture of their activism (do not be deterred by the misleading title).  If voters believe that all lobbying is done on K Street, they do not understand how companies like P&G and GE (the largest receiver of government subsidy in the world) and consulting companies work in the real world.  There is a reason GE owns the Progressive MSNBC network.

The wisdom of the crowd intuits this fundamental issue with business, if only dimly.  There is no morality there; only money.  And what principle there is, is fundamentally progressive.

One might reasonably ask what MBA schools are teaching, if not the popularly decried concept of free market capitalism.  The simple truth is that most free market professors are run out on a rail from MBA schools.  And the telling truth is that there is not one business consulting agency that is publically defending free markets or preaching the dangers to the economy of destroying them.

It is much more profitable for consultants to play the symbiosis game of crony capitalism.  Government regulation and subsidy  is an integral and profitable strategy in every Fortune 50 company in the USA.  For consultants, it is an annuity that forms the core of their income streams.  They are proud of it.  If government spending is destroying the viability of the American economy, consultants are happy to ride the ship all the way to the bottom.  Would you trust such a company with financial matters?  They can not even measure the destruction of the federal Balance Sheet and their active participation in destroying it.

But the structural problem is worse. The pyramid scheme that dominates all consulting and auditing firms does not only preclude excellence in the profession, its structural purpose is to enrich the salesmen at the top of the pyramid.  Most consulting firms and auditing firms could not solve a business issue or find fraud if you put it in front of them.  Their structure precludes it.  The miserable track records of large service firms speak for themselves.  Give me half as many seasoned business executives, at 3 times the pay of a green MBA or CPA, and I'll do an audit for you.  I'll also turn your company around.  But send me a bunch of green CPAs working 70 hours a week with no industry experience, and I'll defraud the books for any amount you want, secure in the knowledge that they'll never find it.

The only way this pernicious situation is allowed to exist in the marketplace is because  the laws have been written to preclude liability in all cases except for blatant failure.  Auditors now only identify 'exposure.'  They have been relieved of any ability to do what most reasonable free marketers expect them to do in their purported role; make an informed opinion on viability, honesty and representative disclosure.  Even the laws on disclosure have been bastardized to obscure this fiduciary duty.

The service industry can not hope to do its job effectively in its current structure.  The negative reputation of consultants and auditors is well earned.   It is incented to produce sales, not fiduciary duty or excellence.  It is a game of fads driven by management books worth about as much as the pop psychology books that the social sciences produce.  You get to be a partner in those firms, not because you can improve the profitability of a client, but because you're a good sales person.  Most employees intuitively understand this even if they are not close enough to the issues to understand why.

This predicament is impossible without the explicit aid of the law.  The dirty secret is that most consulting proposals and audits are not worth the paper they are written on.  And until businesses turn them away, and boards get serious about demanding excellence instead of rubber stamps, the structural issue will continue.  The answer is not more regulation.  It is a simple one; holding boards and upper management accountable for breaches of fiduciary duty and malfeasance.  Screw Sarbanes Oxley.  But more on that topic another day.

What does all this have to do with Mitt Romney?  The problem with Mitt is that he is not only a product of that environment, he excelled in it.  Here again, the wisdom of the crowd perceives his delivery as slippery and not based on principle.  Trust is the number one issue with politicians for voters, superseding even political philosophy.  With Romney the trust issue is prevalent wherever he turns.

So the fundamental question is very simple.  "Can we trust Mitt Romney?" 

Unless he publically addresses these fundamental issues, for most voters on the right and the left, the answer is going to be, "No."

Voters are much smarter than the elites believe.  If Romney wants to be President, he needs to stop playing strategy and polling and slick political advisor schemes, and start talking plainly.  Given his position and experience, an honest discussion about crony capitalism would be a good place to begin.  Given the state of the economy, the timing could not be better.

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