The Upside of Inequality

Last October 25th, I put up a post entitled “Income Inequality”. It generated pretty good readership as well as quite a few comments to me. There was little disagreement with my post. One long time MR reader surprised me, however. He dared me to read a book entitled THE UPSIDE OF INEQUALITY, How good intentions undermine the middle class, by Edward Conrad (Penguin, 2016). It author, Edward Conrad, was an original partner at Bain Capital (of Mitt Romney fame) and now is a visiting scholar at the American Enterprise Institute. His e-mail to me was not strident but he challenged me as I have said more than once in MR that I make a regular practice of reading material that I generally disagree with simply to question and test my currently held beliefs. His approach was a brilliant piece of mind-manipulating gamesmanship. How could I not read the book as I said reading opposing opinions had been my method of operation for decades?

Hence this post.

The book is not an emotional diatribe at all. If any, to use Federal Reserve speak, it is almost entirely data-driven. What I did like about it was that he mouthed the same top line statistics that one sees and hears across all major media but then he dug deeper with a special emphasis on the demographics. He truly proved that one can drown in a river with an average depth of six inches. In the introduction, he states: “If you take nothing else away from this book, I want you to remember this: Higher payoffs for success increase the supply of properly trained talent, and these higher payoffs motivate innovators, entrepreneurs, and investors to take risks. These two effects loosen the current constraints on growth, which frees the economy to grow faster.”

He then goes on to make a spirited defense of the 1% in American society. The argument is not new but he argues that the super wealthy, even after taxes, do not spend a large part of their incomes. After taxes and charity (which can be substantial among the 1% and especially the .1 of 1%), they reinvest a great deal of their income. This stimulates growth and creates jobs. Those who are fans of income distribution do not seem to grasp that basic truth according to Conrad. He is kind to immigrants and is especially fond of the approach that Canada has taken in recent years of recruiting ultra-high-skilled young people as a way to accelerate economic growth.

Do I buy the whole story? His arguments are well reasoned but he makes one big error in my view. Conrad states that if we raise taxes on the 1% they will not be incentivized nearly as much as now. Observing some very wealthy people over my fairly long life, I beg to differ. Serious financial players tend to love “the game.” Yes, if taxes became confiscatory (60-70%) as a few are now touting, some may slow down or vote with their feet and leave America. I feel it would take a lot to really kill incentives among the Uber-rich. Even modest private investors including myself, enjoy the action and would not walk away from it unless the tax bite and regulations became extremely draconian.

He also makes no mention of possible class warfare or civil unrest if income inequality continues to grow. Again, most of his comments are interpretations of real data that is carefully researched so sociological prognostication does not find its way in to the text.

His admiration for entrepreneurs is sincere. What I really like is that he did not sugar coat the process. Most will fail and, especially in tech, the payoff to those who succeed will often generate a lottery sized windfall. These innovators will trigger significant growth. So, in essence, he is saying that by leaving the 1% alone, we can lift many up in our society as their investments in innovative ideas and technologies will create new jobs, new industries and wealth. Also, to his credit, he admits that crony capitalism does exist in our society but those with connections are hurting growth by using their political influence to keep the playing field anything but level.

Most of us would agree that in a free market society there will always be income inequality. As I have written before in MR, some people work harder, some are smarter, some are luckier than most of us and some are unknowingly well positioned just as their industry is leaving the station. He clearly agrees with this and also takes on current French economic icon Thomas Piketty whose CAPITAL IN THE TWENTY-FIRST CENTURY a few years back was a clarion call for aggressive income distribution. Piketty attacked the wealthy saying much of their income came from passive income (dividends, bond interest, rents). Well, where did the money come from to generate the income? From savings. We all know a number of well off mature people who live largely on dividend income. They are not the idle rich a la the British aristocracy in the 19th century. They worked hard, saved, and invested.

As I mentioned, I do not buy his entire thesis. Inequality is growing which concerns me. Yet Conrad states his case with careful statistics and inarguable demographic data. Do I blame the media for not reporting on this topic in detail? Not really. We live in a world of 30 second sound bites, and, sadly, tweets. How do you cover a topic as involved as this for mass consumption?

I thank my reader for challenging me to read THE UPSIDE OF INEQUALITY. The book did not sway me completely but it made me think. You cannot ask for more.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com