What's Wrong with Inequality?

Entrepreneur Vision Concept

Do you, the reader, own any Apple products? Are there Dell computers in your office, or at home? Have you purchased anything on Amazon in the past month?

It’s a question worth asking considering all the present hysteria about wealth inequality.  Figure that Apple co-founder Steve Jobs died worth billions, Michael Dell is worth $20 billion, and Amazon founder Jeff Bezos is one of the five richest men in the world.

Their enormous wealth has surely increased wealth inequality in a substantial way, but can anyone seriously say they wish all three had been layabouts? Or on the dole? Inequality would surely be greatly reduced, but so would our living standards be.

More realistically, it’s safe to say that while views differ on the subject of inequality, when presented with the individuals whose wealth has expanded the gap between rich and poor, most would say we want a great deal more of these wildly enterprising people.  Life would be unrelentingly bleak without the super-rich and the staggering innovations that made them rich.

Bain Capital founding partner Edward Conard plainly agrees.  In his new book, The Upside of Inequality: How Good Intentions Undermine the Middle Class, Conard’s stated goal is to “puncture popular myths about inequality and the economy.” As Conard correctly sees it, we need to “stop blaming the success of the 1 percent and embrace the upside of inequality: faster growth and greater prosperity for everyone.”

Conard’s argument is a very important one when we stop to consider the present debate about the wealth gap.  Democrats, despite being funded by incredibly talented coastal elites whose capitalistic advances have so greatly improved our lifestyles, employ horrifying rhetoric about how “something must be done” by government to shrink the divide between rich and poor.  Lest we forget, inequality warrior Bernie Sanders nearly wrested the Party’s presidential nomination from Hillary Clinton.

What’s important is that Republicans aren’t much better.  While they talk a big game about the importance of economic growth, they cower before inequality; usually hiding behind statistics to allegedly “prove” that it’s really not grown much.  And then when inequality rose even under President Obama, they used this happy truth to besmirch his governance.  A more realistic response would have been for Republicans to cheer on a rising wealth gap that signaled successful GOP blockage of some of the former president’s worst ideas.  Republicans will never admit it, but their basic desire to reduce taxes and regulations, open up trade, and stabilize the dollar, would lead to massive increases in wealth, and by extension, inequality.  An already great U.S. would be spectacular under such a scenario.

Not asked enough is what’s so bad about inequality in the first place? Conard asks, and correctly notes that those whose economic exploits lead to greater inequality “improve the future.” Yes, they do.  We need more of the 1 percenters who get that way by virtue of turning yesterday’s rich-man’s luxuries (the original computer cost over $1 million, the first mobile phone $3,995, and laser printer $17,000!) into common goods.

More broadly, we need to ask ourselves some basic questions: is the NBA worse off because LeBron James is a better player than anyone in the league? Is the NFL worse off because Tom Brady and Aaron Rodgers are much better passers than Matt Schaub and Mark Sanchez? Were we hurt because the Beatles made appealing music that consumers bought in droves, thus rendering the Fab Four indescribably rich? In an economy of individuals, and that’s the only kind of economy, we’re all constantly in search of the path that will enable our own inequality relative to others.  Inequality is ultimately about freedom and happiness.  As Conard explains it, as opposed to it signaling theft, “Rising income inequality is the by-product of an economy that has deployed its talent and wealth more effectively than that of other economies – and not from the rich stealing from the middle and working classes.” Absolutely.

Notable here is that the above speaks to an aspect of Conard’s book that is informative, but also perhaps superfluous.  It’s not insulting the author to say that he comes from the world of numbers, so while he doesn’t hide from the undeniable societal and economic good that springs from inequality, the technocrat in him seemingly couldn’t resist showing how income statistics revealing a growing income gap are rather overstated.

Addressing the inequality hysteria of Thomas Piketty and Emmanuel Saez, Conard bolsters his point about the good of inequality by noting that in the highly unequal United States, “incomes have grown as fast as, or faster than, other high-wage economies.” Logically so.  Income is a function of investment, and the more wealth there is, the more investment there’s going to be.

Conard adds that the income stats that transfix the Pikettys of the world ignore “the fact that an increasing number of workers live alone instead of in families with more than one worker.” Conard’s greater point is that the view suggesting increased wealth concentration at the top deprives workers at the bottom is “mistaken.” So true, but when those who see the undeniable good of wealth creation reduce what is beautiful (see the advances of Jobs, Dell, Bezos, the highly compensated genius of James, Brady and Paul McCartney) to numbers, they needlessly shift the terms of the debate to the lefty playing field.  It’s better to state what’s true: in an economy of individuals, inequality is the goal of all individuals.  Thank goodness unique skills are rewarded so handsomely in the United States.

Additionally, Piketty and Saez can’t have it both ways.  Their view, one discredited by Conard, is that inequality brings great harm to those who are middle class or poor, and then they play with income statistics (similarly discredited by Conard) to “prove” their thesis.  The problem for them, and this is something Conard didn’t touch on, is that market signals belie both their pessimism and their statistics.  Lest we forget what Piketty and Saez regularly remind us, the U.S. is easily one of the most unequal countries in the world, yet during periods of booming growth (exactly when inequality is growing the most) that same U.S. is showered with immigrants (legal and illegal) eager to boost their economic circumstances.  But if Piketty and Saez were correct, border crossings into the U.S. would plummet amid the growth.

Notably, the above market signal speaks to a serious flaw in the book that Conard perhaps doesn’t truly believe.  More on this in a bit, but to read Conard is to often read an author arguing with himself.  He correctly notes that economic growth is a good thing, rising inequality and rising wages are an effect of growth, but they’re also logically a magnet for the world’s strivers at all levels.  Yet Conard writes that a “near-unlimited supply of low-skilled, low-wage workers – both offshore and immigrant – has put downward pressure on lesser-skilled wages relative to higher skilled wages.” Really? The author can’t have it both ways, and once again, he may not want to.  The simple point here is that immigrants wouldn’t rush into the United States for persistently lower wages; wages constantly reduced by what he describes as a “near-unlimited supply” of new entrants. What this tells us is that the more human capital, the better for workers of all stripes.  If that weren’t so, immigrants wouldn’t see the U.S. as attractive in the first place.

As for the notion that offshore workers push down U.S. wages, this is belied by Conard’s own odd focus on how low-skilled U.S. workers are harmed by “trade deficits.” Such a view is contradictory.  It’s contradictory firstly because increased labor force division is the certain driver of increased specialization that boosts individual productivity in the first place.  Adam Smith had it right long ago with a pin factory that he wrote about in The Wealth of Nations.  And then if the supposed “trade deficit” is rising in the U.S., that’s a signal of growing acquisitiveness on the part of American consumers; the point being that if a globalization of the labor force were actually pressuring U.S. wages downward, the logical result would be reduced imports into the United States, not more.  We can only import insofar as we’re already productive, and surging imports into the U.S. signal broad American gain from a globalized work force that has pushed Americans into better, and more highly-paid work.

Furthermore, trade deficits are merely an accounting fiction.  All trade balances; our “deficit” in trade is a direct result of enormous foreign investment inflows that spring from our export of shares in our world-leading companies.  The export of shares doesn’t count in the calculation, but this export, one driven by foreign investment, is a bullish signal for the U.S. economy.  Conard wouldn’t wholly disagree with this, but he argues that a lot of the foreign inflows are to purchase U.S. Treasuries.  No doubt there’s some truth to the latter, but this just speaks to how much bigger our alleged “deficits” in trade would be absent all the government spending.  Indeed, if Washington weren’t wasting so much of our precious wealth, more of it would be reaching entrepreneurs on the way to even more innovation.  This would prove an even greater magnet for global investment, and would logically drive up the accounting abstraction that is the “trade deficit” even more.  What Conard bemoans in Upside is rather bullish.

Conard’s focus on low wages, presumably his way of appeasing those who dislike his proper elevation of inequality, needlessly confuses the book’s message.  Worse, it’s not true.  His belief that immigrants have increased low-wage work stateside ignores the feverish automation taking place among businesses.  What this reminds us is that contrary to the popular view about low wages being a lure for investment, the real truth is that low-wage workers are very expensive.  Their slight wages speak to low productivity, high turnover, tardiness, etc.  The U.S. is a magnet for immigrants and investment precisely because it’s a place where the low-skilled can increasingly boost their productivity on the way to higher wages.

Mentioned earlier was Conard’s propensity to argue with himself.  This likely speaks to a live mind constantly evolving thanks to new information, but for the purposes of Upside, it arguably speaks to Conard’s editor doing a lousy job of editing.  The examples are many, but at one point Conard notes happily that “in today’s knowledge-based economy, companies can scale to economy-wide success with little need for capital.” Yes, they can, and that’s why there’s a growing number of billionaire founder/CEOs with very few employees.  But a few pages later, Conard contends that “It’s illogical for a CEO managing five employees to earn the same pay as one managing fifty thousand employees.” Why is it illogical for a CEO to earn enormous sums for creating immense value with very little in the way of capital? Furthermore, Conard’s initial assertion was that today’s knowledge-based economy assures more and more highly paid CEOs overseeing fewer and fewer employees.

At another point the author observes that Silicon Valley is “on fire.  Google, Facebook, Amazon, and Apple have increased investment to $60 billion per year in 2014 from less than $10 billion in 2000.” Great stuff, but a few pages later a downcast Conard laments that “we don’t see cash-rich technology companies like Google, Facebook, Apple and Microsoft stretching to invest their cash in product development….Quite the opposite, we see these companies hoarding cash and buying back their shares.  That’s odd behavior if the returns are superior.” Yes, it is, but more odd is that a few pages before Conard wrote of a technology industry “on fire,” with its brightest lights investing with great gusto.

A few pages later Conard observes that “Given the plethora of start-up related risks, assets that reduce risk, such as teams of properly trained talent, proven supervision, an infrastructure for commercializing innovations, and synergies with existing businesses, are more valuable than they otherwise would be.” A free lunch for anyone who can decipher what was doubtless well meaning, but also incomprehensible.  Conard was ill served by his editor, and that’s not fair to the author.  In a paragraph about the difficulties “retiring baby boomers” may bring to the U.S., Conard adds the non-sequitur that “China looms as a growing existential threat to our national security,” only for the author to conclude in the same paragraph that “Embracing ultra-high-skilled immigration is America’s best shot avoiding permanent damage from these otherwise unsolvable problems.” Ok, wise minds can debate what the burden of retirees will be, but what does it have to do with China possibly looming as an existential threat?

Where Upside proves most disappointing concerns Conard’s comfort with anti-freedom answers to the growth question.  He writes that “America needs to replace the current ethos, which discourages students from learning practical skills, with one that insists that talented people have a moral obligation to put their talents to full use serving their fellow man.” Without getting into what skills will be most beneficial in an economy marked by constant evolution, what makes America the most prosperous country on earth is an ethos driven by fierce individualism that frees its people to do as they wish.  Lest we forget, entrepreneurs generally achieve by virtue of doing that which the established have dismissed, yet Conard apparently wants human action to be controlled based on a “moral obligation” that would be a creation of the establishment.

And while he properly talks up the good of reduced tax burdens throughout Upside, Conard calls for national solutions that include “training the next generation of students” as though the innovation that leads to inequality can be trained.  And by whom?

Conard’s better conclusion is that “It’s disingenuous to measure growth for the one lucky success while ignoring the fate of the other ninety-nine who didn’t succeed.” Yes, the inequality that is undeniably great for everyone papers over the many who pursued similar stabs at greatness, only to fail.  Why do we penalize the few who succeed? That seems to be Conard’s broad, and very important point, but it’s sadly suffocated at times in a book that is more about an author arguing with himself than one that proves what is true: the upside to inequality is immense.