THE UPSIDE of INEQUALITY
The scourge of America’s economy isn’t the success of the 1 percent—quite the opposite. The bigger problem is the government’s well-meaning but misguided attempt to reduce the payoffs for success.
Four years ago, Edward Conard wrote a controversial bestseller, Unintended Consequences, which set the record straight on the financial crisis of 2008 and explained why U.S. growth was accelerating relative to other high-wage economies. He warned that loose monetary policy would produce neither growth nor inflation, that expansionary fiscal policy would have no lasting benefit on growth in the aftermath of the crisis, and that ill-advised attempts to rein in banking based on misplaced blame would slow an already weak recovery. Unfortunately, he was right.
Now he’s back with another provocative argument: that our current obsession with income inequality is misguided and will only slow growth further.
Using fact-based logic, Conard tracks the implications of an economy now constrained by both its capacity for risk-taking and by a shortage of properly trained talent—rather than by labor or capital, as was the case historically. He uses this fresh perspective to challenge the conclusions of liberal economists like Larry Summers and Joseph Stiglitz and the myths of “crony capitalism” more broadly.
Instead, he argues that the outsized success of the most successful Americans is not to blame for the stagnating incomes of the middle and working classes. If anything, their success has put upward pressure on employment and wages.
Conard argues that high payoffs for success motivate talent to get the training and take the risks that gradually loosen the constraints to growth. Well-meaning attempts to decrease inequality through redistribution dull these incentives, gradually hurting not just the 1 percent but everyone else as well.
Conard outlines a plan for growing middle- and working-class wages in an economy with a near infinite supply of labor that is shifting from capital-intensive manufacturing to knowledge-intensive, innovation-driven fields. He urges us to stop blaming the success of the 1 percent for slow wage growth and embrace the upside of inequality: faster growth and greater prosperity for everyone.
In the aftermath of the Financial Crisis, many commonly held beliefs have emerged to explain its cause. Conventional wisdom blames Wall Street and the mortgage industry for using low down payments, teaser rates, and other predatory tactics to seduce unsuspecting home owners into assuming mortgages they couldn’t afford. It blames average Americans for borrowing recklessly and spending too much. And it blames the tax policies and deregulatory environment of the Reagan and Bush administrations for encouraging reckless risk-taking by wealthy individuals and financial institutions.
But according to Unintended Consequences, the conventional wisdom masks the real causes of our economic disruption and puts us at risk of facing a slew of unintended—and potentially dangerous—consequences. His book addresses many essential but overlooked questions, such as:
- If the United States had become a nation of reckless consumers rather than investors, why did productivity soar in the years leading up to the meltdown?
- If predatory bankers took advantage of home owners, why did down payments decline, thereby shifting risk from home owners to lenders?
- If the risks were easy to spot, why did top political and financial advisers encourage lenders to make unsound investments?
- If new regulations encourage banks to hold enough capital to fund withdrawals and not just loan losses, how will the economy underwrite the risks necessary to reach full employment?
In an attempt to set the record straight and fill the void left by other analysts, Conard presents a fascinating and contrarian case for how the economy really works, what went wrong over the past decade, and what steps we can take to start growing again.