Dallas Morning News Q&A: How We Can Address Growing Wage Disparity with Ultra-High-Skilled Immigration

Ed Conard speaks with Jim Mitchell of the Dallas Morning News about his new book, The Upside of Inequality: How Good Intentions Undermine the Middle Class.

Jim Mitchell
Dallas Morning News
October 13, 2016

Former Bain Capital managing director Edward Conard says middle-class prosperity is taking it on the chin, but the concentration of wealth in the top 1 percent is not the reason. The problem is the entrepreneurs have moved to Silicon Valley, with few left behind to re-employ workers in areas where factories are closing down. In his new book, The Upside of Inequality: How Good Intentions Undermine the Middle Class, Conard argues the U.S. can address the issue with more immigration of highly-skilled workers. 

What are the myths of income inequality and economic growth?

The most important myth is that the success of the one percent is responsible for the slow growth of the middle and working class. In a capital-intensive manufacturing based economy, savings constrains growth. You need savings to build factories, add inventory and scale up to economy-wide success. But in a knowledge-based economy — companies like Google, Facebook, WhatsApp, Instagram, and Snapchat — can grow to economy-wide success and need virtually no investment at all. 

So what you find is that the innovators capture a much greater share of the value that they create because they don’t need to share that value with investors anymore. And because you see this lottery-like payoff that doesn’t require a lot of investment to get into the lottery, you see more people going for that one in a hundred, one in thousand payoff. So that even if the returns are not spectacular, you will see a lot of people trying to win. As a result, you will see more one-in-hundred successes and people ending up in the far end of the curve. And those people are creating value for their customers, employees and indirectly for the entire economy.

A lot of working people would say, “Hey, I appreciate the entrepreneurship, but I haven’t had a raise in six years, so what about me?”

Let me step back. I was a manufacturing engineer at Ford Motor Co. before going to Bain. When American manufacturers move their production offshore to Mexico for example, economists tell those displaced workers, “Don’t worry, the opportunist entrepreneurs are coming to re-employ you.” But the talented innovators have all moved to Silicon Valley and the manufacturing engineers who remain behind are designing products that benefit overseas workers. And that brain drain slows the productivity in the wage growth of American workers. It is no surprise that the wage growth of displaced communities has remained depressed for decades. Plus, there is a large pool of low-skilled immigrants who are depending on that same pool of entrepreneurial talent to raise their productivity. That only slows the wage growth and productivity gains further. It is not immigration per se but low skilled immigration.

So look into the future. How do you resolve this imbalance?

One is that retiring Baby Boomers eat us alive. The Congressional Budget Office projects federal spending will grow from 21 percent to 30 percent of GDP over the next 30 years. Debt rises from 75 percent to 140 percent of GDP. The second problem is the growing strength of China that economically and militarily just threatens America further. The United States can’t grow fast enough on its own to solve those problems and can’t just close the door to immigration. Increasing high-skilled immigration is the only way we are going to accelerate to a rate fast enough to matter.

The Texas and Mexico economies are intertwined. Does a wall blocking illegal immigration make any sense even if we’re just shutting out low-skilled workers?

We are never going to build a wall so let’s stop talking about it, that’s ridiculous. But the problem there is you still would be eaten alive by retiring Baby Boomers who would drive up government spending. You could tax everybody, but that would slow down risk taking, and if it slows down growth in the process, you haven’t really solved the problem. We have to change the mix toward more high-skilled and ultra-high skilled immigrants. It would be a significant impact on the growth rate.

But isn’t the H-1B visa program already designed for companies to get high-skilled foreign workers?

Yes, but the problem is there is a fair amount of abuse. A foreign worker hired to work on your computer can get an H-1B visa but this not really a high-skilled job. Look at Japan. They have lots of engineers, not a lot of MBAs. You see the same in Europe. In the United States, high-scoring Americans are shifting toward business, communications and law and away from math and science. There is probably synergy with what Americans want to be, so let’s team them up with the rest of the world. The combination of the two seems much more powerful than either one alone.

How does that address the American 50-something-year-old guy who is hanging onto his job?

Let me start with the 55-year-old guy who has spent his whole life training to do XYZ in manufacturing and then he loses his job because it gets sent to Mexico. We can talk all we want about retraining guys who are 55-years-old but look at the research. It doesn’t work or at least it doesn’t work effectively. Is there going to suffering as a result of creative disruption? Let’s not kid ourselves there is going to be. We need to be sensitive to that and not just say “the entrepreneurs are coming.”

What do you mean when you write that having a moral obligation to help is not what it seems?

I personally don’t believe that the talents of mankind belong to the lucky recipients, that those talents belong to all mankind and those who are lucky enough to get the talent have a moral obligation to put those talents to work serving our fellow man. It is not obvious how each person should best spend their time, but one thing that concerns me is why we have this safety net that begins to compete dollar-for-dollar with what some can earn in the economy. It is going to de-motivate work. Where the supply of college  graduates far exceeds the demand in the labor force, taxpayers should gradually reallocate their subsidies  away from those majors  toward the majors where there is a shortage. Now you can’t do it overnight because you have a huge entrenched faculty that wants to teach art history and would be out of a job. But if I am a taxpayer I don’t care about Elizabethan poetry; I want you to work on my behalf. I am not going to let you contemplate your navel on my behalf.  

How might a Donald Trump or Hillary Clinton impact the economy?

(laughing) I don’t want to be here defending Donald Trump. But here is what I see with Hillary Clinton, for whom I would have a very hard time voting, which doesn’t mean I would vote for Donald Trump either. But we have had eight years of no recovery, 1.5 percent tepid growth. The difference between 1.5 and 3 percent growth in a $20 trillion economy is $2 trillion to $3 trillion of  GDP lost per year and lost forever. That is a big, big, big price to pay. Her proposal is more spending, more taxes in the face of 50 percent marginal tax rates [all taxes from social security to state federal and local taxes, etc.] in the face of 36 percent government spending. If you increase government spending, you are going to consume more risk-taking and talent and crowd out the private sector. I am not 100 percent what Donald Trump wants. I am sympathetic to the unbalanced trade and trade deficits hurting our workers, but you can’t tax trade without hurting workers. But if you cut the tax rates as he is proposing, I worry we’ll get huge deficits. The Trump stuff is screwed up to me and on top of that, he has been a bull in a china shop in a country that needs to be unified not divided.

So where will this country be in the next 10 years?

I think government spending gradually drifts up, regulations gradually drift up and this web of regulation makes it harder and harder to push against and get innovation. I think that demographics move against investors toward consumers. I think you will see the low-growth malaise and slow rising income that will increase the political dissatisfaction and division inside the country that has come to bear this election. 

Donald Trump’s legacy is going to outlive him in that I think Republicans are going to say the Reagan Democrats and working class workers really have legitimate concerns that are not being addressed by economics that assumes we are living in a manufacturing economy with constrained savings. We have to be more thoughtful about the mix of immigration and unbalanced trade and slow wage growth of middle-class Americans. 

[Trump] is a bad messenger with a very important message. When Paul Ryan is delivering the message instead of Donald Trump, the message will be lot less divisive. I think the Democratic Party has taken the position that anyone who wants to tax the rich come join our party. Newly-arrived immigrants, retirees, the poor, middle-class Americans. Those factions are starting to compete with each other. It is not surprising that a guy like Donald Trump comes along and goes after the biggest faction, working-class native-born Americans, and represents those in competition with the other guys. And Republicans will look at that and say, with a little more refinement of the message, we can put together a coalition despite the demographics against it.