Café Hayek’s Don Boudreaux used the National Review review to criticize my new book, The Upside of Inequality: How Good Intentions Undermine the Middle Class. Here is my reply:
The Upside of Inequality argues that in today’s knowledge (and service) economy properly trained talent and the economy’s willingness to take risk constrain growth, not risk-averse savings, which sit unused despite near-zero interest rates.
While it’s true that some investment flows into the U.S. as equity, the inflows of debt from the trade deficits dwarf the inflows of equity, especially so if you logically net outflows against inflows. The outflows are predominately equity and not debt. A graph from my previous book, “Unintended Consequences,” shows the tight relationship between trade deficits and foreign borrowing.
It’s true that if someone is willing to bear additional risk, risk-averse savings can be borrowed and spent. In reality, risk-averse saving currently sit unused at the margin even at near-zero interest rates. Prior to the financial crisis, risk-averse savings largely funded consumption, both government spending (entitlements) and unsustainable subprime consumption, not investment that grows the economy.
Regarding immigration…The book recognizes that the supply of immigrants creates its own demand. The relevant question, however, is: at what marginal product of labor? The book does not argue that immigration per se lowers wages; it argues that reducing the ratio of high- to low-skilled workers slows lower-skilled productivity and wage growth. While it’s true that some innovations, the iPhone for example, are highly scalable, it’s also true that supervision, process engineering, and the like, create a large share of innovation at a micro level where these constrained resources are much less scalable.