Hollywood on the Potomac’s Janet Donovan wrote a lengthy article about the Washington D.C. book party for my new book The Upside of Inequality: How Good Intentions Undermine the Middle Class.
Hollywood on the Potomac
by Janet Donovan
October 3, 2016
It’s hard to imagine there is any upside to inequality so we were curious when we received an invitation to celebrate Edward Conard’s book: The Upside to Inequality: How Good Intentions Undermine the Middle Class at the Kalorama home of Juleanna Glover & Christopher Reiter in Washington, DC. According to Amazon, “Four years ago 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.” We of course, being of feeble economic mind, asked Conard to explain in ‘lay terms’ exactly how there is an upside to inequality.
“I’d say it’s a deep pool of highly motivated, properly trained talent that’s working inside of institutional capabilities like Silicon Valley that make it a lot more productive than it is in the rest of the world,” he told Hollywood on the Potomac. “That’s driving faster growth and higher incomes in the United States than we see in other high-wage economies like Europe and Japan.” Tyler Cowen, Conard’s friend who sports a Ph.D in economics from Harvard University and is currently a professor of economics at George Mason University, joined the conversation by adding: “It’s really about how risk taking equity capital is what is scarce in our economy. All the remedies you hear, however good they may sound, they will fail unless they produce more risk taking equity capital. That’s the key point. That’s too abstract to be a title, but forget about the upside of inequality. Focus on getting that equity capital to take more risk. I would have given Ed’s book a different title.” Conard chimed in: “It’s 100% correct and I wanted to call the book The Equity Constraint. That was the title I wanted on the book.”
The author with Tyler Cowen (R)
Conard refers us to Chapter 5, which really goes to it and debates Larry Summers over secular stagnation, the core of the book, so natch we needed a simpler explanation of ‘secular stagnation.’ “The book argues that in a capital-intensive manufacturing-based economy, that savings is the constraint to grow; that you have to have more savings, more investment, more capital, because Ford Motor Company needs a lot of plants, a lot of inventory in order to get to economy-wide scale. In a knowledge-based economy, Google and Facebook can scale up to economy-wide success, they don’t need a nickel of investment to do it. That has a couple of effects.” Conard told us. “One is, you leave savings on the sidelines, which slows down growth. The second is that the successful innovators don’t really need to share the value with anybody, so you end up with more income inequality, but we’re all left, I think, with the core problem in the book, which is how you get the savings put back to work so that you can maximize growth, employment, and wages.” Ok, we’re in. Thanks for the Google, Facebook reference – we can relate!
Back to Amazon’s summary: “Now Conard is 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 growing wealth of most successful Americans is not to blame for the stagnating incomes of the middle and working classes. If anything, the success of the 1 percent 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.”
Photo courtesy of Bloomberg
“The constraint is equity,” Conard explained. “You need equity to underwrite the risk. For example, there are two kinds of savings. One type would be, you put your money in the bank and you say, ‘I’ll let you (the borrow/investor) use my savings if you take the risk.’ So you (the borrower) sign a contract that says you’ll pay me (the risk-adverse saver) back. You (the risk-adverse saver) are willing to fund the savings, but you’re not willing to take any risk. The alternative is an equity holder who really underwrites the risk of an investment but they have to put up collateral, their house, for example, in order to borrow from a risk-averse saver and take the money and use it (i.e. put it at risk). There might be entrepreneurs that want to start a business but if they don’t have the collateral, the equity to put up to underwrite the risk, the risk-averse saver is never going to lend them any money. So you need both of these things (the capacity and the willingness to take risk) in order to grow the current economy.”
Q: What are the biggest markets that do that would you say? Silicon Valley, maybe real estate? A: “I think one of the big issues has been, what do we use these risk-averse savings for? If you look at the United States, it has been used for real estate and on the margin, they’ve been used really by sub-prime homeowners for consumption. That proved to be fairly unsustainable because if real estate prices aren’t rising, it’s hard for them to borrow and no one will lend them the money. If you look at Germany, they largely loan the money to Greece. Greece spends it, they can’t really pay it back. If you look at the Chinese on the margin, they’re building these huge cities of empty apartment buildings because people keep looking for low-risk investments because the risk-averse savings are there to fund them, but we don’t really have any use for them (the risk-averse savings) because what’s powering the economy today, what’s growing it, are things like Google, Facebook that are really knowledge-based, people-intensive investments that need almost no savings at all.”
“Here’s another way to put it,” added Cowen. “A lot of the world savings right now is coming from Asia, China, South Korea, Japan. Those individuals, for whatever reason – reasons of distance, reasons of fear, reasons of cultural unfamiliarity – they’re buying T-bills. T-bills do not translate into risk-bearing equity capital. It’s a kind of waste of capital. There’s too much of the economy now cash-funneled into checking accounts, T-bills, money market funds, not enough inter-capital, not enough risk taking. Talent doesn’t have the capital, capital’s not seeking the talent. There are unrealized gains from trade, thus a slow recovery.”
Photo courtesy of Wall Street Journal
“One of the things I say is that what we should try to do is this: Larry Summers’ argument is let’s take the capital and invest it in infrastructure and the government’s going to invest and grow the economy faster. What he doesn’t say is that if the government doesn’t increase the amount of spending and borrow more, then it doesn’t really solve the problem of putting all these idle savings back to work. The argument I make in the book is let’s stop these savings at their source. Their source really is the trade deficit, not trade. We need trade, you can’t make for $20 what you can buy for $2, but you don’t have to have unbalanced trade where we buy something from China and instead of China buying something from us that employs our workers, they loan us the money back by buying T-bills, then we have to take the risk of putting that money to work, but that money sits un-used. When it sits un-used, we end up with unemployment. One answer (e.g. Larry Summers’s) would be, let’s borrow the money and spend it and have the government grow bigger. My argument, my concern is, that if risk taking and talent are the binding constraints to growth, then any kind of spending increase, whether it’s the government or the private sector, consumes the same constrained resources. So you just get more government spending, less private-sector spending. The two offset. My alternative is that for every dollar that exports, we would issue a license for a dollar of imports. That would force trade to balance. We let the licenses trade freely so that one country can be unbalanced.” OK, we’re definitely looking forward to Champagne & Sushi so we can assemble all of this information.
Pamela Lynn Sorensen (L) with Host Christopher Reiter
At this point we decide to engage in a pop quiz by tossing out a couple of names to see how he felt about them. Donald Trump: “I think Donald Trump recognizes that low-skilled immigration and unbalanced trade – he thinks it’s trade, I think it’s unbalanced trade – have an effect on the wages of workers and I think he plays to the concerns of the people who are most affected by that. I don’t think his policies are right. I don’t think he understands it properly, but I think he’s tapped into an angst that I think economists have turned a deaf ear to. They have a different view of the world and so they haven’t gotten to the same conclusion.”
David Stockman who says like the roach motel, the ‘Money goes in, doesn’t come out.’ “I’d say two concerns about that. In a world where there’s an awful lot of unused savings, he’s obsessed with the gold standard and the apocalypse.”
Robert Reich: “I’d say I don’t think he’s an economist to be taken seriously. I think it’s pop economics that sounds good on the surface. When you dig below, there’s a lot less there than what you think.”
Robert Rubin: “Very smart guy,” said Cowen. “Never got out of the box of the establishment in his thinking. He’s actually ended up as somewhat underrated I would say.” “Yeah, but I think he’s over concerned about balancing the budget at a time when they’re flooded with savings,” interjected Conard. “I’m a little less concerned about debt than he is I’d say. I wouldn’t say that might not have been a good idea in the 1990’s, but I’m not sure it’s such a good idea today.”
Photo courtesy of Intelligence Debates
Last question. Q: If you were to choose anybody to be Secretary of the Treasury, regardless of which party wins, who would be your choice?
We didn’t recognize any of the names so we went home to Google, Facebook them.