The Weekly Standard Reviews The Upside of Inequality

Michael M. Rosen
The Weekly Standard
November 21, 2016

As impassioned calls to curb income inequality, including through a growing movement to establish a “guaranteed basic income,” have increasingly dominated the political conversation here and abroad, Edward Conard’s contrarian argument for pro-growth policies—including those that inevitably increase inequality—couldn’t have arrived at a more opportune moment. Billed as a “comprehensive defense of income inequality,” Conard focuses his brief on the notion that inequality yields “faster growth and greater prosperity for everyone.” He casts his book as an antidote to Thomas Piketty’s 2014 anti-inequality bestseller, Capital in the Twenty-First Century.

In classical economic terms, Conard methodically, if sometimes ploddingly, elucidates how liberating the capitalist genie from the regulatory bottle grants society’s fondest financial wishes, even though (or perhaps because) some wishes are more ambitious than others. Contrary to the conclusions of leading leftist economists, the “1 percent,” Conard finds, has largely earned its success not “through cronyism or other uncompetitive practices” but by “commercializing successful innovation.” Conard begins by fingering not corporate poohbahs but low-skilled immigration as the most significant brake on the growth in median income: The influx of such labor “spreads a given increase in the demand of properly trained talent and successful risk-takers over a greater number of lesser-skilled workers who compete with one another to satisfy that demand.” Such competition inexorably drives down wages.

The Upside of Inequality takes a hatchet to five key “myths,” beginning with the notion that “incentives don’t matter.” Pace the arguments of legions of progressive economists, redistribution, Conard contends, has “large detrimental effects on risk-taking, innovation, productivity, and growth over the long run.” He cites numerous peer-reviewed, cross-cultural studies establishing a clear link between higher taxation and slower growth. Consider the United States, where median family incomes are 15-30 percent higher than in (relatively) high-tax Europe and Japan. The other myths Conard examines—”commonly held beliefs, widely supported by top academics, that crumble under closer scrutiny”—include the supposed unearned nature of financial success, the shortage of investment opportunities, the hollowing-out of the middle class, and the decline of mobility.

That last myth, in particular, he debunks by invoking recent studies showing American upward mobility on a par with that of Europe, including Scandinavia, for all but the poorest quintile. And with respect to the very poor, Conard cites reams of data holding single-parenthood and low high-school graduation rates, not inequality, responsible for impeding movement between social classes.

In his most illuminating section, Conard propounds a way forward that comports with free-market principles and common sense. As a first principle, he cautions against the seductions of sentimentalities, the so-called moral arguments for redistribution, such as the mistaken notion that a highly progressive income-tax structure (and, to a lesser extent, charitable giving) can make a meaningful dent in global poverty. Instead, noting that “America’s poor are among the richest people in the world,” Conard contends that we can alleviate poverty only by “making investments and producing innovations that increase prosperity.”

But how do such investment and innovation percolate down to the lowest quintile? Improving the creaky American education system will prove critical, but Conard dismisses the benefits of preschool and charter schools alike, instead extolling the virtues of vocational schooling, online instruction, and, especially, STEM education and ancillary training in sales, marketing, and management.

Equally critical is what Conard labels “ultra-high-skilled immigration”—that is, workers with abilities in the 95th percentile whose arrival on American shores to fill high-tech positions would also create job opportunities throughout the economy: “The success of these companies and workers will accelerate growth and the accumulation of equity that’s needed to underwrite further risk-taking.”

Conard also favors lowering—preferably eliminating—the corporate income tax and approvingly cites Warren Buffett’s trade-balancing scheme: obliging “would-be American importers to buy a dollar of American-made goods for the right to import a dollar of goods produced offshore.” Taken together, these prescriptions will eventually “have large and compound effects on growth, employment, and wages at all skill levels.”

Conard’s prose occasionally tends to bog down in economic jargon and suffers from a certain defensiveness. It’s also not exactly the type of intellectually electrifying book that Piketty’s proved to be and is unlikely to earn its warm reception, even on the economic right. Still, The Upside of Inequalityamply rewards the careful, patient reader with a strong interest in—though not necessarily a deep understanding of—basic economics and provides a handy primer for pundits and politicians who struggle to respond in kind to the anti-inequality screeds of leftist economists.

Michael M. Rosen is an attorney and writer in Israel.