The Upside of Inequality: How Good Intentions Undermine the Middle Class
Published By: Portfolio
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While growing income inequality is a real phenomenon, a misdiagnosis of its causes and consequences leads to policies that slow growth and ultimately weaken America. Ignoring the true sources of rising inequality — namely trade, trade deficits, and immigration in an economy constrained by properly trained talent and its capacity to take entrepreneurial risk — and blaming high-wage earners creates a dangerous feedback loop. Raising taxes on their success reduces risk-taking and innovation, which in turn slows growth, reduces middle-class wages, and increases the demand for redistribution — a recipe for stagnant growth.
Edward Conard’s new book, “The Upside of Inequality: How Good Intentions Undermine the Middle Class,” explains why government intervention to mitigate inequality ultimately hurts the middle and working classes. Conard delivers a robust defense of capitalism and dismantles today’s most popular myths about income inequality and the economy:
- The myth that the rich get richer by making the poor poorer. No other high-wage economy has done more to help the world’s poor than the US economy. Regardless, advocates of redistribution press on. Rising income inequality is actually the byproduct of an economy that has deployed its talent and wealth more effectively than that of other economies — and not of the rich stealing from the middle and working classes.
- The myth that incentives don’t matter. In an innovation-driven economy, there are large and compounding costs to dulling incentives for entrepreneurial risk-taking. As payoffs for success have risen, entrepreneurial risk-taking has accelerated US growth relative to other high-wage economies with more equally distributed incomes. Because of this growth, today, median US household incomes are 15 to 30 percent higher than those in Germany, France, and Japan.
- The myth that mobility has decline. If the success of America’s 1 percent comes at the expense of the middle and working classes, we should see mobility declining. Yet, even with significant immigration, there is little evidence that mobility has declined or that mobility in Scandinavia, the supposed paradise of redistribution, is better than in the United States.
- The myth that technology hollows out the middle class. While the economy has created jobs for 13 million lesser-skilled Hispanic immigrants, the distribution of middle incomes is virtually unchanged but for an upward shift in incomes. Since the financial crisis, accusations that crony capitalism and the success of the 1 percent slow middle- and working-class income growth have only grown louder. The incomes of the very top of the 1 percent have soared, and the growth of middle-class and working-class incomes has remained slow. Many insist that this gap has increased because the wealthy are rigging a zero-sum game to take what rightly belongs to others. Conard addresses these accusations and explains how income redistribution is what hurts the middle and working classes.
The US economy’s growth has accelerated relative to other high-wage economies with more equally distributed incomes — the opposite of what one would expect if cronyism had increased enough to account for rising income inequality. Since 1980, US employment has grown twice as fast as employment in Germany and France. This growth has created a home for 40 million foreign-born adults, their 20 million native-born adult children, and their 20 million children.
Conard lays out a blueprint for increasing middle- and working-class wages in an economy with a near-unlimited supply of lesser-skilled workers and where properly trained talent fuels growth by increasing the economy’s capacity for risk. He calls for America to better train its own talent and recruit talent aggressively from the rest of the world. He recommends cultivating a climate where business and high-tech entrepreneurial risk-taking thrives, rather than where success is undercut and taxed at every turn. Conard proposes changes that reduce the inherent instability of banking rather than simply imposing a litany of regulations that leave risk-averse savings sitting unused. In that environment, America’s institutional capabilities to take risks would compound and grow at a faster rate.
What is the upside of inequality? In the long run, faster growth, more jobs, and greater prosperity for everyone.
Advance Praise for “The Upside of Inequality”
“Ed Conard challenges misconceptions that distort our economic debates. He debunks the myth that inequality is a conspiracy perpetuated by robber barons, and sheds light on the complex economic phenomena that shape America’s success. Readers of all political persuasions will benefit from this highly informative book.”
—Arthur C. Brooks, president, American Enterprise Institute
“This provocative new book by Ed Conard is a must-read for serious students of economic policy. Conard’s core thesis — that advancement in living standards is constrained by risk capital and properly trained talent — suggests an inequality borne of returns from innovation. Some of his arguments may rankle the left or the right, but his solutions are sensible and all the more compelling in the context of this paean to risk taking.”
—Glenn Hubbard, dean, Columbia Business School; former chairman, Council of Economic Advisers
“Conard makes a fresh argument for the productive value of inequality, which is that scarce entrepreneurial effort and risk-tolerant capital are the resources that are both most central to economic growth and most sensitive to the potential distortions imposed by taxation and regulation. Whether or not one accepts this argument, it’s an argument well worth having.”
—David Autor, professor of economics, Massachusetts Institute of Technology
“Ed Conard provides a much-needed reappraisal of the role of inequality in a free-market economy. The most crucial insight of economics is that incentives matter, and those incentives will inevitably show up as an unequal distribution of economic resources. Conard argues forcefully that the well-intentioned policies of reducing inequality in the short term are not necessarily beneficial in the long term, as inequality and economic growth are closely linked.”
—George J. Borjas, Scrivner Professor of Economics and Social Policy, Harvard Kennedy School; author, “Labor Economics” and “Immigration Economics”
“Ed Conard reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking. That is why it is highly rewarded. Intellectual and political attacks on those who use these attributes will prove to be counterproductive.”
—Lawrence Lindsey, CEO, The Lindsey Group LLC; former director, National Economic Council
“I profoundly disagree with much of what is in Conard’s book but respect the clarity with which he makes his case. Agree or disagree, this book can sharpen your thinking on critical economic issues, making it a very valuable contribution.”
—Lawrence H. Summers Summers, former secretary of the Treasury; director, National Economic Council; president emeritus, Harvard University
“Ed Conard puts forward a comprehensive explanation of the modern economy. Critics may dismiss it as a defense of the 1 percent, but it’s much, much more than that. I rarely see economic analysis as insightful as this.”
—Julian Robertson, founder, Tiger Management
“Page after page, Ed Conard challenges conventional wisdom about the causes of growing inequality, the constraints to growth, and the feasibility of commonly proposed solutions to advance a thought-provoking blueprint for growing middle- and working-class incomes in a world with an abundance of workers. Whether you agree or not, this is serious thinking for serious thinkers.”
—Mitt Romney, former governor of Massachusetts
Edward Conard is the author of the Top 10 New York Times bestseller, “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong” (2012). He is a visiting scholar at the American Enterprise Institute. Previously, he was a founding partner of Bain Capital, where he worked closely with his friend and colleague, former presidential candidate Mitt Romney. He has made more than 100 television appearances.
