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Summary and Analysis of The Upside of Inequality: How Good Intentions Undermine the Middle Class
Based on the Book by Edward Conard
By Worth Books OPEN ROAD INTEGRATED MEDIA
Copyright © 2017 Open Road Integrated Media, Inc.
All rights reserved.
ISBN: 978-1-5040-4595-7
CHAPTER 1
Summary
Part I: The World As We Find It
Chapter 1: The Causes of Growing Inequality
Edward Conard is fighting back against the idea, put forth by the economist Thomas Piketty and others, that the vast increase in the wealth and income of the top 0.1% of Americans has led to a stagnation of middle- and lower-class incomes. Conard's argument is that inequality has led to more growth in the US economy — and, therefore, a higher median household income — than countries with more active wealth distribution. His belief is that innovation will continue to be rewarded at exponential rates, with the likes of Bill Gates growing "richer relative to doctors, schoolteachers, bus drivers, and other median-income employees whose pay is limited by the number of people, or customers, they can serve." Also, since tech companies can succeed with less initial capital than corporations of the past, the wealth will be concentrated in the companies' owners rather than spread out among investors.
Conard blames the decrease in well-paying, lesser-skilled jobs on globalization and immigration, and he believes that placing higher taxes on the wealthy — with the goal of redistributing that money — will only slow growth. Instead, he suggests lowering taxes and an increasing "proper" training of US talent, which means discouraging study in the liberal arts in favor of more practical curricula.
Conard argues that it is the expansion of the global economy that has led to the disproportionate wealth of the top 0.1%. Those who can achieve "economy-wide" success, such as Taylor Swift, will logically receive a larger share of the pie than the average worker, who is constrained by the proportion of the economy he or she can reach. He also argues that CEO income has gone up much faster than average-worker income because corporations have grown in size, making a CEO's work more valuable. At the same time, technology has made highly skilled workers more efficient, putting them in the position to demand exponentially higher wages. And as innovators require less capital investment, they stand to earn bigger payoffs, which encourages more people to take entrepreneurial risks. He compares it to the lottery: More people playing means a bigger payoff for the winner.
These risks ultimately create a feedback loop in which the successful will continue to take more risks and become wealthier. In countries where there is less incentive to take these risks, Conard posits that even their "most productive workers" are unable to succeed to the fullest of their capabilities. He asserts that, since the majority of increases in income for the top 1% comes from their investments — rather than a percentage of the income earned by labor — the top earners are not taking anything away from the 99%.
Conard's core thesis is that this style of reward system encourages more entrepreneurs to take risks, and their successes benefit the US economy: Their increased tax share funds social programs and the military.
Need to Know: Conard argues that income inequality in the United States is a result of massive innovation and the expansion of the global economy, and that, since those things are good for the US economy, they — and the resulting income inequality — are actually good for America.
Chapter 2: The Reasons for Slowing Wage Growth
Conard places the blame for the slowdown in middle- and working-class wages on trade and immigration. He argues that, since global trade lowers the costs of goods, trade makes everyone better off on average, but less-skilled workers suffer disproportionately from the loss of wages. He also blames low-skilled immigrants for flooding the US labor market and trade deficits for constraining resources.
Conard explores the twentieth-century changes that led to our current shortage of low-skill, high-paying jobs. The mid-twentieth century featured a growing economy and a restricted amount of labor, producing an unprecedented amount of high-paying jobs. More people went to college, meaning there were fewer people looking for low-skilled work. The growing population following the baby boom led to an increase in manufacturing, and more buyers meant more jobs and higher wages. In these circumstances, there is competition for workers and inequality lessens as the workers can demand higher wages. In essence, Conard argues that the end to these circumstances was inevitable because the country saturated itself with education and the migration from rural living to city living reached its peak.
Conard also argues that investment in new technologies has always led to a decrease in the cost of goods at the sacrifice of lower-paying jobs. He uses the example of a tractor, which made farming more efficient, lowered the cost of food, and "allowed" ex-farmworkers to work in other jobs that were more "economical" now that the cost of food was lower.
Again, Conard discusses how the lower prices we pay for goods from other countries hurts middle- and lower-class workers but benefits the rich, retirees, and the "non-working poor." He cites two economic studies that show that because lower-income families spend more money on low-cost imported goods, the cost of living is less expensive than official statistics suggest and the current poverty rate is half of the official number. He also clarifies the difference between low-income households, which he describes as mostly "retired, disabled, sick, unemployed, or headed by single mothers with young children," and low-wage workers, who, he maintains, are being unfairly punished due to trade and immigration.
In asserting that an influx of immigration has pushed down wages in unskilled labor markets, Conard also discusses his belief that constraints on investing have discouraged American companies from spending "unused savings" on training new talent and investing in new jobs. Meanwhile, high-tech companies have nabbed talented workers such as midlevel engineers, leaving manufacturing jobs without people to fill those positions, encouraging companies to ship manufacturing overseas.
In discussing foreign trade, Conard examines the various ways that countries invest their surplus money other than directly investing in productivity and growth — all of which he dismisses as "unwise." As a result of the financial crash and the collapse of the subprime mortgage industry, companies are saving their money, which is slowing growth. Conard dismisses multiple studies that show that trade and immigration do not lower wages, calling them dated and imprecise, and cites a recent small study that implies that immigration does push down wages.
Need to Know: Conard counters the narrative that slowing wage growth in the lower and middle classes is caused by increasing inequality, instead putting the blame on foreign trade deficits, increased immigration, and a system that discourages domestic investment in industry.
Part II: Debunking Myths: Why Mitigating Inequality Is Not the Solution
Chapter 3: The Myth That Incentives Don't Matter
Conard believes that income redistribution — achievable through higher taxes on wealthier individuals — discourages innovation, thereby slowing growth. Instead, he posits that income provides a key incentive for risk-taking innovators and that even marginal tax raises can have "large compounding effects in the long run."
When it comes to genius ideas, Conard believes that talented communities of people inspire risk-taking and competition between their members, thereby driving more innovation than in universities or government-funded research institutions. This is partly because there are financially driven people eager to implement great ideas for profit and because finding a successful idea offers the possibility of significantly greater financial gain due to the pickiness of customers.
Conard argues that success being closely linked to social status is beneficial, as it drives innovation. This and other incentives make America more innovative than other modern countries. He posits that income redistribution lessens or eliminates these incentives and that lowering taxes to increase incentives would be better for the economy in the long run. He dismisses economic success stories during periods of higher taxation and insists that America's lower rate of redistribution is the key to our comparatively higher growth.
Customers receive most of the advantages of innovation, according to Conard — Steve Jobs may have gotten rich from the iPhone, but its benefit to society was much higher than its benefit to him. Conard argues that super successful ideas rarely bring huge wealth to innovators, as ideas spread quickly and are copied and improved upon by others, whereas the benefits to consumers are long-term. He states that the benefits people would receive from redistributed income are fewer than the ones they would receive from the end result of innovation.
Conard then returns to his main thesis: Income inequality and economic growth are inextricably linked, and redistributing incomes causes slower economic growth.
Need to Know: Conard believes that income redistribution reduces the incentives for innovation and therefore slows economic growth, hurting the middle class more than helping it.
Chapter 4: The Myth That Success Is Largely Unearned
Conard addresses the idea that much of today's success and wealth has been achieved unfairly, either through a fluke of circumstances that skewed supply and demand or through shady business and government dealings that improperly enriched individuals or businesses. He disputes the idea that high-level managers are taking advantage of fading social norms to push for higher pay packages, instead arguing that companies are simply more successful now and therefore their higher-ups have earned more as a proportion of their success. He also asserts that we do not have a lack of talent; rather, smart students are unwilling to study "the tedious tasks" of computer programming and engineering that the market currently values.
Conard then disputes the ideas of liberal economists like Thomas Piketty, who feel that extremely high CEO wages are unjust because they unnecessarily incentivize gaming the system for even more money. Conard's argument is that CEOs are actually compensated for taking risks, and that since most people are so resistant to risk-taking and its potential losses, CEOs must be given high salaries to incentivize the daring attitude that is necessary to the success of a company. He also argues that talented managers must be compensated sufficiently to keep them interested in working for that company rather than pursuing their own entrepreneurial goals.
In response to the claim that large corporations now face less competition, allowing them to earn more money unfairly, Conard says there is more competition now — domestically and globally. At the same time, the rise of the Internet has allowed people to do more research, making them less likely to fall victim to asymmetrical information problems. Conard contends that while large tech companies like Google and Facebook may enjoy economies of scale that make them hard to compete with, their profits come more from their low-cost "idea-intensive" structure than lack of competition.
Conard also disputes the idea that as the rich become more disproportionately wealthy, they will use their money to influence politics in ways that benefit them financially. His counterclaim is that rich people using money to influence the government is balanced by the majority of people voting for their own self-interests.
In opposing a minimum wage, Conard argues that it isn't corporations that set wage rates but the corporations' customers. The minimum wage just forces out lower-skilled workers by attracting "somewhat-higher-skilled workers" who have declined to join the workforce up until this point. He claims that unions similarly lead to layoffs and slower growth, as higher wages must lead to higher prices and less demand for the product.
Need to Know: Conard rejects the idea that the wealthy have not earned their money and argues that forcing up wages in low-skill jobs will do more harm than good to low-skill workers.
Chapter 5: The Myth That Investment Opportunities Are in Short Supply
Conard disputes the idea that a shortage of investment opportunities means there is money not being invested that could be redistributed with no ill effects. He recounts several economists who worry that too much saving, particularly by the wealthy after the financial crisis, has led to less employment and investment. But Conard again returns to the idea of innovation, which he argues creates demand for investment, which "begets competition and competition begets investment in a self-reinforcing feedback loop."
According to Conard, a lot of people are just unwilling to take more risks in investments, especially after a shock to the system — such as a financial crisis. While many believe that government spending is necessary to recharge the economy during a setback, Conard replies that this actually de-incentivizes private investors from spending the money needed for economic growth.
In the switch to a more "knowledge-intensive" economy, popular safe investments — such as those tied to a manufacturing culture — are increasingly unavailable and the necessary investments in technology are riskier and, therefore, unattractive to risk-averse investors. Meanwhile, tech companies are more likely to hold on to their money as they know an unanticipated change in technology could threaten their businesses.
Conard posits that an increase in foreign investment in ultra-safe US government debt has forced US investors looking for safe investments into the private sector, which he argues led to the massive investment in subprime mortgages, leading to the financial crisis. Now that investment in subprime mortgages has effectively ceased, there are fewer "safe" options for investors, leading more people to save rather than invest.
Another reason that fewer people are investing is recognition, after the financial crisis, that the banking system is not as stable as previously assumed. Conard states that the government's subsequent choice to make it harder for banks to rely on the Federal Reserve to rescue them in case of a run on the banks did the intended job of making banks less likely to take risks but also slowed the recovery.
Conard blames increased regulations under the Obama administration combined with unpredictable global events for making investors more risk averse. For this reason, those who decide to make riskier investments are rewarded at a higher rate, thus leading to inequality. Conard's argument, then, is that taking away the money earned from these investments (through taxation) discourages such investment, leading to slower growth.
Continuing on this path of thought, Conard posits that using government spending to increase demand causes the private sector to decrease risk-taking out of fear that the government is over-burdening itself and that inflation will eventually lead to higher taxes. At the same time, he argues that increased government investment in infrastructure will not have the promised economic effect — increased consumer demand — because governments are not held to the same standards of productivity and profit-seeking as private companies. He also rejects the idea that the government should use inflation — or the threat of inflation — to scare people into spending their savings, as it would be a huge gamble for the Federal Reserve and is unlikely to have a significant impact on demand.
Need to Know: Conard argues that most investors are inherently risk-averse, so monetary policy must reward those who are willing to take investment risks that help grow the economy. He believes that redistribution of wealth punishes those who take risks and that government regulation and global instability further discourage risky investment.
Chapter 6: The Myth That Progress Hollows Out the Middle Class
Conard investigates the idea that the increase in technology and the stratification of social classes has led to a "hollowing out" of the middle and working classes. He rejects the idea that technology has eaten away at middle class jobs, instead blaming "lesser-skilled Hispanic immigrants" for skewing the numbers and making America seem less well-off.
In fact, he challenges the idea of a declining middle class entirely, arguing that an increase in single-person households have made comparing tax returns over the years misleading and that the rising price of employer-sponsored health care should be reflected in the "real" income of a worker. Conard also argues for focusing on the increase in consumption as a better marker of prosperity than income levels.
He presents a variety of social issues and their purported effects on the economy: Women working more and marrying less may be a good thing, but children raised in single-parent households are more likely to face difficulties in life. He asserts that the rich should not be blamed for moving into more isolated environs to "shield their children from bad examples," while also insisting that middle-class people who took out extensive mortgages to emulate a certain more affluent lifestyle "set many workers on the straight and narrow."
(Continues...)
Excerpted from Summary and Analysis of The Upside of Inequality: How Good Intentions Undermine the Middle Class by Worth Books. Copyright © 2017 Open Road Integrated Media, Inc.. Excerpted by permission of OPEN ROAD INTEGRATED MEDIA.
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