iberals are always finding crises that must be addressed immediately through government action. A couple of years ago they declared a civil-rights jihad on behalf of the transgendered, a group so few in number that my three-year-old spellchecker doesn’t have the word in its dictionary. In economics, the increase in income and asset inequality between the top and the bottom of the socioeconomic scale in recent decades has generated considerable pressure to narrow the spread, mostly, of course, by taxing the rich. Thomas Piketty, author of Capital in the 21st Century, called for a wealth tax and a top income-tax rate of 80 percent.
And there is no doubt that this increase has been real and dramatic. To make the first Forbes 400 list in 1983, it took $82 million (roughly $250 million in 2017 dollars). Only a handful on the list were worth over a billion. Today it takes $1.7 billion just to be on the Forbes 400, and there are 153 billionaires in this country too poor to make the cut.
No small part of the creation of these enormous fortunes in recent decades is that in the new digital economy, unlike the old industrial one, there is little need for capital and thus little need to cut investors in on the deal and thereby spread the wealth. It is not a coincidence that seven of the 10 top fortunes on the Forbes list (those of Bill Gates, Jeff Bezos, Mark Zuckerberg, Larry Ellison, Michael Bloomberg, and Larry Page and Sergey Brin) arose in the new economy.
The salaries and remuneration of top executives have also soared in recent years, far outstripping the increase in average income for their employees. Rex Tillerson’s retirement package, as he leaves ExxonMobil to become secretary of state, calls for him to get $180 million. Curiously (well, not curiously actually), the left never seems upset about the enormous incomes of creative artists and sports stars. The singer Taylor Swift pulled in $170 million last year. James Patterson, the mystery writer whose book factory turns out about one new title a month, earned $95 million. Top pitchers in the major leagues can pull down more than $7,000 per pitch.
Edward Conard, in his illuminating new book The Upside of Inequality: How Good Intentions Undermine the Middle Class, explains why this is, and why this is not, a crisis. A founding partner in Bain Capital, Conard has far more experience with the real economic universe than most academic economists and, unlike most academic economists, he writes plain, sturdy English prose. His earlier book, Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong, was a New York Times bestseller and richly deserved to be.
Conard notes that a doctor, for instance, can treat only one patient at a time, which severely limits his potential income, however high his fees. But an entertainer such as Taylor Swift has no limit to the number of people she can entertain. More, the number of people who are her potential audience is far larger than it was 50 years ago, at the height of the Beatles craze, as more and more of the world has reached First World status. Still more, the entire world economy in the 1960s was only as large as China’s is today.
As Conard explains:
A more prosperous world values and rewards innovations—a new song or movie, a new technology, or a new insight—more highly than a less prosperous world. That’s a good thing. The growing income of the 1 percent is the result of simple multiplication, not a deduction from the pockets of the less successful.
Even in the case of CEOs, the larger and more prosperous world economy has made their success more valuable. “It’s illogical for a CEO managing five employees to earn the same pay as one managing fifty thousand,” he writes. “As companies grow larger and more valuable, CEO pay has logically risen relative to the pay of the average employee. The ratio of CEO-to-employee pay may be clever rhetoric. But it’s illogical economics.”
He also notes that while the S&P 500 index rose 500 percent between 1979 and 2007, the incomes of the top 1 percent went up only 275 percent. In other words, CEO compensation has grown more slowly than the market value of the largest companies. The growth of middle-class and working-class compensation, on the other hand, has been restricted by both increased immigration and by globalization, with many more people competing for middle- and lower-skill jobs.
Perhaps the most interesting part of this consistently interesting book is the middle section, “Debunking myths: Why Mitigating Inequality Is Not the Solution.” His first—one very popular on the left—is that incentives don’t matter. “No myth is more foundational to the crusade for income redistribution,” he notes, “than the argument that payoffs for successful risk-taking don’t matter.”
The idea that taxing success, which is what income redistribution is all about, would not adversely affect willingness to take risks is a classic instance of George Orwell’s famous crack that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.”
Conard points out that there have been a number of “natural experiments” in the world economy over the last half century and more disproving the idea that incentives don’t matter, that innovation will take place regardless of the rewards seeking new ideas:
Look at the enormous differences in growth and prosperity among similar countries that have dulled incentives by redistributing income: East and West Germany; North and South Korea; Hong Kong, Taiwan, and China today versus Communist China; and the United States relative to Europe. Played out over time, the differences are startling. And there are few, if any, exceptions.
Conard also observes that in a capitalist economy, competition will always assure that it is the customers who capture most of the value of innovation. To maintain market share, companies must innovate constantly just to keep up with their rivals’ innovations. And competition also forces companies to cut costs and improve quality, passing much of the increased value along to their customers to ensure they don’t become some other company’s customers.
Thus innovation, however rich it makes the original innovator, enriches the economy as a whole far more. The Internet made billionaires of Zuckerberg and Bezos (and millionaires of many, many others), but it has created a vast industry employing hundreds of thousands of well-paid employees and enriched the lives of all who use it, most of whom find it now indispensable.
Among the other myths Conard debunks, or, more accurately, eviscerates, is that success is largely unearned (“You didn’t build that”), that there is a shortage of investment opportunities, that progress hollows out the middle class, and that social mobility has declined. With sharp analysis, lucid prose, and a few easy-to-grasp—and devastating—charts, Conard shows how these myths are mostly tendentious twaddle with little or no basis in reality.
Conard, however, is no zealot simply retailing the latest conservative talking points. In the last part of his book, he questions how effective charter schools can be in improving American education, and how limited is society’s ability to lift families at the bottom out of poverty by making them economically self-sufficient.
And he brings up a subject that has been little discussed in the op-ed world. The baby-boomer generation—the pig in the American demographic python—is now moving into retirement (the oldest baby boomers will turn 71 this year). As they swell the ranks of seniors, the age group with the highest voter turnout, they will, undoubtedly, exert enormous political pressure both to not lose any of their retirement benefits, including pensions from often woefully underfunded public pension plans, and to have new benefits bestowed. In other words, they want more redistribution—to the most prosperous demographic group.
But he also sees several ways forward, such as lowering barriers to the immigration of the highly skilled and the lowering of the corporate tax rate. The former is not likely to be a priority in the Trump administration, while the latter, hopefully, will be.
The Upside of Inequality is a well-written, thought-provoking book. It will be invaluable to anyone who wants a clear-eyed look at the country’s economic problems and their possible solutions.