TIMOTHY NOAH MAY 3, 2012
Edward Conard's forthcoming book, Unintended Consequences: Why Everything You've Been Told About The Economy Is Wrong apparently argues (among other things) that income inequality is good and that we need more of it. Conard is a former partner and protege of Mitt Romney at Bain Capital, which makes his argument especially piquant to the press. (Romney is taking care neither to associate nor disassociate himself from Conard's provocations.) I have not read Unintended Consequences, so I can't comment on the book in any comprehensive way. But I have read an Adam Davidson column about the book in the May 5 New York Times Magazine. I have also read the book's introduction and first chapter, which are posted on Conard's Web site. What I see doesn't persuade me. Let's go through some of Conard's arguments.
1.) Income concentration at the top is good because rich people invest. Like a lot of people who argue in favor of income inequality, Conard portrays his opponents as opposing capitalism itself, which--no argument here--depends on a certain amount of income inequality in order to function. You have to reward effort and skill. But the question (for those of us who support capitalism but decry income inequality) is not whether there should be any inequality, but rather how much inequality we need to tolerate, and most especially whether a long-term trend toward growing inequality is good for the economy or the health of society. We can argue about how much inequality is necessary, but almost no one thinks that ever-growing income inequality is a social or economic good.
Conard says that the more investment you have, the cheaper the stuff that the 99 percent buy will become. This argument (which I think of as the "Who Needs Good Jobs?" argument) presumes that Americans will consume even when they can't actually afford to, and data on the current recovery provide some evidence that may be true. But I'm not sure it's a model for a healthy recovery, based on the evidence of the 2008 crash. (Conard blames that unpleasantness, incidentally, not on overly-clever derivatives or excessive leverage or predatory mortgages but on panicky bank customers who created a run for no apparent reason.)
Also, it isn't always true that prices come down when investment and competition increase. Food and clothing and consumer electronics are all cheaper than they once were, factoring in inflation, but cars and houses and health care and higher education are all much more expensive.
2.) The U.S. economy is phenomenally productive! Between 1995 and 2004, for instance, growth in output per worker in the U.S. (2 percent) outpaced growth in output per worker in Germany, France, and Japan (1.1 percent, 1.5 percent, 1.3 percent). Most people would use this as an argument against income inequality, because the U.S.'s rise in productivity is not translating into higher wages for the average worker, as it always has in the past. During the past decade productivity increases have been especially steep while the median income has declined slightly. Rising productivity is great, but why isn't it shared? Conard says it's because the workforce includes a lot of rifraff who have "below-average productivity"--young people, the "marginally employed," "near-retirees," women who will later drop out to raise children. But (even if you accept Conard's claim that these workers are less productive than average, which I'm inclined to doubt) the U.S. workforce has always included these categories of worker. Yet previously when productivity went up median income went up too.
Conard also makes much of the fact that if you go all the way back to 1979, when the Great Divergence began, the median income has risen, and it's risen even more when you factor in employee benefits and government transfers. This is a straw man. When people talk about the "stagnation" of incomes at the median what they mean is a.) stagnation relative to increases during the postwar years in the U.S.; and b.) stagnation relative to increases for the affluent and super-rich. No amount of statistical manipulation can make these two depressing trends go away.
3.) Forget the Great Compression. The postwar era, when U.S. incomes became more equal while the economy boomed, can't be used as an object lesson because it was a fluke:
World War II destroyed Europe's and Japan's infrastructure. This weakened their ability to compete with the United States, and it took decades for these advanced economies to catch up.... The United States was essentially a closed economy.
There's some truth to this, but not nearly as much as Conard supposes. Europe's economy in fact rebounded pretty quickly, thanks in part to the Marshall Plan; the economist Mancur Olson has argued that Europe's up-from-the-ground postwar economy was an advantage rather than a disadvantage relative to the U.S., because in remaking itself Europe was unburdened by any long-term accretion of special-interest market distortions. But the larger point is that it wasn't only the U.S. that prospered at midcentury as incomes became more equal. The same thing was happening throughout the world in industrialized democracies, including those in Europe. It was because of this that the Nobel prizewinning economist Simon Kuznets formulated a theory of income distribution that said advanced industrialized democracies inclined toward greater income equality as a matter of course. He was right about that until the late 1970s.
I could go on, but I won't. I haven't read the book, but what I've seen of it does not make me glad that incomes are becoming more unequal. You shouldn't be, either.
Update, May 14: I debated Conard today on NPR's "On Point." (I come in at 20:45.)