Debunking Inequality Myths with Ed Conard
2017-02-25 · Guest: Ed Conard (Economist and author) · 47:37
Causes and misconceptions of income inequality
Bob Zadek interviews economist and author Ed Conard about the causes and misconceptions surrounding economic inequality. They discuss how market forces, regulation, and immigration policies impact the middle class, and why the success of top earners is often a driver of broader economic growth rather than a hindrance to it.
Topics: Income Inequality, Crony Capitalism, Market Economy, Government Regulation, Immigration Policy, Social Mobility, Economic Growth
Speakers: Bob Zadek, Ed Conard
Marbury v. Madison [00:12]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the only live libertarian talk radio show on the air all weekend. Thanks so much for listening. I am, of course, your host, Bob Zadek. 424-BOB-SHOW is where to join my conversation at any time. Callers are, of course, welcome.
This is a momentous week in the history of our country. On February 24th, 1803, the Supreme Court claimed its power, which it still, of course, retains today. It retained its power in the well-known, famous case of Marbury v. Madison. It’s a wonderful story. It was one of the earliest and most, perhaps the most important Supreme Court case, and it involved a battle among the giants of our founders: Thomas Jefferson, John Adams, James Madison, and John Marshall. All were involved in the case of Marbury v. Madison. That case established forevermore the right of the Supreme Court to determine whether the conduct of the other two branches of our government was constitutional or not. The story is well-told if you go online to the National Constitution Center. They have a wonderful story of Marbury v. Madison. It’s worth the read. I commend it to all of you.
Defining Income Inequality [01:02]
Bob Zadek: Now to our main event this morning. It is with great pride that I’m happy to welcome to the show Ed Conard. Ed is a well-known author, economist. Ed has published two New York Times bestselling books, including the subject of this morning’s conversation, The Upside of Inequality: How Good Intentions Undermine the Middle Class. Ed is one of the founders of Bain Capital. He founded that with his good friend and colleague and former presidential candidate Mitt Romney. Ed has debated in the media just about every well-known economist, including Paul Krugman, Joe Stiglitz, Alan Krueger, and also Austan Goolsbee, who was in the early Obama administration. So Ed, you have debated so many other well-known economists, I feel like there should be a bell in the background and I should be helping you off with your satin long robe as you stand in the middle of the ring. But it’s not that kind of a show. So welcome to the show this morning.
Ed Conard: Bob, thank you.
Bob Zadek: And it’s my pleasure. Now, your book has as its title and its subject matter a word which is, in my opinion, painfully, painfully misunderstood, overused, and co-opted by the left and perhaps by the right. The word is inequality. Now, in your book, you spend lots of time and with great care, you discuss the subject of inequality, how good intentions undermine the middle class. What do you mean by inequality?
Ed Conard: Well, it discusses income inequality, which has grown in the United States over the last 30, 40 years and tries to get at explanations for why inequality has increased. Ultimately, I try to dispel the myth that the success of the most successful Americans is leading to the slow growth of middle and working-class incomes. I try to explain why America’s most successful workers are growing more productive and more successful relative to their counterparts in the rest of the world. And I try to show, and we’ll maybe get into this in more detail, ways in which trade and immigration have slowed middle and working-class wage growth relative to GDP growth and as a result has increased income inequality. But that the success of the most successful Americans is responsible for generating a lot of the growth that we’ve seen in America and in fact working against a lot of world forces by pulling US wages up higher or high, pulling them up relative to the middle and working classes in Europe and Japan where our incomes are median incomes are 15 to 30% higher than theirs.
Market Forces vs. Crony Capitalism [03:12]
Bob Zadek: Ed, we have more or less—and I’m not trying to be snotty, I’m just trying to be realistic—we have more or less a market economy. That is where goods and services, products are bought and sold at a price that they are worth. It is a market economy and the price of something, the value of something is dictated by the marketplace. We are, of course, there are exceptions to that. We are very much not a pure market economy, but certainly it is not inaccurate to call us a market economy. That being the case, if you concede that point, then isn’t inequality simply a function that some people’s—an hour of one person’s labor is worth a lot less than the hour of somebody else’s labor? And if that statement is true, what’s wrong with that?
Ed Conard: Well, I think there’s a lot of truth in that. I think the pushback on the other side is that there is some, you know, there’s a lot of crony capitalism too. And we should be out there trying to root it out. And the question is, if you look at the incomes of the most successful, highest-paid Americans, they’ve grown as a percent of GDP over time. Have they used crony capitalism to get an increasing share of income? You know, are they negotiating with their friends on the board of directors saying, “Look, just wink-wink, pay me more even though I’m not worth it,” or are they actually delivering value to the rest of the economy that we’re all willing to pay for?
I certainly agree with you and I show a lot of evidence that it’s far more a market-driven economy and that’s why we’re seeing growth in the success of the most successful Americans rather than simply a matter of increasing cronyism. And examples of evidence of increasing cronyism would be that we’re seeing an increasingly entrenched status quo. We’re seeing exactly the opposite, which is faster turnover in Fortune 500 companies. Their lives on the Fortune 500 list have gotten much, much shorter. We see shorter tenures for CEOs. We see many more self-made entrepreneurs on the Forbes 400 richest Americans. We see faster turnover on the Forbes 400 richest Americans. If we look at the tech sector, the 15 largest tech companies in the United States in 2000 are worth about 60% of their value today. And if it wasn’t for Microsoft, they’d be worth substantially even less. They’ve been replaced by a whole new set of competitors and technologies and companies. We’re seeing a much more disruption of the status quo as opposed to entrenchment of the status quo, which you’d expect to see from increasing cronyism. As well, the US economy growth is accelerating relative to other high-wage economies with more equally distributed incomes. So if we were misallocating resources, we should expect to see a slowdown in our growth rate. We’re seeing exactly the opposite, an acceleration. So I think there’s always questions about whether it’s crony capitalism or capitalism, market forces at work. I try to show in the book that what we’re seeing is more evidence of capitalism than crony capitalism in driving this shift in the distributions of income.
Bob Zadek: So then is it fair—obviously crony capitalism is, if you’re going to be complaining about economic circumstances, crony capitalism is for sure the low-hanging fruit. Nobody except for the crony or the crony capitalist, nobody supports crony capitalism, at least not in those words. They might support it under the guise of making things more equal, they’re really supporting crony capitalism. But let’s put aside, because it’s indefensible, crony capitalism. Obviously your book, your book is a very serious book and you spend some time pointing out crony capitalism, but the issue is not crony capitalism. There is a huge amount of mythology in this subject of inequality. And when we come back from our very short one-minute break, Ed, I’d like you to point out to us some of the most significant myths that you successfully dispel in your book about the subject of inequality. This is Bob Zadek, I’m speaking with Ed Conard. Ed has written The Upside of Inequality: How Good Intentions Undermine the Middle Class. And when we come back from break, we will ask the question: what’s wrong with paying somebody what they are worth? Please stay tuned, I’ll be back in one really short minute.
The Role of Government Regulation [07:12]
Bob Zadek: Welcome back to the Bob Zadek Show, the only live libertarian talk radio show on the air all weekend, the show of ideas, never of attitude. Thanks so much for listening to my conversation this morning with Ed Conard. Ed is the author of The Upside of Inequality: How Good Intentions Undermine the Middle Class. The subject, of course, is inequality, and by inequality this morning we are talking about inequality in earnings between the middle class, the upper class, and perhaps even the lower classes. So the subject is inequality. Now Ed, certainly statistically, the middle class has not kept up in terms of wage growth with the upper classes. And I’ll ask you in a moment to dispel some of the myths about that economic circumstance. But before we do that, in your opinion, is the government part of the problem, part of the solution, or neither?
Ed Conard: I guess all of the above. Sorry, we didn’t rehearse that one, Ed, I’m sorry. No, that’s okay. But certainly I would say this, which is, you know, we put a—the government is putting an increasing web of complicated regulation onto the economy and layers and layers and layers. It’s so complicated nobody can really figure it all out anymore. And I think that that certainly slows down growth, it slows down the creation of prosperity, and it creates opportunities for crony capitalism for people to get lawyers to understand where the loopholes are and to take advantage of the loopholes rather than, as you point out, delivering value for customers, which is what we want capitalism to do—make us all richer by delivering us more value. And by all richer, I mean middle, upper, and lower classes. So I do think there’s a problem there.
I think, you know, can government potentially be a solution? I think it certainly can be. If it was hands-off, completely libertarian, would it—would we all be more prosperous? I suspect we would, but would there be costs and benefits? Sure, there’d be costs and benefits. And I think you could always say there’s some regulation that would alleviate some of the cost, but very hard to engineer the proper regulation that doesn’t in many cases do more damage than good.
Bob Zadek: So if government certainly has been part of the problem, there’s no question about that, whether you look at minimum wage legislation, economic regulation in general, crony capitalism, a tax code which is highly politicized as we all know. So certainly government has been exacerbating that problem. And is government the solution merely by getting back to zero and just taking a step back and let the economy do its thing with market forces and the government simply going back to its historical role of making sure people do not defraud each other, steal, or harm each other? If the government took a step back, in your opinion, is the natural course of events in a free market that there would be less income inequality, more income inequality, or should the government not even care whether there is or not?
Ed Conard: Well, I suspect there would be more income inequality, but that doesn’t mean everybody wouldn’t be substantially better off, including the lower classes. I think it certainly if you look back at the different presidencies, the more regulation an administration has put into place during their presidency—President Obama put in a lot, President Nixon put in a lot—where we saw an expansion in the amount of regulation, we definitely saw a corresponding slowdown in growth rates because you’re taking your talent, your manager, properly trained talent, your management, and you’re focusing that talent rather than on creating value for customers into thinking about how do they manage in this world of new regulation.
Now, the caveat to that would be, I don’t think anybody puts in regulation that they don’t think makes the world better. So for example, if they put in pollution regulations, I think they think the net benefit of all that is positive, not negative, although I think the economy is so complex nobody can really do the analysis to figure out what the true costs and benefits of any regulation is. So they’re kind of doing it blindly. And I think, you know, what have we learned from history? The economy evolves a lot like evolution in that nobody really knows what the answer is. They run lots of experiments, most of them fail because no one wants to buy the product, the competitor’s product’s better, there’s a disruptive technology that’s a better alternative, and ultimately through survival of the fittest, a small number of things truly emerge as being valuable. I think what you see in the government’s process is you have a bunch of smart guys who sit around and think about, or they think they’re smart guys anyway, they sit around and think about what engineering improvements would make the world better, and they basically put those improvements in place without any competition, without any survival of the fittest. The likelihood we know from the private sector that the likelihood they found the right answer is one in a hundred, one in a thousand, one in a million, because that’s what really survives in the private sector, which is subject to survival of the fittest, that the government sector doesn’t really—it doesn’t have to worry about that. So you get these things like Social Security that has no alternative competition. You get one system in place and that system’s going to grow and evolve for the rest of time whether there’s a better alternative or not.
Bob Zadek: In your opinion, if the government rolled back what is really pure economic regulation—and I picked in my earlier comment, I mentioned the minimum wage as a very glaring example, but we can take wage and hour legislation, family leave, all of this employment-dictated regulation—if we rolled it all back and simply let the marketplace dictate the terms of employment, in your opinion, would in the long run, would there be less income inequality or more income inequality? Putting it another way, does the government have a role or should it have a role in reducing income inequality as the end of itself?
Ed Conard: So I’ll take those as two different questions. I think the government’s role should be to maximize the incomes of the middle and working class. I think the rich, talented people will take care of themselves. I don’t think the government really has to worry about that. They’ll worry about it themselves and they’ll be quite successful at it. So I don’t think their goal should be to narrow inequality as it should be to increase the prosperity of the majority of people. I agree on the first question, I believe if you rolled back all labor regulation in truth that there might be more inequality, but the middle and working class would ultimately be richer because the economy would grow faster and their standard of living would grow more. But I don’t think anybody could actually work it out quantitatively and prove the answer to that. That’s just my hunch, my opinion.
What I—if I go back to the issue of should the government be concerned about inequality, I think of it this way, which is, you know, you could say do the talents of mankind belong to the lucky recipients and they get all the benefit from their talent, or are the talents randomly distributed among mankind and they in fact belong to mankind? And then we’d say, let’s look at a successful individual. Well, they’re successful probably for three different reasons and maybe even more. One of them is they have unique talents that they were born with. The second is they worked hard to develop those talents, they worked hard to save their money and learn a skill and put that to work. And the third is they often took entrepreneurial risks. I think if we—we have to be worried about disincentivizing risk-taking that creates an enormous amount of value in the economy. We have to be very concerned about demotivating hard work and getting the kind of tedious training, say computer programming versus art history, that customers really demand.
But on the other hand, I think there is a legitimate argument to be made that there should be some sharing between the most talented workers and the least talented workers over and above simply what that talent is able to produce in the free market. But I think there’s a really complicated question about whether or not the reduction in incentives from income redistribution, which is what my book talks a lot about, overcomes—is the cost of reducing the amount of risk-taking and work effort, what effect does that have on growth rates versus simply redistributing the income directly? And what I would say is people look at that and they say, “Geez, if you increase the tax rate a little bit, is Bill Gates really going not create Microsoft?” What you really see over time in the United States, and you don’t see this in Europe and Japan to anywhere near the same extent, is that we have created organizational institutional capabilities that make our more productive people—that make our most productive people way more productive than their counterparts. So they get on-the-job training at companies like Google and Facebook. They work in communities of experts like Silicon Valley. They have access to investors like venture capital investors who have a lot of familiarity with the technology that outside investors don’t have. And all of that combines to make our most productive workers more productive. I don’t think that just comes randomly. I think it comes slowly over time. I think the US has developed it quite systematically since about the mid-1980s onward. And it gives the United States today a competitive advantage that Japan and Europe simply haven’t been able to duplicate. And our growth rate would be faster still relative to theirs if they weren’t sharing disproportionately in the innovation that’s being created in the United States, which the rest of the high-wage world has had an extremely difficult time duplicating. And so you have to look at that and say systematically the US has built this decade by decade over time. No one else has been able to achieve it. We have to be very, very careful.
High-Skilled Immigration and Productivity [11:12]
Bob Zadek: You have described a national incubator for innovation, which is part of the secret of our economic success. We’re going to go to break in a second, Ed. This is Bob Zadek speaking with Ed Conard. We are speaking—Ed has written The Upside of Inequality: How Good Intentions Undermine the Middle Class. The subject of inequality, when we come back from break, does inequality and freedom crash into each other? Please stay tuned, I’ll be back in two incredibly short minutes.
Bob Zadek: Welcome back to the Bob Zadek Show, the only live libertarian talk radio show on the air all weekend. This morning I am delighted, I am proud to be speaking to Ed Conard. Ed has written The Upside of Inequality: How Good Intentions Undermine the Middle Class. Ed is a successful author as well as economist and investor. Ed’s two books have both been on the New York Times bestseller list. Ed has debated every, I think it’s fair to say, every well-known economist who operates in the public sphere, and we are delighted and proud to have Ed on the show this morning. Now Ed, your book is an economic book, not necessarily a political book, although of course you cannot divide the two as neatly as one would think. But focusing on a somewhat political if not philosophical question: what’s interesting to me is nowhere in the Constitution is there any discussion of capitalism, free markets, economic freedom, the right of consenting adults to enter into any contract they want so long as it doesn’t harm somebody else in the process. The Constitution is not an economic doctrine, it’s a political doctrine that creates a country and that created a country.
What is your position and how would you feel about the prospect or the thought that it’s not the government’s job to do anything to grow or to shrink the economy? The economy will be what it is, it’ll operate naturally anymore than it’s the government’s job to cause trees to grow. Trees just grow and animals procreate. So why should the government even care as a matter of politics what happens to the economy? And what gives the government the moral or the political obligation to take steps to grow the economy?
Ed Conard: Well, I’m not—I am an economist, I don’t know that I’m a political science expert, so I’m wading into complicated, complicated waters that I probably—Answer as a guy, answer as a guy on the phone. Yep, no, I’m just—I’m just prefacing. So I hope I don’t step in the mud. I guess I’d think of it this way, which is a group of people can band together and by contract do whatever they want. And you can either join the group or not join the group. And so it’s not clear to me what the group is in terms of geography. Let’s say the geography is the United States and the majority of people say we want to run this group, this geography, in a particular way. Now, you know, I’m going to segue a little bit, but you’d say, “Okay, we recognize that the talent’s randomly distributed and some people have a lot more talent than others, and yes, we want to encourage the people with talent to develop their talent and work hard and take the entrepreneurial risks that are going to create a tremendous amount of value for us.” But then you want to start to say things like, “Well, do I want to let a lot of low-skilled workers into the country, for example, because I’m going to be dividing the efforts of that talent, if that’s a constraint to growth, over more and more low-skilled workers? And the more high-skilled workers I have per low-skilled worker, the more money the low-skilled workers are going to make.” They could say we’re not hands-off, we’re going to do it any way we want. But I don’t see why the middle and working class couldn’t get together contractually and say, “If you want to sell us goods, if you want to trade with us, if you want to use our court system, if you want to live in our land, if you want to be protected by our military, then you have to be willing to agree to some other things which are to our benefit.” One of those might be restricting low-skilled immigration, for example, which may pull down the wages of low-skilled workers. And they might say we’re happy to trade with low-wage economies, but when we trade with low-wage economies, we bear 100%—we the working class bear 100% of the pressure on our wages, but we don’t get 100% of the benefit. The rich, the top 20%, produce 50% of GDP. The retirees capture 20 to 25% of GDP. The non-working poor gets 5 to 10% of GDP. So we get 15 to 20% of the value, let’s call it 20% of the value for 100% of the cost. We may not be better off as a result of this, and therefore we want to regulate it in a way that doesn’t cost us to our disadvantage. So yes, would it constrict the freedom of the most successful workers or the most talented workers? I think it does, but I don’t see why they—I think might makes right in some way, and I don’t see why they couldn’t and wouldn’t take those steps.
Bob Zadek: Now, your book spends a lot of—your book does a lot of scholarship on immigration policy. We’re going to go to break in three minutes, but in the three minutes we have left before we go to break, your book deals with a lot of the mythology around immigration and you talk about the effects of immigration on inequality. Share with us what you have learned.
Ed Conard: I think what matters most is the ratio of high-skilled to low-skilled workers in this knowledge-based economy. And I think the US has a—quite a shortage of high-skilled workers relative to low-skilled workers relative to other economies. So if you look at international test scores, we have about one high-scoring worker for every two low-scoring workers. Germany has twice as many high-scoring workers as we do. Scandinavia has four times as many, and Japan has six times as many. So we are getting far more productivity out of a much smaller pool of high-skilled talent in the United States. It’s been incredibly valuable, but when you open the doors to low-skilled immigration and you change the ratio of high-skilled to low-skilled, the supervision that high-skilled worker is providing—and by supervision I mean the factory they’re designing, the product they’re designing, the direct supervision of the labor, the processes, many different aspects to supervision besides just watching the employee work—if you dilute that ratio, I believe you get lower productivity growth and lower wage growth as a result. And so we should be thoughtful about the ratio. Now, you know, we can go to break and talk about what the future looks like because I don’t think the future is going to work without a significant amount of immigration because we aren’t going to be able to feed the baby boomers and not do major damage to our economy. But I think we have to be very thoughtful about the immigration policy that we have in place to maximize the value of the policy we’re putting in place.
Bob Zadek: But if you opened up—of course I am, as all my listeners know, my policy is, put more simply, let them all in. So without debating “let them all in,” which would be my world, what if we had a more generous immigration policy and paid attention to the ratio but increased the numbers? So many more immigrants were allowed in, but the ratio would be one to maximize economic growth. Would that be an area where our worlds would not at all collide?
Ed Conard: Yes, I would agree. I think you have about 100 million full-time workers. The top 5% is 5 million. You have about 7 billion people in the world. The top 5% is 350 million. Half of them are too young and too old. Half we don’t know who they are. Half are never going to move. You get to a pool of about 50 million ultra-high-skilled workers. If we went out and got five of those 50, we could potentially double our growth rate. We issue about a million green cards a year. So in about 5 to 10 years, we could potentially double the number of high-skilled workers. Now, if you look out into the future at baby boomers retiring, today government spending as a percent of GDP is 35, 36% of GDP with state, federal, and local. That’s historically high for this point in the economic cycle. The Congressional Budget Office projects government spending to grow 10% of GDP over the next 30 years as baby boomers retire to 45%. You need enormous growth to keep the government spending down as the baby boomers retire. It’s unlikely we’re going to take any benefits away from the baby boomers. And when they finally do retire and absorb, consume an enormous amount of GDP, we’re going to have to contend with a billion hard-working Chinese who are going to be looking at a weakened United States at that point and saying, “This is our best opportunity in history to control the world.” I think we have to be very thoughtful. I’d be very aggressive about recruiting ultra-high-skilled immigration.
Bob Zadek: Ed, hate to interrupt, we’re going to go to break in a second, hate to cut you off. This is Bob Zadek speaking to Ed Conard, The Upside of Inequality. We’ll be back after a one very short minute break, please stay tuned.
The Perception Gap: Business vs. Entertainment [14:12]
Bob Zadek: Welcome back to the Bob Zadek Show, the only live libertarian talk radio show on the air all weekend. This morning I am delighted, I am proud to be speaking to Ed Conard. Ed has written The Upside of Inequality: How Good Intentions Undermine the Middle Class. Ed is a trained, skillful, and very wise economist, but yet he has written the book for all Americans to read. It is readable, it is informative, it is a must-read if you want to follow what’s going on in our economic life of our country. Now Ed, I warned you before the break so you can’t complain. We are now back in the closing minutes of our show. We have a very strange administration in Washington, one that doesn’t lend itself to any labels whatsoever. It for sure is not libertarian in its focus, it’s not necessarily conservative. It sure isn’t progressive. It denies—it doesn’t lend itself to any label whatever. It seems to be government by transaction and transaction with no governing philosophy, at least that’s my opinion. Given all of that and all of the murkiness involving the driving principles of the Trump administration, are you optimistic, pessimistic, neither, and what will you look to to make you feel optimistic or to have you look at your passport?
Ed Conard: I’m optimistic. I probably was born inherently optimistic. I believe that we are transitioning from a capital-intensive manufacturing economy to an information-intensive economy. The US has an enormous competitive advantage. I think there’s a lot of road ahead of us for enormous improvements to standard—standards of living. We should recognize that our standard of living is more than double what it was in the 1950s when 30% of the people didn’t have electricity and 40% of the people didn’t have phones. So even if we don’t make a lot of progress from where we are, I feel pretty good about where we are. As it relates to the short term and the Trump administration, I remain optimistic. Well, anyway, I believe no government can stand in the way of the forces that are at work in the economy. They can slow it down and speed it up a little bit, but not a lot. In the Trump administration, I see the following: I think that we needed to reassess our views on trade and immigration because we had run radically in the benefit of the most talented Americans. I think we found the middle and working class say, “Hey, wait a minute, we want another look at these because you’ve pushed them far in your direction and it’s not necessarily in our best interest.” And I think beyond that, I see the administration being quite free market-oriented in their belief that reducing regulation and pushing the free market harder will create prosperity at all levels of the income distribution. So they seem to be free market, free enterprise, wedded with a skepticism about trade and immigration, which we probably needed a little bit of a check given the last couple of decades that we’ve gone through. I guess even though I think at times I scratch my head on some of the policies and things that they seem to be pushing and they wouldn’t be quite the answers that I get to, I believe that the economy is robust enough and the government is robust enough that we can have small incremental changes but not big changes to the course of history.
Debunking Mobility and Stagnation Myths [15:32]
Bob Zadek: Something’s always been puzzling to me and I’d like your thoughts on it if I may. I’m going to ask you to be a bit of a social commentator if you will. When we talk about income inequality, often the captains of industry, the leaders such as the founders of Bain Capital, those people who are in the public eye and very successful, they are, as we know, demonized. They are given certain very negative and unpleasant qualities in the media, in movies, in television, in writings of those people who are opinion makers. There’s a lot of complaining and characterization and caricature creating of successful business people. None of that takes place with respect to successful entertainers—Leonardo DiCaprio and many others and Susan Sarandon who make awful lots of money and they spend it in a very somewhat ostentatious way, perhaps no more ostentatious than anybody else, but what’s going on? A lot of the conversation of income inequality, they carve out only certain successful people, those people who make it, quote, “in business,” but those who make it in the entertainment spheres seem to get a pass, and yet they are—their income is at least as unequal. What’s going on?
Ed Conard: I think it is a paradox that you do see for sure. But I’d say there’s a number of different things. The first is that the consumer can see directly the value that a movie star or a sports star creates for them. They feel it, they get it, they get the entertainment, they make the decision to buy the ticket, they recognize they’re getting more value than the price that they’re paying. I think when it comes to large companies, it’s a little bit harder to see that. The second is, I’ll describe it as they can see that they’re doing no harm. So the fact that Michael Jordan is out there playing basketball, there’s no crony capitalism involved, so they don’t see any way in which Michael Jordan could be hurting them. And the third thing is they recognize—and they also recognize that the fact that Michael Jordan has worked hard and has developed his talent doesn’t hurt any other person who’s developed their talent either. In fact, if anything, the guys on his team are made better by the fact that he’s worked harder and is able to help them as a team to be even more productive than they would be without him. And lastly, I think they recognize that they’ve truly earned their success by working harder even though they were born with talent. A lot of the athletes were born with talent, they worked harder and harder to get to where they were. I think it’s much harder to see that when you’re talking about the CEO of Exxon or even the CEO of Time Warner, something like that, even in entertainment, because it’s going on behind the scenes. So people I think are just a lot more leery. They just believe there’s a lot more corruption, crony capitalism, luck, nefarious dealings, negotiations, etc. and they think the—I think they think the worst of it, unfortunately, whereas you just sort of strip down to its real essence when you see a sports hero. You can see exactly what’s going on, they worked hard, they’ve created value, and you’re eager to buy the value that they’ve created.
Bob Zadek: And although everybody recognizes that Steve Jobs has made everybody on the planet literally’s life much better, increased the quality of living, it’s not—there’s no one-on-one relationship between your iPhone and the genius behind Apple at the time. And perhaps that is the issue.
Ed Conard: I’ll tell you, they think Steve Jobs and they give Bill Gates a pass too. It’s—those guys are treated as if they were sports heroes because they recognize the value that they were creating. I think it’s other people who are harder to identify that people have more difficulty.
Bob Zadek: Now, in your book, we have a lay non-economics audience out there. What are the lessons, if you can just tick them off, that you hope readers will take away from your book about inequality, the causes and, if you will, the remedies?
Ed Conard: I try to show in the first chapter how information technology has made it much easier for a talented group of successful entrepreneurs to scale to economy-wide success, including like a Taylor Swift, and why they’re going to be much bigger than a doctor or a school teacher who are constrained by the number of customers that they can serve. So we should expect the most successful companies, the most successful entrepreneurs to get bigger and bigger relative to the median.
I’ve tried in the second chapter to show why the growth in the median has been slow. I say, look, growth can manifest itself in two ways: as an increase in employment or as an increase in wages. We have had twice as much employment growth as Germany and France, three times as much employment growth as Japan since the 1980s. We have 60 million foreign-born adults and their native-born adult children in our economy today. We’ve done more to help the middle and working class than any economy, high-wage economy on the earth.
I then try to go into some other myths, examples that success is hollowing out the middle class. I show you a lot of data and evidence in the distribution of income which shows that it’s scarcely changed at all. The median income has grown about 40% since the 1980s when you calculate it properly to include all the economic value like healthcare advances and things like that. I think that’s a widely—that’s consensus view.
I show you mobility statistics. For example, if you think mobility is declining, it has been virtually the same for the last 50 years. The US has almost the same mobility as Scandinavian countries, which are thought to have the best mobility in the world for all but the poorest Americans.
Bob Zadek: Ed, explain mobility. It’s a very important concept and I want to be sure the audience appreciates that.
Ed Conard: So mobility is if you were born in the bottom 20%, what’s the probability that you can get to the top 20%? Or similarly in the other direction, if you were born in the 80th percentile, what’s the probability you’ll go downward to the 20th percentile? So you know, there is some genetic component which is if your parents are successful, there’s a pretty good chance the children are going to be born with a lot of talent, so you shouldn’t expect to see just 100% mobility between the top and the bottom. And you don’t want complete mobility either because you want people to work hard and be able to move from one level to the other. But what you’re trying to see is if a person was born with talent, how much does their socioeconomic upbringing hold them back? And of course, we know that it’s going to hold them back to a certain extent. The question is, is it becoming more and more of a problem over time? We don’t see that. Are other economies able to produce more equality than—mobility than we are? We don’t really see that when we look carefully at the evidence. If you look at other factors like if you came from a low socioeconomic family and you went to college, how did you fare relative to richer kids that went to the same college? The outcomes are very, very similar for those kids when you adjust for the quality of the college that they’re able to get into, despite the fact that there’s affirmative action which helped the poorest students get into better colleges than the richer students for the same set of credentials. So we see a lot of evidence that mobility actually looks much better than the picture that’s—that we try to paint in the press.
Economic Outlook and Closing [18:12]
Bob Zadek: And mobility is so important because it tells people you’re in control of your own life. I take that, Ed, as a parting comment of “buy long.” Thank you so much, Ed, for giving us an hour of your time and ending on an optimistic note. This is Bob Zadek inviting you to subscribe to my show on iTunes. Click the like button if you like the show, subscribe, go to my website to be on our email mailing list so you can get one tiny email a week learning about upcoming shows. Thanks so much again to Ed, thanks to my friends for listening, and have a nice Sunday.