BOOK REVIEW: ‘Unintended Consequences’

OPINION:

UNINTENDED CONSEQUENCES: WHY EVERYTHING YOU’VE BEEN TOLD ABOUT THE ECONOMY IS WRONG
By Edward Conard
Portfolio, $27.95, 320 pages

There is no reward without risk; and there is no economic growth without risk takers (investors and entrepreneurs) receiving their due reward. It is the entrepreneur working with the investor, not the government bureaucrat, who will save America from its economic malaise. That is the central contention of Edward Conard’s “Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong.” And Mr. Conard, a former managing director at Bain Capital from 1993 to 2007 and a Romney donor, has begun a necessary national conversation by focusing principally on what really happened to the American economy.

“When all is said and done, you’re either for investment and risk taking as a solution for what ails the economy, or you’re against it,” writes Mr. Conard. “The real world offers no middle ground.” In other words, policies that spread the wealth around hinder the drive of those who create the wealth to spread. Mr. Conard knows that most Americans don’t know how the economy really works. His book is a necessary, comprehensive corrective. Consider it the economics class you ought to have had.

He begins by deftly explaining how it is that the American labor force grew to be the most productive in the world: an embrace of Joseph Schumpeter’s “creative destruction” effect on the mobility of labor markets. In a world of 75-cent-an-hour unskilled labor, “*uccessful risk takers put Americans, immigrants, and offshore workers to work, not government handouts,” Mr. Conard says. Unfortunately, the Obama administration misses this by increasing tax rates on “the rich” (really the investors) and by pursuing policies that create uncertainty (and thereby idle capital). Capital is a coward, after all, and Mr. Obama’s trillion-dollar stimulus and health care takeover has put the fear of God into it. “We should be highly skeptical of proposals that claim to offer improvements, and scrutinize them carefully for unintended consequences,” as Mr. Conard notes.

Often policies taken with the best of intentions wind up retarding, not spurring, growth. This is because the roots of economic growth can be seen in that old Keynesian formula for gross domestic product: consumption plus investment plus government. Rich people don’t consume their incomes; they invest them. Mr. Conard explains: “[e]ven if we place no value on the consumption of the rich, we must recognize that the rich invest rather than consume a portion of their income. That investment creates enormous value for consumers and wage earners over and above the value it creates for investors.”

Mr. Conard believes that the resulting benefit to society is often 20 times that of the investor, but nevertheless, the net result is often “income equality,” the bete noire of the political left. In such a model, we want income equality because it is a byproduct of talented people taking risks.

The drive to be in the 1 percent compels human progress, even if individuals must work long hours. “God didn’t put talented people on earth to be happy. He put them here to take responsibility, lead, innovate, and take prudent risks,” Mr. Conard writes. He has no illusions about modern workforce life. “It’s not beautiful. It’s hard work. It’s responsibility and deadlines, working till 11 o’clock at night when you want to watch your baby and be with your wife. It’s not serenity and beauty.” Give us your tired, your poor, your huddled masses in their cubicles yearning to be rich, in other words, and they’ll give you economic growth.

But whereas Vice President Joseph R. Biden calls those who pay higher taxes patriotic, Mr. Conard knows that the real patriots risk their capital for the improvement of their fellows by improving themselves. He has little patience for the human capital waste of most higher education. “Art history and Elizabethan poetry don’t employ workers; the arduous and tedious application of business sciences such as computer programming and accounting does,” he writes. Only increasing the payoffs - that is, by allowing people to keep the reward they get from taking the risk - can increase the probability that people will choose productive forms of labor.

“It’s not like the current payoff is motivating everybody to take risks,” Mr. Conard told Adam Davison of the New York Times. “We need twice as many people. When I look around, I see a world of unrealized opportunities for improvements, an abundance of talented people able to take the risks necessary to make improvements but a shortage of people and investors willing to take those risks.”

Since Mr. Conard’s book was published, the political left - everyone from James Fallows of the Atlantic to the New York Times which called Mr. Conard’s book “the most hated book of the year” to Jon Stewart of the “Daily Show” - seems to believe an odd interpretation of economic growth: that, in effect, there is something exceptional about America, so exceptional that it doesn’t matter what taxes are, Americans will continue creating companies.

But the evidence Mr. Conard brings to bear and some he left out suggests he’s right: The formation of new firms has slowed in recent years as policy uncertainty has grown. Fewer risk takers means fewer firms - and fewer jobs. Those who make investments risky by introducing more political risks cannot be said to favor growth.

And so, we could all do with a little more income inequality. While some are quick to condemn income inequality and while Mr. Conard is right to dismiss the 1950s as not very representative, he would have done well to look at income inequality over time. Had he, he would have realized that the model for the 2010s is the 1920s, where the economy grew over 7 percent from 1924 to 1929 and real annual income per capita rose 37 percent. Virtually every time economic inequality has risen, average people have gotten richer as the luxuries of the rich have become middle class. The ’20s, like the ’90s, roared, and we ought to be grateful that men like Mr. Conard, in a time when the 1 percent are unjustly persecuted, are finding their voice. The rest of us want to hear what they have to say, even if we don’t always agree.

David DesRosiers is the publisher of RealClearPolitics.