Book Review: The Upside of Inequality by Edward Conard

Can we talk about wealth inequality? I think it’s a top three problem within the United States.

Obviously, many disagree with me.  In The Upside of Inequality, Edward Conard effectively makes the capitalist’s case for the importance of unequal results in household wealth. At the risk of my simplifying a book-length argument, I’d say Conard justifies his view on the upside of inequality in two main ways.

First, we need unequal incentives to push innovation and risk-taking, the engine of a capitalist economy. Without the promise of outsized rewards, where would the urge for improvement come from? Take away the outsized rewards through taxation and redistribution and we remove the innovative engine of the economy, writes Conard. Ok, I’ll admit, I’m sympathetic to that idea.

Second, Conard argues, we need concentrations of wealth in the hands of risk-taking capitalists, to fund the innovative ideas of entrepreneurs who have more talent than money. Take away the piles of money in the hands of capitalists, and you remove the fuel from the engine. Ok, I find this argument of Conard’s plausible as well.

I don’t say I celebrate Conard’s view because of any ideological attachment to capitalism. I say it because practically speaking the miracle of lifting billions of people out of poverty in recent decades happened under market-based economies that innovated and encouraged hard work and risk-taking. Countries that squash markets and enforce a state-driven equality – Cuba, Venezuela, North Korea, Zimbabwe come to mind – tend towards horrific poverty.

But I still worry about inequality.

upside_of_inequalityIn households with children under age 18, a recent New York Times piece explained, the bottom 50 percent of households actually have negative net worth. They have more debt than savings or assets.

That New York Times piece also describes a straight-line 3-step mechanism of inter-generational poverty:

  1. Wealth correlates strongly with the likelihood of attending and graduating from college.
  2. A college degree correlates strongly with higher lifetime earnings.
  3. No higher degree means a much harder path to attaining or maintaining a middle class life.

Those steps alone suggest that at the bottom rung of society, poverty begets poverty, and inequality tends to beget more inequality.

Meanwhile, at the upper end of the economic ladder, the power of compound investment returns, reduced taxes on intergeneration wealth transfers and favorable tax rates on dividends and capital gains, tend to maintain the status quo among wealthy households. Wealth begets wealth. I don’t like the idea of stagnation at the top and bottom.

Further into The Upside of Inequality, Conard challenges deeply held beliefs. Traditional measurements of the lack of wealth for the bottom 50 percent of American households miss a key factor. Namely, measuring consumption at the bottom half – due to social safety net programs including government transfers Medicare and Social Security – shows a strong reduction in poverty over the last 20 years. If we measure consumption instead of wealth our society looks far less unequal.

Conard also makes some disturbing counter-arguments about the usefulness of investing in education to overcome economic immobility. His skeptical arguments will make people on both the left and right of the political spectrum uncomfortable.

My fondest wish on this topic is not to bash capitalism – or socialism for that matter – but to ask: Can we talk about a middle ground?

Conard worries about killing – through redistribution and taxation – the golden goose that has raised billions out of poverty. I worry about the fact that negative median net worth of the bottom 50 percent of households in America. A hollowed-out middle class has both economic effects and effects on social cohesion.

I’m worried that the concentration of wealth in the United States at the very top is too high and getting higher. In developing that view, I look to Thomas Piketty’s 2014 masterpiece Capital, in which he shows we’re on trend to return to 19thCentury Gilded Age levels of wealth-concentration in the US. I don’t love the idea of an entrenched aristocracy in America.

While Conard celebrates the positive economic effects of that inequality – more pools of wealth encourage more innovation, which leads to economic growth – I’m worried about the moral problem of an entrenched aristocracy permanently separated from the other 99 percent of society.

My view: I’m ok with some inequality. I’m a capitalist. To the extent more hard work and more talent leads to more money for some people than others, I’m fine with that. That’s great.

I’m not ok with permanent inequality, or inter-generational inequality, or inequality that suggests a fixed, rigged, game. If being born into poverty is a life-sentence to an underclass, then inequality is something I’m less ok with.

What do I want in terms of a conversation? I want people on my side of the debate – people who think inequality is a top problem – to read more smart people on the other side of the debate, like Edward Conard. Because if you don’t know where your own assumptions are weak or wrong, it’s hard to enact change.

Of course I also want folks worried about “creeping Socialism” in America to consider the moral consequences of a system in which children don’t get enough to eat, and the next generation’s children might not either. You can talk all you want about “bootstraps,” but are kids still in elementary school responsible for yanking on their own straps?

I really don’t have an answer. While I disagree with Conard – more on moral grounds than economic grounds – he’s also done far more reading than me on the subject.

Before you write to tell me that I’m either a greedy capitalist or a lefty socialist (I admit, I’m giving evidence of both here), can you instead just read Conard’s book? And then Piketty’s Capital?

Sometimes I think the only solution to these arguments, at the individual level, is to consciously set out to read the things we’ll probably disagree with.


Please see related posts

Book Review: Capital by Thomas Piketty

Book Review: Unintended Consequences by Edward Conard


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One Reply to “Book Review: The Upside of Inequality by Edward Conard”

  1. “we need concentrations of wealth in the hands of risk-taking capitalists, to fund the innovative ideas of entrepreneurs who have more talent than money. ”

    I would argue that we do not currently lack risk capital in the US. If anything, money is looking for better ideas right now.
    With the expansion of our systemically created underclass (poorly educated, economically ignorant, and politically powerless), we have a shrinking pool of entrepreneurs who will be able to effectively employ the vast pools of risk capital. Education is clearly critical- there are no good “easy” ideas left, and the next great innovation will necessarily be technical in nature.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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