The Wealthy are Underpaid

The New York Times Magazine recently published a particularly interesting and timely piece on the role and importance of the wealthy in our nation. Writer Adam Davidson interviewed former Bain Capital employee Edward Conard, whose book "Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong" will be published next month, in order to gain some perspective from a member of the class that some claim are ruining our democracy.

Davidson takes us through Conard's background and his fascinating logic on income equality, the financial crisis, risk-takers vs. "art history majors", and more. Overall, Conard argues persuasively that inequality is great for the overall health of the country. According to him, income inequality is simply the result of investors being rewarded for their contributions to society, and he also claims that society actually receives a disproportional amount of benefit from the wealthy's investments. Concard goes as far to say that the "wealth concentrated at the top should be twice as large."

Personally, I agree with his points on how investments of the wealthy benefit everyone, and the article does point out it is a widely accepted idea. I do, however, disagree with his following views:

The financial crisis, he writes, was not the result of corrupt bankers selling dodgy financial products. It was a simple, old-fashioned run on the banks, which, he says, were just doing their job ... people don’t realize that what happened in 2008 was nearly identical to what happened in 1929,” he says.

Conard concedes that the banks made some mistakes, but the important thing now, he says, is to provide them even stronger government support. He advocates creating a new government program that guarantees to bail out the banks if they ever face another run. As for exotic derivatives, Conard doesn’t see a problem. He argues that collateralized-debt obligations, credit-default swaps, mortgage-backed securities and other (now deemed toxic) financial products were fundamentally sound.

Some sound thoughts:

As Conard told me, one of the crucial lessons he learned at Bain is that it makes no sense to look for easy solutions. In a competitive market, all that’s left are the truly hard puzzles. And they require extraordinary resources. While we often hear about the greatest successes — penicillin, the iPhone — we rarely hear about the countless failures and the people and companies who financed them.

Some not so sound advice perhaps:

There’s also the fact that Conard applies a relentless, mathematical logic to nearly everything, even finding a good spouse. He advocates, in utter seriousness, using demographic data to calculate the number of potential mates in your geographic area. Then, he says, you should set aside a bit of time for “calibration” — dating as many people as you can so that you have a sense of what the marriage marketplace is like. Then you enter the selection phase, this time with the goal of picking a permanent mate. The first woman you date who is a better match than the best woman you met during the calibration phase is, therefore, the person you should marry. By statistical probability, she is as good a match as you’re going to get.

He is too quick to dismiss the rise of "crony capitalism" and the potential dangers when one class holds too much power.

"I don’t want to talk about rent-seeking,” he told me. “When you go off to a third-world country, there’s a dictator who says, ‘I’m giving the telephone franchise to my brother-in-law.’ It’s pretty hard to do that here."

Davidson sums up his own views in paragraph near the end:

The rich could earn a great deal of wealth through their own hard work, skill and luck. They could also use their subsequent influence to make themselves even richer. One of the great political and economic challenges of our time is figuring out the balance between wealth that benefits society and wealth that distorts. Of course we want to encourage people to take risks and find areas of productive innovation. It’s just not in the interest of the United States to allow wealth to skew the political process so that good new ideas are barred.

What are your thoughts on the article?
What points do you feel strongly for or against?
Will you read Conard's book?

Link to article