WEALTH INEQUALITY—THANK YOU, SIR, MAY I HAVE ANOTHER?

Most people see wealth inequality as a product of a system that unfairly is controlled by and skewed towards those in the upper percentiles of income and wealth control. Then there is Edward Conrad.

“Who the hell is Edward Conrad ?” you ask. Ever hear of Mitt Romney? Ever hear of Bain Capital? There’s your connection. Conrad was with Romney in Bain, left for a time, and was lured back by the Mittster in 1992. He was able to retire a few years ago at the age of 51, a multi-multi-millionaire who still maintains an office at Bain.

Now in a New York Times article titled “The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy” writer Adam Davidson interviews Conrad and previews some of the ideas he promulgates in a forthcoming book called “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong”.

http://www.nytimes.com/2012/05/06/magazine/romneys-former-bain-partner-makes-a-case-for-inequality.html?pagewanted=1&_r=1

In summary, Conrad opines that wealth inequality isn’t bad. Indeed we need more of it. Sort of a trickle down theory on steroids.

As Davidson puts it Conrad

…aggressively argues that the enormous and growing income inequality in the United States is not a sign that the system is rigged. On the contrary, Conard writes, it is a sign that our economy is working. And if we had a little more of it, then everyone, particularly the 99 percent, would be better off. This could be the most hated book of the year.

It certainly will be in the UMOC household.

Conrad views the wealth creators as benefitting the masses.

The idea that society benefits when investors compete successfully is pretty widely accepted. Dean Baker, a prominent progressive economist with the Center for Economic and Policy Research, says that most economists believe society often benefits from investments by the wealthy. Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. The Google founder Sergey Brin might be very rich, but the world is far richer than he is because of Google. Conard said Baker was undercounting the social benefits of investment. He looks, in particular, at agriculture, where, since the 1940s, the cost of food has steadily fallen because of a constant stream of innovations. While the businesses that profit from that innovation — like seed companies and fast-food restaurants — have made their owners rich, the average U.S. consumer has benefited far more. Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it.

Now Conrad’s theory seems to be that we all have the ability to invest and become rich. We simply need to resist the consumerism urge and put that money into creating wealth instead.

However, to me the flaw in that position is that to reap the societal benefits as he states above requires that people consume, not merely invest.

To Conrad risk taking is an absolute necessity, and he looks down his nose at those who eschew such risk taking. Part of the interview took place in a cafe.

At a nearby table we saw three young people with plaid shirts and floppy hair. For all we know, they may have been plotting the next generation’s Twitter, but Conard felt sure they were merely lounging on the sidelines. “What are they doing, sitting here, having a coffee at 2:30?” he asked. “I’m sure those guys are college-educated.” Conard, who occasionally flashed a mean streak during our talks, started calling the group “art-history majors,” his derisive term for pretty much anyone who was lucky enough to be born with the talent and opportunity to join the risk-taking, innovation-hunting mechanism but who chose instead a less competitive life. In Conard’s mind, this includes, surprisingly, people like lawyers, who opt for stable professions that don’t maximize their wealth-creating potential. He said the only way to persuade these “art-history majors” to join the fiercely competitive economic mechanism is to tempt them with extraordinary payoffs.

“It’s not like the current payoff is motivating everybody to take risks,” he said. “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. That doesn’t indicate to me that risk takers, as a whole, are overpaid. Quite the opposite.” The wealth concentrated at the top should be twice as large, he said. That way, the art-history majors would feel compelled to try to join them.

Yet that notion somehow appears to be a Ponzi Scheme variation. If everyone invests, pure mathematics tells you not everyone will get the same return or, if all that investment is concentrated within the select few enterprises that will yield returns, the returns to all the investors on a pro-rated basis will be relatively miniscule, surely not the immense wealth Conrad himself has managed to accumulate.

For instance look at the profits Bain Capital generated for its investors. It didn’t have millions or even thousands of people or firms risking their money. It probably wasn’t even in the hundreds. Rather Bain’s pool was open to a select group of investors, many of whom already belonged to the 5-10% if not the 1%.

Assuming you and I and Joe Schmoe and all the other Schmoes were permitted to participate, whatever profits resulted (and in not every case did profits come) would have been split among many more entities.

In fact, under Bain, not all of the businesses drawing its attention had great investment to expand the business. In some cases the business may have tanked but Bain charged substantial management fees and gained from other revenue streams or profit centers within.

Edward Conrad is a contrarian on another facet of our recent economic doldrums.

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, whom, he says, were just doing their job. There are a huge number of people in our economy who want ready access to their savings — pension-fund managers, insurance companies and you and me with our bank accounts. And because economic growth comes from long-term investments in things like housing, factories and research, the central role of banks, Conard says, is to turn the short-term assets of nervous savers into risky long-term loans that help the economy grow.

In conjunction with that argument Conrad invokes the Bailey Savings and Loan from It’s a Wonderful Life.

Conrad applies much of his philosophy through the use of mathematical logic.Included in that is his method of choosing a spouse, utilizing demographics and what he terms “calibration”. That is, he believes in dating as many people as possible until you develop a good sense of your ideal spouse.

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. (Conard used this system himself.)

I find Conrad’s outlook appalling. More importantly, though it reeks of unmitigated greed, it ignores all the human elements that go into making our society, with all its faults, as palatable as it is.

In these days  comservatives want the government to get out of the safety net business and leave the poverty relief to private entities. The assumption that Conrad shares this desire is not unreasonable, yet he decries Warren Buffet’s efforts to distribute much of his wealth to worthy causes.

Mitt Romney has been characterized by many pundits as being out of touch with the masses. If Conrad were in the market for a male spouse instead of a female, his calibration theory would put him and Romney in bed together. That is not an image that is fit for children and other living things.

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Comments

  • umoc193  On May 2, 2012 at 6:17 PM

    Matthew Yglesias of Slate provides his take on Conrad here.

    http://www.slate.com/blogs/moneybox/2012/05/02/does_inequality_spur_investment_.html

  • little_minx  On May 2, 2012 at 8:46 PM

    Conrad sez, “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.”

    Oooh, what woman could resist such sweet-talking?

  • Anonymous  On May 3, 2012 at 2:59 PM

    Conrad is a greedy little sociopath; a real ashole right up there with Mittens/Thurston Howell.

  • Deke James  On May 3, 2012 at 3:06 PM

    Conrad is a greedy sociopath.

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