Bennett Group Financial

Dawn J. Bennett, Host of Financial Myth Busting, Interviews Ed Conard, Author and Scholar


Washington, DC -- (ReleaseWire) -- 10/20/2016 --BENNETT: Ed Conard is the author of two Top 10 New York Times bestselling books. The first, Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong came out in 2012. The most recent, published in 2016, is The Upside of Inequality: How Good Intentions Undermine the Middle Class. He's also written op-eds for The Wall Street Journal, The Washington Post, Harvard Business Review, Fortune and Politico among others. Ed, welcome to Financial Myth Busting.

EDWARD CONARD: Dawn, thank you for having me.

BENNETT: Your book does exactly what we do on the show which is bust the zombie-like myths that never seem to die. Chief among them, of course, is the issue of inequality which is a source of so much conversation in this election cycle. What, to borrow from the title of your book, is the upside of inequality?

CONARD: If you look at United States, we have a very deep pool of well-trained talent which is taking more entrepreneurial risks than their counterparts in Europe and Japan, substantially more risk, and producing faster growth and higher median wages. If you look at the U.S., employment growth has grown twice as fast as Germany and France since 1980 and three times faster than Japan, at median household incomes which are 15 to 30 percent higher than those economies. And we're doing that with a pool of workers where about 25 percent score in the top third internationally on academic tests; about 45 percent of our workers score in the bottom third. If you look at Germany, it's about a third at the top, a third at the bottom. If you look at Japan, it's almost 50 percent at the top and only 15 percent at the bottom. So, with even a smaller pool we're generating faster growth at higher incomes.

BENNETT: Is the real challenge facing America today how to accelerate growth in wages? because we have too many low-skilled workers?

CONARD: Well, I wouldn't go so far as to say that. I would say we have too few high-skilled workers and that the ratio between high and low is very important. When you think about what a high-skilled worker can do, they really have three jobs. One is they can create innovation like the iPhone that's beneficial to everyone; the second is they can be doctors and lawyers that just keep the gears moving, and the third is that they can organize unskilled workers into companies that can serve customers more effectively that increases the productivity of unskilled workers. Those are the three functions so, to the extent if we're short on workers, one of the arguments that the book makes is that properly trained talent and entrepreneurial risk-taking are the binding constraints to growth today, not savings. What we see is savings that are unused and the productivity of our workforce slows down.

BENNETT: People tend to assume that in societies with vast inequality income mobility, where people can climb the socioeconomic ladder, is impossible. But you point out that's actually not the case. What is the reality?

CONARD: Yes, there's a landmark study done by two fairly liberal Harvard researchers and one from the University of California that show that mobility has not slowed down at all relative to the past in the U.S. In fact, if you look at absolute mobility or ability to save or earn $50,000 or $100,000, it's actually gone up over time. And there are other studies that compare the mobility of the U.S. to Scandinavia which has the most equally distributed income of all the high wage economies. What you find is mobility is virtually identical for all Americans except in the bottom 20 percent and if you dig into the bottom 20 percent, the mobility is identical for white Americans, it's slower for black or African-Americans in the bottom 20 percent. And if you dig into that, what you find is that single motherhood and high school dropout rates seem to account for almost all of the differences in mobility and that has profound effect on mobility across all races, across all income groups. So, it seems to be a sociological issue more than it is an economic issue.

BENNETT: Interesting. Now, you argue that many of the things Washington does to ostensibly address income equality – higher taxes on the rich, regulation, entitlements – only slow down growth which exacerbates the original problem. I've long argued that the Federal Reserve is also fueling inequality as the Fed prints money and essentially deposits it directly into big banks which ends up helping to run those banks but not the economy on Main Street. Do you agree and does the Fed come in for criticism in your book?

CONARD: The Fed does come in for criticism in trying to pump up growth by printing money. I don't think it will work. You've got to remember that the Federal Reserve doesn't produce anything, it doesn't create anything that would actually increase growth. But the argument I made in my first book was that the money would largely sit unused because we're bumping up into other constraints to growth which is our willingness to take risks so, for example, borrow that money and put it to work. It would sit unused and create neither inflation nor growth. So I think it's largely to destabilize the economy a bit. It's made financial markets harder to interpret but it's had actually very little effect, I think, on the economy, so a lot of risk for not much benefit.

BENNETT: Aren't U.S. government programs to redistribute income the real enemy of the middle class?

CONARD: Well, I think in some of the cases—at the high end when we slow down the payoffs for risk-taking we see less risk-taking. We've seen that in Europe, we've seen it in Japan, and it has profound effects over long periods of time. So if you look at how much capability the U.S. has produced, institutional capability, companies like Google, Facebook, Silicon Valley. There's been enormous growth in our capability to produce innovation relative to Europe and Japan. And then at the low end, the way things are done is we're giving workers a safety net, about $30,000-$35,000 a year. That is about what a full-time Hispanic male worker in prime working age can earn full-time, so I do think you are demotivating work at the bottom end of the wage scale.

BENNETT: Talking about the regulation part, I know your book proposes some ideas on how to clean up big banks and, of course, this week we saw the CEO of Wells Fargo resign after a scandal involving bankers creating fake accounts to cash in on promotional payouts. And the story is really interesting to me because even after a law as expansive and intrusive as Dodd-Frank it's still completely impossible to regulate out of existence every bad banking behavior. So, I'm just wondering how can that be done.

CONARD: Well, I'm not sure that can be simply done through regulation. I think it's just too complex. One of the worries that I had in my first book was that the real guarantors of the bank are rich taxpayers. We are saying we don't want the taxpayers to guarantee the banks. One of the things we did was push that risk back onto the banks but, of course, banks have to push it back onto their customers. Their customer is a middle class homeowner who today has a very hard time getting a mortgage as a result of all these regulations. And if you look at the volatility of bank stocks, for example, and other measures like that, it doesn't seem like the regulations have had much impact on making the banking system more stable. All they've really done is made it very, very difficult to borrow money, particularly if you're a middle class homeowner with the modest credit rating.

BENNETT: Right, extremely difficult. I want to change tracks here. I want to talk a little bit about politics. You're friends with Mitt Romney who made a big splash earlier this year when he gave a speech calling on Republicans to reject Trump. In that effort he's failed or, at least, Trump became the Republican candidate. So, as you look toward November, what do you make of the prospect of a Trump presidency and are you as down on him as your former colleague?

CONARD: I recognize why some people are leery of Donald Trump because of his undisciplined behavior, but do they need to go public and really work against him? I think that only works on behalf of the Democrats. And I think—who's more likely to rein in spending? Certainly, it seems like Republicans are more likely to rein in spending. The other place I think there's an opportunity for us to grow—I do argue in the book that there's a shortage of the most talented workers that drive growth today and by the Democrats having linked high and low-skilled immigration together we all agree that more high-skilled immigration would help growth and yet we have not been able to increase it one bit. I think if Republicans were in power they would de-link the negotiations. They would set aside low-skilled immigration and they would allow more high-skilled immigration and I do think that would grow the economy faster.

BENNETT: Do you have any ideas on how to attract high-skilled people?

CONARD: Well, I think there's—a lot of them who are dying to come here simply have very tight quotas that don't allow them to come. The second argument that I make in the book is that we should lower the corporate tax rate to 15 percent in order to make it competitive and we have international competitors who want to leave the United States because the tax code is uncompetitive as it is written. I think it's foolish to run an economy that way. We should be trying to attract not only the most capable workers, many of whom are eager to come here, but also the corporations that hire those workers and put them to work to compete internationally. We're shooting ourselves in the foot.

BENNETT: Ireland, for example has a 12 percent corporate tax rate.

CONARD: Sure. And I sat on a board of a high-tech company we have about a 12 to 15 percent tax rate, so actually it's a case of the tax law as implemented does divide between local competitors, domestic competitors who end up with a very high tax rate but they probably pass that onto customers because all competitors have the same tax rate. But if you look internationally, we have forced our companies to push the money overseas, to locate overseas, because they simply can't be competitive with a 35 percent tax rate which is really significantly higher when you add state and local taxes as well. So they've all pushed to Ireland and places like that to get the tax rate down to 15 percent that it needs to be competitive.

BENNETT: Speaking about taxes, Hillary Clinton is deriding Trump's tax cut plan as 'trickle-down economics on steroids'. That's what she said. It seems that the Democrats will call anything that slightly reduces the rate of spending growth as trickle-down economics. But as the author of the book called 'The Upside of Inequality', do you think that Republicans should ever just come out and say, 'You know what? One of the best things to do for the poor is cut taxes on the rich.'

CONARD: Well, I think trickle-down is something you learned in the second grade to make you a liberal. I would remind everybody that for a person to actually pay taxes, to produce a profit, they first have to create a lot more value for their customers than they do for themselves. So, I think you can say a producer creates about $5 of value for everybody else in order to put $1 of value in their pocket. I think the number is more like 20 to 1. Ironically, I said 'It's probably 20 to 1, but let's just assume it's 5 to 1,' in my first book. And then I was quoted in The New York Times saying it's 20 to 1 and they said it can't be possible and they want and got Dean Baker, one of the most liberal economists, say it's only 5 to 1. So, yeah, let's just remind there's a lot of trickle-up. You have to produce $5 of value to get $1 to be taxed on in the first place. So, I think of it as trickle-up economics as opposed to trickle-down economics. I don't know what the government is loading in at the top. It's actually trickling down. Somebody's got to earn this money in the first place.

BENNETT: What do you think about this big government that we have today?

CONARD: Well, I do think we create this web of regulations that does two things. The first is it requires a huge amount of resources to deal with it. I sit on the boards of companies. We spend so much time talking about Sarbanes-Oxley and things that have no impact on our customer at all. So the amount of resources it consumes, instead of those resources driving up growth, it's certainly slowing down growth. The second thing it does is that the big companies and the rich investors can all hire lawyers, armies of lawyers, to look for loopholes, unintended loopholes in those regulations and use those to gain competitive advantages. We don't want people gaining profit that way. We want them to get profit by creating things like the iPhone and Google and Facebook that make us all better off. So I do think that it has two very, very bad consequences: slower growth and an increase in cronyism and income inequality. When it's produced that way, not honestly, in the competitive markets it's not good.

BENNETT: According to everything that I'm reading, it looks like Hillary Clinton is going to get in.

CONARD: 85 percent chance in online betting markets, yes.

BENNETT: She's actually going to continue the Obama administration's plan on expanding the government.

CONARD: Yeah, she wants $200 billion a year increase in spending and increase in taxes. We saw what's happened over the last eight years. We've had very tepid economic growth; we've had tepid employment growth. To the extent, we've achieved employment growth. We haven't seen any rises in wages.

BENNETT: So where is she going to get the money? Where is the money going to come from?

CONARD: Well, she taxes success, so it has a combination of two things. That would have turned into equity, that would have underwritten risk, that would have grown the economy faster. And the second thing is it discourages and reduces the payouts for risk-taking so gradually, over time, you get slower compounding effect in the institutional capabilities like Silicon Valley and Google and Facebook that grow our economy.

BENNETT: And more and more people will just end up going overseas, more Americans, more entrepreneurial Americans.

CONARD: I don't know how many will go overseas. What they do do though—we know what they do in Europe. They go on vacation. What you want your top-talented people to do is go to work, take risks that grow the economy. What you don't want them to do is say, 'I've made enough money as a dentist. I'm going to take the summer off and go on vacation,' and do very little for their fellow citizen in terms of creating jobs and organizing unskilled workers into companies that are going to produce value for customers and make those workers more productive and ultimately increase their wages.

BENNETT: In other words, they become demotivated.

CONARD: Yes, exactly.

BENNETT: Ed, will you let our listeners know where to get your book?

CONARD: Of course, you can get it on Amazon and all the online book sellers. If you go to you can buy it there and watch a lot of video from TV, podcasts from radio and op-eds in the print media.

BENNETT: Thanks, Ed, for being on Financial Myth Busting. Everybody, it's The Upside of Inequality: How Good Intentions Undermine the Middle Class.

For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.

About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.

She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.