• “We need to think deeply about what economic development is and who it is for; and, engage the larger society in that conversation.”

    Dr. David T. Barnard
    President and Vice-Chancellor
    University of Manitoba

  • “Rising income inequality undercuts the trust that is essential for the market system to work.”

    Art DeFehr
    President and CEO, Palliser Furniture.

  • “Investing in people in the new economy is now not just morally sound, but economically rational”

    Alan Freeman
    Cultural Economist

  • “Organizations and societies in which the top few appropriate most of the value are like inverted pyramids – inherently unstable”

    Dr. Hari Bapuji
    Associate Professor, University of Manitoba

  • “The present crisis has overturned many accepted truths: that poverty matters but inequality doesn't is one of the more important.”

    Radhika Desai
    Professor, Department of Political Studies, University of Manitoba

  • “The income gap between rich and poor, between skilled and unskilled workers, has been rising in both developed and less developed countries for a number of years. The trend is disturbing and we must find a way to turn this trend around.”

    Michael Benarroch
    Dean, I.H. Asper School of Business, University of Manitoba

Monday, June 11, 2012

Private Equity and Economic Inequality

By BEIF Team

Edward Conard, who worked at Bain & Company, has written and recently released a book entitled, Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong.To read a good review of this book by Roger Lowenstein, please click here.

This book appears at a time when the issue of income inequality continues to take centre stage and the investor class is under scrutiny for the returns they receive. Conard’s work at Bain & Company involved managing private equity, i.e., equity in companies that are not listed on a stock exchange. Typically, a private equity firm like Bain & Company would purchase another company and attempt to make a profit by streamlining operations or by expanding to different markets. Then the company would be sold after a few short years for a handsome profit. Critics argue that private equity companies increase inequality by ruthlessly pursuing efficiency that all too often results in massive layoffs, while giving huge returns to investors.

Conard’s book is an attempt to provide the perspective of investors. He seems to believe that income inequality is essentially good because it allows for investment. In the book, Conard argues that “risky investment drives improved productivity, which in turn drives higher wages and living standards for the poor and the rich.” This ‘trickle-down’ doctrine of economics places immense value on investment, and Conard takes it to its extreme believing that anything that hampers investment ultimately harms America’s productivity.

With this foundation, Conard goes a step further to suggest that “any increase in marginal [tax] rates will discourage the rich from investing”. In fact, he even argues against consumption taxes stating that “A heavy tax on consumption will discourage increased investment by making it harder to display status.” He also advocates against charity, arguing that it “draws from the pool of capital” available for investment.

Overall, Conard’s book aims to provide a solid defense of the virtue of private investment and a case against charity and taxation. In some ways, there is an underlying defense of economic inequality built into some of these arguments. No wonder that it does not directly deal with the other side of the issue - how to overcome the problems of economic inequality? And it also does not address the related question: how can public finances be raised and public goods be generated if there is no taxation on the rich and no charity by them?