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?