By ADAM DAVIDSON
Published: May 1, 2012
Ever since the financial crisis started, we’ve heard plenty from the 1 percent. We’ve heard them giving defensive testimony in Congressional hearings or issuing anodyne statements flanked by lawyers and image consultants. They typically repeat platitudes about investment, risk-taking and job creation with the veiled contempt that the nation doesn’t understand their contribution. You get the sense that they’re afraid to say what they really believe. What do the superrich say when the cameras aren’t there?
With that in mind, I recently met Edward Conard on 57th Street and Madison Avenue, just outside his office at Bain Capital, the private-equity firm he helped build into a multibillion-dollar business by buying, fixing up and selling off companies at a profit. Conard, who retired a few years ago at 51, is not merely a member of the 1 percent. He’s a member of the 0.1 percent. His wealth is most likely in the hundreds of millions; he lives in an Upper East Side town house just off Fifth Avenue; and he is one of the largest donors to his old boss and friend, Mitt Romney.
Unlike his former colleagues, Conard wants to have an open conversation about wealth. He has spent the last four years writing a book that he hopes will forever change the way we view the superrich’s role in our society. “Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong,” to be published in hardcover next month by Portfolio, 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.
Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.”
This is the usual defense of the 1 percent. Conard, however, has laid out a tightly argued case for just how much consumers actually benefit from the wealthy. Take computers, for example. A small number of innovators and investors may have earned disproportionate billions as the I.T. industry grew, but they got that money by competing to constantly improve their products and simultaneously lower prices. Their work has helped everyone get a lot more value. Cheap, improved computing helps us do our jobs more effectively and, often, earn more money. Countless other industries (travel, telecom, entertainment) use that computing power to lower their prices and enhance their products. This generally makes life more efficient and helps the economy grow.
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.
Google’s contribution is obvious. What about investment banks, with their complicated financial derivatives and overleveraged balance sheets? Conard argues that they make the economy more efficient, too. 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. 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.
Every once in a while, this system breaks down. For one reason or another, the savers panic and demand all their money back. This causes a massive problem because the money isn’t sitting at the bank; it’s out in the world in the form of long-term loans. “A lot of people don’t realize that what happened in 2008 was nearly identical to what happened in 1929,” he says. “Depositors ran to the bank to withdraw their money only to discover, like the citizens of Bedford Falls” — referring to the movie “It’s a Wonderful Life” — “that there was no money in the vault. All that money had been lent.”
In 2008 it was large pension funds, insurance companies and other huge institutional investors that withdrew in panic. Conard argues in retrospect that it was these withdrawals that led to the crisis — not, as so many others have argued, an orgy of irresponsible lending. He points to the fact that, according to the Financial Crisis Inquiry Commission, banks lost $320 billion through mortgage-backed securities, but withdrawals disproportionately amounted to five times that. This stance, which largely absolves the banks, is not shared by many analysts. Regardless, Conard told me: “The banks did what we wanted them to do. They put short-term money back into the economy. What they didn’t expect is that depositors would withdraw their money, because they hadn’t withdrawn their money en masse since 1929.”
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. They were new tools that served a market need for the world’s most sophisticated investors, who bought them in droves. And they didn’t cause the panic anyway, he says; the withdrawals did.
Even though these big conclusions are at odds with most other accounts, several economists said that they see Conard’s description of the crisis as more than just an apologia for the banking class (though it certainly is that, too). Andrei Shleifer, an influential Harvard economist, told me that he thought Conard was “genuinely fantastic on finance.”
“Unintended Consequences” only mentions Romney by name once (and in the acknowledgments, at that), but Conard hopes that the arguments detailed in his book will help readers understand why it’s so crucial that his former boss — who believes the government should help the investor class — win this November. As I read “Unintended Consequences,” though, I wondered if the book would have the opposite effect. Even staunch Republicans and many members of the Tea Party might bristle at a worldview that celebrates the coastal elite and says many talented people in the middle class aren’t pulling their weight. Was Conard saddling his old boss with another example of how out of touch those with car elevators and multiple Cadillacs can be? In this time of overheated arguments between opponents who rarely listen to one another, here was a rare member of the 1 percent openly trying to make his case. How convincing is it?
Conard and I eventually sat down at a cafe off Madison. His book is filled with a lot of abstraction, so I asked him to show me how his ideas play out in the real world.
Conard picked up a soda can and pointed to the way the can’s side bent inward at the top. “I worked with the company that makes the machine that tapers that can,” he told me. That little taper allows manufacturers to make the same size can with a tiny bit less aluminum. “It saves a fraction of a penny on every can,” he said. “There are a lot of soda cans in the world. That means the economy can produce more cans with the same amount of resources. It makes every American who buys a soda can a little bit richer because their paycheck buys more.”
Really long, but worth the time: http://www.nytimes.com/2012/05/06/ma...pagewanted=all
We'll see what Krugman says next.