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Rui Dai Headshot

Should the Super Rich Be Richer?

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With the presidential election coming up in just a few short months, one of the biggest questions on everyone's minds is economics, specifically unemployment. President Obama has attempted to generate a momentum to raise higher taxes on the rich and giving other incentives to try to lower unemployment. The Republicans have always supported, though will only now infrequently say out-right, that the rich are the ones who create the jobs and therefore deserve lower taxes.

In the past few days, the fight was just sparked in a very interesting direction by TED censoring one of its own talks about U.S. inequality and publicity for the soon-to-be-published book by Mitt Romney's former right-hand man at Bain Capital, Edward Conrad.

Over the past month, Edward Conrad has been drumming up publicity for his new book titled, Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong. According to interviews with Conrad, the book provides a radical outlook on the reasons behind the financial crisis and how the United States can keep its edge in the upcoming global race for innovation.

Conrad believes that the banks' irresponsibility is not the reason behind the 2008 meltdown. Instead, it is because everyone decided to suddenly take all of their money out of the banks at once, similar to what he claims is the catalyst for the crisis in 1929. Because banks loan out the money that it receives, there is rarely a lot of money in the banks at one time. As a result, if everyone runs to the bank at the same time, there is not enough for everyone and results in a financial crisis.

I can understand this reasoning, but Conrad fails to fully explain the insolvent loans that the banks were making at the time of the collapse. Conrad argues that the banks were making risky decisions in order to reap in greater gains later on, but Congressional hearings have indicated that the banks were betting against the loans that they were making. This suggests that what the banks were doing wasn't risk per se; it was more of rigging the game.

Conrad's failure to completely account for how the super rich can rig the system also cuts at his strategy for creating innovation. Conrad argues that the super rich benefits society more than the financial incentives that they bring in. For every dollar that the super rich receives, Conrad argues that society gains $20 in benefits. This may seem counterintuitive, but the math behind it seems solid. Of course, because the data that he used isn't released, it is still very likely that his analysis is skewed because he used mainly successful companies.

Conrad argues that founders of companies such as Microsoft, Apple and Facebook makes society richer, more than increasing their own wealth, because of the products and services that their companies provide. Society benefits 20 times more from the iPhone than the financial rewards that Apples makes off selling it. As a result, Conrad reasons that in order to promote more innovation and risk-taking that will create similar companies to benefit society, the financial incentive needs to be greater. The super rich need to be richer.

I disagree most strongly with this reasoning, because it completely fails to take into account the mounting evidence that increasing financial incentives does not correlate with increasing performance. Giving out large bonuses has been shown to be completely counterproductive. Similarly, making the super rich richer will not necessarily generate more benefits for society.

An example that Conrad gave to show the amount of wasted potential is what he calls the "Art History majors," people who are college graduates and undoubtedly extremely smart, but who lack the motivation to contribute more to society. Conrad believes that if the super rich become richer and there is greater inequality, these "Art History majors" will be incentivized to make more of their lives and thereby contribute more to society.

This is the crux of Conrad's argument for inequality: increase inequality and people will have to be more innovative and therefore contribute more back to society.

Despite the gaping loopholes in Conrad's argument, it still appears logically sound and theoretically plausible. However, macro historical evidence from a censored TED talk by Nick Hanauer completely eviscerate Conrad's entire argument. The TED talk demonstrates that the rich have become richer, but the rest of society hasn't gained nearly as much. The theoretical benefit that Conrad proposes the super rich contributes to society does not hold up against Hanauer's data.

If Conrad's theory were right, then the cost of living would have decreased by 20 fold for every one-fold increase of the superrich's financial wealth. Instead, the opposite is observed in the data provided by Hanauer's TED Talk. Average hourly earnings have decreased since 1970, while everything else from food, gas to rent and utilities have shot up. The average income of the top 1 percent has increased by 240 percent since 1970, while productivity only by 80 percent. Similarly, cutting taxes on the super rich clearly inversely correlates with the unemployment rate: the lower the taxes, the higher the unemployment.

Of course, the data that the TED talk presents is also slightly skewed for dramatic effect purposes, but it appears to be less so than the data Conrad said that he used. There are gaps in both arguments, but the gaps in Conrad's seem bigger.

Hanauer's TED talk directly contradicts Conrad's argument in his to-be-published book. This might be why the talk was censored. The official reason for the censorship is that the talk is too political and creates too much partisanship. More likely however, because the super rich sponsor TED, it was censored because it causes too much damage both to Conrad's argument and in connection with the Republican platform of lowering taxes.