One of the most important speeches of the 2016 election was delivered in Utah in June to an audience of ultra-rich Republicans that included Mitt Romney. The speaker was Edward Conard, who joined Bain Capital after graduating from Harvard Business School in 1982 and worked in private equity for twenty-five years before retiring to become, of all things, a pundit.
Conard thrives in debate. His first book, Unintended Consequences, was a revisionist history of the mortgage boom and bust as well as a defense of tax-cutting and high CEO pay. His second, The Upside of Inequality, was published in September. (The Washington Free Beacon had an excerpt from it here.) Conard’s style is direct and bracing, and what he has to say is grounded in decades of experience in the real world of investment and finance. He has been wildly successful. There is no question that he is an elite. Which makes what he told his peers all the more important.
Supporters of free enterprise, he acknowledged, have a problem that is larger than Donald Trump or Hillary Clinton. The problem is that the success of an information economy that values skilled and highly skilled labor creates a political backlash. And the reasons for this backlash are the very things that make the system prosperous.
Here is how it happened. The industrial economy was constrained by limits on capital and labor. That is no longer the case. “There’s a near infinite supply of labor now and there’s a near infinite supply of capital.” What constrains the information economy is rather a lack of “properly trained talent” and an unwillingness to take risks.
America has been fortunate: We have networks of talent in place in Silicon Valley whose risk-taking, when successful, is rewarded handsomely. “We are much more successful at achieving lottery-like successes that increase income inequality than the rest of the world.”
That creates the dilemma. The rise in income inequality not only generates envy but coincides with economic disruption that displaces workers who lose jobs to outsourcing and whose wages do not rise thanks to the limitless pool of unskilled labor. Conard put it in terms familiar to an observer of this campaign:
“If Whirlpool moves its plant to Mexico, economists today say, ‘Don’t worry, opportunistic entrepreneurs will swoop in and put everybody back to work and competition will force everybody to invest more capital per worker, and drive productivity back up to where it was. And the increase in productivity is critical to maintaining the high wages. But the successful entrepreneurs never show up because they have all moved to San Francisco and they’ve outsourced all of the manufacturing to Foxconn. And so these guys are left saying, ‘Wait a minute! The model doesn’t seem to work for me.’ And it doesn’t work for them.”
Conard said the advocates of free enterprise have lost control of the GOP and won’t return to power until they reach an understanding with the workers whose anger has driven them to Donald Trump. Just as the business community allied itself with the New Right and religious right in the 1980s and 1990s to cut taxes, Conard said, entrepreneurs and investors must reach a détente with the populist right today. His red line is embracing policies that would slow innovation because “in the long run the only thing that matters is the rate at which we increase productivity, and we don’t want to throw the baby out with the bath water in order to gain control.”
What are required, Conard said, are “tough, and perhaps even odious, compromises.” The first is rebalancing American trade. Not abandoning free trade altogether but writing parity into trade agreements. “If you sell us a dollar of labor, find a dollar of labor to buy from us. We’ve got lots of stuff to sell, we don’t care what you buy, find something and buy it, but your trade has to be balanced with us.” As Conard told Ben Smith, balance could be achieved through a system of import licenses. These are sure to be controversial.
“Unfortunately,” Conard went on, “we have to dial down low-skilled immigration. We have to recognize that there is more unemployment among the lesser-skilled workers than among the most-skilled workers.” The way to boost these workers’ jobs and wages is by creating a labor shortage. “It’s going to put pressure on employers to hire those workers and find jobs for them because they’ll be the only workers left to hire.”
This is what happened after the crackdown on illegal immigration in Arizona where, according to the Wall Street Journal, the state economy “took a hit” but “reduced competition for low-skilled jobs was a boon for some native-born construction and agricultural workers who got jobs or raises, and that the departures also saved the state money on education and health care.”
Conard not only would balance trade but also immigration. For the low-skilled immigrants here illegally, Conard would offer a truce to the Democrats in exchange for “dialing back” further low-skilled entries. He is somewhat fuzzy on how this truce would work, and if the parties involved would find it acceptable. Moving to a points-based migration system rather than a family-based system might do it. Seriously limiting the number of refugees we accept is another way. You could also build a wall.
There would be fewer low-skilled immigrants under Conard’s plan but also many more high-skilled immigrants. Not only would we prioritize skills, Conard envisions the United States government actively recruiting high-skilled immigrants from overseas. Rather than assign the task of recruitment to a government agency, he might consider easing the path to residency for foreign students already in American universities and allowing states to issue their own visas to high-skilled workers.
The immigrants would solve the lack of properly trained talent inhibiting American growth. And these new arrivals, Conard believes, would act synergistically with the other part of his plan: treating capital gains as ordinary income while lowering the corporate tax rate to 15 percent, thereby incentivizing risk-taking. The resulting growth would assuage the populist distemper and prolong the lifespan of America’s entitlement programs.
Conard’s plan has the advantage of not being tried. Are the political conditions ripe for the sort of trade-offs and logrolling he envisions? Would the advocates of immigration restriction distinguish between low-skilled Mexicans and high-skilled ones? Why not also increase the pool of properly trained talent by overhauling the American education system that has given us the degraded civic culture of 2016? Perhaps most important, who will provide the statesmanship to bring this alliance of capitalists and populists into being? Such questions are unanswerable as the election approaches its ineluctable, dreadful, anxious end.