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Ed Conard, former Managing Director of Bain Capital and author of Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong and more recently, the Upside of Inequality, believes that wage inequality is not a bad thing. He says that wage inequality is a result of outliers, successful entrepreneurs who took risks and are receiving massive payoffs as a result. It is their developments that then lead to wage growth for the middle class. Therefore, wage inequality is necessary to incentivise people to take risks and help grow the economy.
Conard is seen as a voice of conservative macroeconomics and gained fame for his TV debate with John Stewart on his first book which lasted over 40 minutes.
Some of the key takeaways from our exclusive interview:
- America needs to maintain immigration, but only of top talent
- The Federal Reserve needs to become empowered as the lender of last resort and encourage banks to lend or invest
- Corporate tax rate needs to be lower in America, or else jobs and money will only continue to migrate out of the US
- Born: 1956
- Residence: New York City
- Alma Mater: B.S.E. University of Michigan at Ann Arbor & M.B.A. 1982 Harvard Business School
- Fmr Managing Director at Bain Capital
- Fmr Director at Wasserstein Perella
- Visiting Scholar, American Enterprise Institute for Public Policy Research
- Board Member, Waters Corporation
- Author, Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong and Upside of Inequality.
How did you end up in PE/Consulting/Economics?
A friend of mine got into Harvard Business School, and I thought if he could get in, I could get in. So I applied and got in. And I bumped into some consulting firm, Booz Allen Hamilton, who said, “What are you doing in automotive engineering? You should be working in a consulting firm.” So ended up becoming friends with a guy who worked at Booz Allen and Hamilton, and he got me a job there for the summer.
I did a class project for Intel with some guys who worked at Bain Consulting. They said: “Geez, you oughta come to Bain Consulting”. They helped me get a job at Bain Consulting. I worked at Bain Consulting, and I bumped into Mitt [Romney].
After a while in consulting, I went off to investment banking. There was a bit of turmoil in the firm over how much was going to be held by Bill Bain and how much was going to be held by the partners and everyone else. So I went off to investment banking. Worked there a couple of years while the partners at Bain Consulting recruited Mitt to kind of lead the revolt [at Bain].
And then Mitt went out to recruit people who had left, myself included. And I said, “I will not go back to consulting because I’d already been a partner at a consulting firm and worked in an investment bank. But if you would hire me at Bain Capital, which was a tiny company at the time (like 75 million when I joined and 75 billion when I left)”.
He said, “I can not afford you because your pay is too high.”
I said, “Well, will work for free and you can look back, and you can decide how much I’m worth”.
I didn’t do anything in the first year, so he didn’t pay me much. In the second year, I saw a company called Waters Corporation. Which I thought was just an extraordinary company. We ended up buying it. We debated about whether to pay 340 million or 350 million.
Today it is worth its worth 12 billion dollars. And that made my career at Bain Capital
But why leave engineering in the first place?
Part of the reason why I ended up going with Ford Motor Company to Consulting, and ultimately, to Bain Capital was, was I always at Ford making doors fit cars more carefully, back in the 1970s, when they didn’t fit very well before people got concerned with fits and finishes. And I just thought to myself; I am never going to get rich doing this. All the money is going to go to the capital owners. Even if you are an engineer and got great ideas, it doesn’t matter because it is all going to go to the guys who own all the capital. Because your ideas have no value unless you have billions and billions of dollars in capital.
So how could I get to a more less capital intensive, more expertise intensive business then sort of work my way up to partnership?
So essentially, from a very early stage. You realised that to make money really or you wage grow, in other words, you would have to take a risk. Not the classical entrepreneurship mentality but very much an entrepreneur nonetheless. It is no surprise then that you would eventually find yourself vouching for the line of thought where we have to take risks, train ourselves to be experts and try to be the outliers.
Why write about economics?
The narrative was wrong. There wasn’t a great understanding of economics. That nobody had put together conservative macro view. At least as the way as I see it. In part, the reason that is, as economics is more and more data-intensive and empirically focused, to capture credibility. It becomes more narrow and fragmented.
So what you find is that everyone is doing their sliver, but no one is collecting the slivers into a macro-whole because they don’t want to get out of the little sliver they are in. Where they have their empirical evidence, made their name and had credibility.
I felt there are a few guys on the liberal side, Brad DeLong, Larry Summers, Paul Krugman, who are weaving it all together and not creating more little slices by doing it. Tyler Collins to a certain extent but not many. Glen Hubbard does not put together a book and say “Here is my macro view of the world”. And so I was frustrated with that and felt that it needed to be done.
So you have been spending much of your post-Bain Capital life investigating the conservative macroeconomic view and formulating a plan you feel would work best in the current economic circumstances. Not of 20 years ago or even 10 years ago but right now.
What is that plan to keep America as the top global economy?
So this is maybe a solution for America cause it probably has benefits for America that may hurt the rest of the world to some extent. The first recommendation that I make is that we should go out and recruit the most talented people from around the world and bring them to America. Now, we have about 105 million full-time workers; I think it is around 105 to 110. The top 5% are 5 million workers. There are 7 billion non-Americans. The top 5% would be 350 million. Half of them we don’t know who they are. Half of them are never going to move here. You get down to a pool of about 50 million. We got to get 5 million of those to double the number we have in the top 5%. I don’t know if that doubles our growth rate from 2 to 4%. I do not know if we are fishing out of a pool where one plus one equals two and a half.
[But] it’s our best shot at doubling our growth rate. We would be doubling the number of ultra-high skilled workers that we have.
We issue a million green cards a year. So in 5 years theoretically, and I know we could not do it that fast, we could double the number of people within the top 5%.
Mexico would be building a wall because they would be scared to death that we would take all their best people. That is what I would be trying to do (cue laugh on the allusion to Trump’s wall).
Number 2, I would lower the corporate tax rate. I think you have to get it in the range of 15% to matter…
Is 15-20% a reasonable corporate tax rate?
If you look at companies in the United States, like the Wal-marts of the world, they can’t move their intellectual property overseas. They are paying tax rates in the high 20s. If you look at tech companies, like Google and Facebook, they are paying like 15. If you don’t get it in the 20% range, they will pay all their taxes overseas. And if you cannot go too far in that direction, from the 25-30%, that Wal-marts are paying because they are passing it onto consumers anyway. You have to collect the tax revenue from somewhere. If you can get into that 15-20% range, I think you just make America just an unbeatable place to do business.
We are at historically high levels of government spending at this point in our business cycle. It is projected to grow 10 points over the next 30 years as Baby Boomers retire.
You cannot get there with organic grow. You have to be very worried that the Baby Boomers eat us alive and when they are done eating us alive, you got a billion smart hardworking entrepreneurial Chinese who are gonna say, “you know what, this is our opportunity to take over the world. These guys are at their weakest point right now. We should be taking advantage of this.”
You got to feed the Baby Boomers who will not take no for an answer and then you got to be ready to defend yourself at your weakest point. You need faster growth than 2% organic growth that we cannot get any more from innovation and tax reform. We need high skilled immigration to get there.
How would you bring about these changes?
My old sense would be that I would do the reforms in banking. Which I would strengthen the ability of the Fed to act as a lender of last resort because you have enormous risk-averse savings that have to get recycled in the economy.
The next thing I would do is I would issue a dollar of import license for every dollar for exports. I would demand a balanced trade. I would not let the rest of the world dump their risk-averse savings into our silos, which are overflowing. Which slows down our growth, which destabilises our banking system. We have no use for the money. We used it for sub-prime consumption. Germany used it for Greek consumption.
We are not making investments with that money.
We are not increasing productivity.
We are not raising wages.
All you get is a one-time hit, and then it goes away then becomes bad rather than good. I would put a stop to it. I would let the rest of the world solve their problems, Germany, Japan and China, let them solve their problems when it comes to risk-averse savings. I wouldn’t let them solve them at our worker’s expense.
I don’t think you can make for $20 what you can buy for $2 and be competitive in the long run. You have to trade with low-wage economies. It is going to put pressure on the wages of workers because you have smart engineers in Indiana, who are designing products and factories who employ Mexican workers, not US workers. That is going to slow productivity and wage growth for American workers, let’s not kid ourselves. I think it is better to do it with progressive taxation redistributing the benefits.
We know that free trade makes America, any country, stronger because the goods would not be cheaper if our displaced workers could not find higher wages in the US at the now lower cost of the goods. The problem though is that the worker gets about 20% of the value from low-cost goods. Half of that is captured by the top 20% to produce 50% of GDP. 20% is captured by retirees, and 5-10% is captured by the non-working poor. So the worker bears 100% of the cost but only 20% of the benefit.
He might be better off; she might be better off, we do not know to tell you the truth. We hope they are slightly better off. It is logical to say if you are going to bear the cost to get us all the benefits, we are going to redistribute the benefits through progressive taxation.
The last thing I would try to do is motivate the most talented people to put their talents to work on behalf of their fellow man. You know you can do that with philanthropy but another way to do that. Is show them as customers to deliver $5 of value or more for every dollar of value that you put into your pocket. The more of that, the better off we are going to be.
And what we need to do is, get our talented people, students, to feel responsible for putting their talents to work. People think that I am a conservative, but it is ironic because it is my view is that the talents of humankind are randomly distributed. Yes, we want you to take an entrepreneurial risk and be rewarded for that. Yes, we want you to work hard and be rewarded for that. But the fact that you were born smart and capable, you have an obligation to put those talents to work.
So there it is. The plan to save America and it comes with taking risks, incentivizing the smartest people in the world to come to America (yay expensive US universities) and freeing up equity. But what about the UK. The Market Mogul currently lives in London. With Brexit on the horizon and a finance/tech dependent capital, where does London stand?
London: Future Catastrophe or Sadiq Khan’s global jewel?
I tend to be optimistic, not pessimistic to tell you the truth. Cause I think London has proven to be just a uniquely good place for ideas to germinate…Listen to the podcast to unlock the rest of our interview with Ed Conard, as he talks about Brexit, the future of London and what millennials should take away from his book!