In his new book (which I won’t link to here) 51-year-old .01%er Ed Conard, retired, makes a case for greater economic inequality. Yeah — he wants the top 10% to control more than 2/3 of America’s net worth. Conard argues increased wealth concentration at the top is necessary to drive nonproductive “art history majors” (a term he uses to describe lawyers and pretty much anyone he sees as adverse to competition and risk) from the sidelines. Ed hopes that, once we’ve got these wallflowers moving, they’ll get involved with socioeconomically productive endeavors, such as high-leverage (debt-laden) buyouts of companies followed by massive cost-cutting layoffs so that the businesses can be flipped like so many foreclosed properties.
“It’s not like the current payoff is motivating everybody to take risks,” he said. “We need twice as many people. When I look around, I see a world of unrealized opportunities for improvements, an abundance of talented people able to take the risks necessary to make improvements but a shortage of people and investors willing to take those risks. That doesn’t indicate to me that risk takers, as a whole, are overpaid. Quite the opposite.” The wealth concentrated at the top should be twice as large, he said. That way, the art-history majors would feel compelled to try to join them. Adam Davidson — NY Times
Let’s be honest here — private equity firms get cash-rich institutions (e.g., teachers’ pension funds) and ultra-rich individuals to front the capital to purchase an underperforming venture. This limited-partnership legal entity has investors essentially betting on the firm’s management strategy to produce a turnaround or notable growth. The PE firm comes in and “cuts the fat” (often on the backs of the labor force), executing an extreme bottom-line-focused strategy, and each of its management decisions is informed by the desire to exit the investment. The format is both exclusive — you’d typically need upwards of $1M to invest — and short-term focused. There’s zero incentive to think of healthy long-term growth for the asset, as the only goal is to reach IPO or acquisition.
At its best, Conard’s thought grants us a fairly honest portrayal of the inner machinations of his former partner’s take on distributive justice. It’s a scary sight. The fact that this set of folks is so eager to advocate for greater risk just four years after risk nearly destroyed our economy — and after we’ve seen only mixed recovery — tells me that the risk-takers responsible for the economic crisis saw little downside (punishment) to their behavior. Conard, Romney, and their ilk are the outcome of moral hazard.