Conservatives and Income Inequality
July 23rd, 2012

Joel Kotkin and Virginia Postrel do some good work trying to make income inequality a topic that conservatives are allowed to be interested in. It’s an excellent start.

There are plenty of good reasons for conservatives–and all Americans–to hope that Mitt Romney is elected president. But there are also a few factors that should give conservatives, in particular, some concern. At the most superficial level, there’s the precedent in electing the wealthiest man to ever hold the office. There’s no reason to fixate on this fact, but neither should its possible consequences be brushed aside.

Then there’s the question of what the defense of that wealth might cost. For instance, it should not force conservatives into defending the idea that the pursuit of wealth is the paramount American ideal. Nor should it force conservatives to defend all forms of wealth generation as noble, valuable, and good.

This last bit is already something of a problem for many conservatives. We tend to react to the left’s general distrust of the free market by insisting that every market-based outcome is efficient, helpful, and wise. We tend to react to the left’s general demonization of wealth by insisting that every rich guy deserves his fortune and that all transfers of wealth within the marketplace are inherently admirable and optimal.

But we ought to understand that very few markets are actually free, that even free markets frequently produce failures, and that some forms of wealth generation may be–while perfectly legitimate–more about gaming the financial system than creating any intrinsic value.

Jacob Weisberg’s analysis of why private equity is problematic for Romney, for instance, ought to trouble conservatives. Some samples:

It’s not clear that private equity—like other forms of financial innovation—is good for America. You’d think that if private equity made businesses more efficient and valuable overall, there’d be clear evidence to support it, but there isn’t. Private equity firms earn most of their money through financial engineering. A big share of their returns comes from “tax arbitrage”—figuring out how to exploit loopholes to pay less to the government. Because interest is a deductible business expense, debt financing means they often pay little or no corporate tax. Private equity’s reliance on leverage can also magnify short-term earnings without leaving the companies they manage more valuable overall. One legal but dubious practice that private equity firms engage in is paying large “special dividends” out of borrowed money.  As Jim Surowiecki of the New Yorker has written, “These dividends created no economic value—they just redistributed money from the company to the private-equity investors.” There’s some anecdotal evidence that the well-regarded Bain has been a better owner than most. But there’s no real way to evaluate that either.

And then there’s this:

It’s telling that George Romney, Mitt’s father, made around $200,000 through most of the years he ran American Motors Corporation. Doing work that clearly created jobs, the elder Romney paid an effective tax rate that averaged 37 percent. His son made vastly more running a corporate chop shop in an industry that does not appear to create jobs overall. In 2010, Mitt Romney paid an effective tax rate of 13.9 percent on $21.7 million in investment income—around 14 times as much as his father in inflation-adjusted terms. This difference encapsulates the change from corporate titans who lived in the same world as the people who worked for them, in an America with real social mobility, to a financial overclass that makes its own separate rules and has choked off social mobility. The elder Romney wasn’t embarrassed to explain what he’d done as a businessman or to release his tax returns.

This isn’t to say that private equity is scandalous or that Mitt Romney is a rascal. It’s merely to point out that if conservatives wish to support Mitt Romney (and they probably should), it’s not necessary that they be stampeded into defending the entire “private equity” view of the world.


  1. Galley Friend J.E. July 23, 2012 at 2:23 pm

    You’re making me defend Romney, which isn’t nice. Add the 14 percent that Romney paid on those capital gains and dividends to the 30something (or more) percent he paid the first he earned it to get a more realistic figure, vis-a-vis his father’s days as the salaried CEO of a company.

    Unless the argument is that all income, whether interest on passbook accounts (if there ever is such a thing again) or salaries, should be taxed at the same rate, this is apples and ducks.

  2. REPLY
  3. Mike July 23, 2012 at 3:41 pm

    We should compensate executives relative their job creation? That can’t possibly be even close to correct.

  4. REPLY
  5. TubbyLover69 July 23, 2012 at 5:33 pm

    Small point, but I’m pretty sure Romney won’t be the wealthiest man elected president.

    George Washington was far wealthier than Romney. On a personal-wealth-to-GNP ratio, GW was wealthier than Paul Allen (co-founder of Microsoft), Howard Hughes, or J.P. Getty. Other members of the Virginia dynasty–Jefferson and Madison–are estimated to have fortunes around $100 to $200 million today, putting them in Romney’s league. The Kennedy family fortune peaked at about $1 billion. JFK never inherited the money, but it was always at his disposal. Others? Teddy Roosevelt ($125 million), LBJ ($98 million), Hoover ($75 million).

    Americans seem to have a pretty strong stomach for income inequality in presidents. The worry, I suppose, is what Kaus calls “social inequality.” And that’s my real problem with Romney. It’s really hard to imagine him in a tin can, in the middle of the Pacific, perfectly at home among the sons of farmers and mechanics.

  6. REPLY
  7. Norman Pfyster July 23, 2012 at 7:46 pm

    “These dividends created no economic value—they just redistributed money from the company to the private-equity investors.”

    No shit, sherlock! That’s what a dividend is. It’s rather embarassing when one of the most basic corporate finance transactions (hey, even my grandma receives dividends on her stocks) is treated as some kind of scandalous behavior.

  8. REPLY
  9. Nedward July 23, 2012 at 10:31 pm

    What kind of median conservative voter is “for” or “against” a born-rich guy who got richer mostly via moving boxes around (Weisberg /Surowiecki as sophisticated metro liberals need the pseudo-academic nomenclature of “tax arbitrage” to grapple with this)? I thought they were supposed to be sick of a policy realm dominated by Romneys, Bloombergs, Arianna Huffingtons, and George Soroses, et al. As for Romney Sr. the silent majority didn’t care for him, either. It figures that he’d be admired instead by today’s left vanguard, with overlap on the “alternative right” when they’re waxing worshipful of the pre-Vietnam elite. It seems the default modern liberal status consciousness is awed respect of the mega-rich except when carrying the surname Koch or otherwise engaged in counter-revolutionary activity. In contrast the Tea Party philosophy was never centered on propping up a specimen like Romney; you may be thinking of the Rand-thumping libertarian dorks.

  10. REPLY
  11. Steve Sailer July 23, 2012 at 10:37 pm

    The GOP previously picked a George W. Bush, a man who had tried to get rich in the oil business and repeatedly failed.

  12. REPLY
  13. Jason O. July 24, 2012 at 10:46 am

    Romney the elder’s experience at AMC was in fact a blueprint for Mitt’s Bain experience. Nash and Hudson were both failing companies that executed a defensive merger. As CEO George reorganized the new AMC to reflect the reality of that US auto market, shedding brands and shrinking manufacturing capacity (read: jobs). When viewed as a competitor to the Big Three in the 60’s and 70’s, AMC was irrelevant. The company continually cut costs and capacity (read: jobs) until its eventual demise in the 80’s.

    Weisberg’s example is not only invalid, it’s an example of the (now standard) liberal pundit move of looking into the past and finding “good” “centrist” Republicans as a contrast to today’s “extremist” GOP. The fact that Weisberg uses Mitt’s dad to do this strikes me as particularly underhanded.

  14. REPLY
  15. Joe Sixpack July 24, 2012 at 3:30 pm

    Oh Lord.

    Go read “The Theory of Moral Sentiments” and “The Wealth of Nations” by Adam Smith.

    Getting rich in and of itself is a moral good.

    “Smith goes on to say that building up capital is an essential condition for economic progress. By saving some of what we produce instead of immediately consuming it, we can invest in new, dedicated, labour-saving equipment. The more we invest, the more efficient our production becomes. It is a virtuous circle.
    Thanks to this growth of capital, prosperity becomes an expanding pie: everyone becomes richer. But capital can be lost, through mistakes, or theft, or profligate government spending. Governments should aim to allow people to build up capital in the confidence that they will enjoy its fruits, and should be aware that their own taxation and spending will eat into the nation’s productive capital.”

  16. REPLY
  17. Jonathan V. Last July 29, 2012 at 9:13 am

    In the mid-2000s Howard Hubler was paid enormous sums of money by Morgan Stanley. In his final year at the firm, he was paid something like $26 million. He got very rich.

    Hubler was personally responsible for $9 *billion* in losses for Morgan Stanley that year.

    It’s unclear to me how Hubler’s getting rich is either a moral good or a component of economic efficiency.

  18. REPLY
  19. reflectionephemeral July 24, 2012 at 5:34 pm

    We tend to react to the left’s general distrust of the free market

    I’m under 40, so I’m unfamiliar with a Democratic Party that distrusts the free market. Could you spell this out a bit?

  20. REPLY
  21. The flip side of capitalism » Cold Fury July 29, 2012 at 5:19 am

    […] not always a uncomfortable thing defending the wealthy. Nor should it be, really. This last bit is already something of a problem for many conservatives. We tend to react […]