Unintended Consequences, why everything that you've been told about the economy is wrong

by Edward Conard, former managing director of Bain Capital, LLC
isbn: 978-1-59184-550-8

notes:
the US was prosperous [after world war II] for a unique set of reason that are impossible to duplicate today, including a decade-long depression, destruction of the rest of the developed world's infrastructure, a failure of potential foreign competitors to educate their people and a highly restricted supply of workers.

Why did US capitalize on the internet to accelerate productivity more effectively than Europe and Japan. both had access to the same technology, similarly educated work forces and the necessary investment capital.

innovation is no different from any other investment... The quantity of ideas, both good and bad, comes from systematic investment.....economy must divert scarce resources, in this case, talented labor, from production for current consumption to the search for and implementation of new ideas. much of this investment results in failure. antiquated accounting obscures the line between investment and innovation by expensing rather than capitalizing investment in innovation.

risk taking is a function of the amount of wealth, namely equity, available to underwrite risk and the willingness to take risk per dollar of equity.

Does culture or incentives motivate risk taking? "In an era....[that] requires businesses to pour money into risky investments in order to find unproven innovations, talented U.S. employees to risk their precious once in a lifetime careers to lead these efforts and investors to defer consumption to underwrite this risk, it's a dangerous time to experiment with unconventional and unproven economics."

need to hold more capital in reserve to underwrite risk

leaving short-term capital idle cause high unemployment. Keynes "paradox of thrift"

rising home prices affected the behavior of poor home owners far more than that of wealthy homeowners. [borrowed against their houses for real outlays, not to invest or pay down debt]

how do you reduce the risk of damage from withdrawals?

history has show that lawmakers do not offset increases in government expenditures with future reductions. future spending cuts.... are virtually nonexistent.... lawmakers are most likely to follow increases in spending with more increases.

the government is ill-equipped to replace risk taking and investment in a way that truly avoid losses and bankruptcies and successfully transitions the economy to a more optimal allocation of resources. [due to politicians catering to voters] Most voters consume virtually everyting the earn. save ... nothing, invest...less, ... seldom underwrite any risk.

economist Paul Krugman agrees. "public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect."

consumers ultimately pay corporate taxes in the higher price of goods. the reason that politicians prefer higher corporate taxes is because most consumers don't recognize that they are being taxed.

If voters want economic policies that increase risk taking, accelerate growth and reduce unemployment, they must elect lawmakers who respect and encourage risk takers. the alternative is lawmakers who believe the increased risk of damage from withdrawals, increased government spending (which demands higher taxes) and far-reaching regulatory changes filled with unintended consequences has little, if any, impact on risk taking, economic growth and increased employment.

rich invest rather than consume a portion of their income. [which] creates value for consumers and wager earners over and above the value it creates for investors....[through] wages, value of products. the poor  capture so little of value from investment [because] of the 44 million people in poverty in 2009, according to the Census, very few work. they largely garner value through income redistribution, not through the economics of investment, which creates value through wages and the consumption it buys.....Today, the bottom 20 percent of household supply only 15 hours/week of work, on average. Their incomes don't reflect the economic wages of the working poor; they reflect benefits paid by the government.

taxing the rich and redistributing their income comes at the expense of the middle class. the richest families consume very little of their income, perhaps 10 percent or less. .. had the rich continued investing, the demands of consumers would have dictated the success and failure of their investments. investors would have run experiments to find new products that uncover those demands.

in addition to reducing investment and the motivation that drives it, redistribution of income by the government decouples the full cost of labor from its market price.... if companies don't bear the full cost of employees, employees will end up earning more than they contribute... they will earn wages proportional to their economic contribution from business plus government benefits unrelated to their economic contribution... misallocation diverts scarce resources from more productive endeavors to less productive  endeavors. investment declines and growth slows.

charity may even hurt the poor more than it helps them. Dambisa Moyo... 'evidence overwhelmingly demonstrates that aid in Africa has made the poor poorer, and growth slower.' similarly expenditures to reduce U.S. poverty may have contributed to a greater number of children born out of wedlock, reduced hours of labor supplied by poor families, increased dropout rates, increased drug use and elevated crime rates.

what burdens future generations is not debt per se but government-induced consumption whose increase comes at the expense of reduced investment. a reduction in investment and risk taking slows growth and diminishes the future for our children

a shortage of talent exists... because a large number of college graduates refuse to take the risk and responsibility necessary to bring unrealized investment opportunities to fruition.

this uniquely American innovation-based strategy will not succeed if we reduce the payouts for successful risk taking...payouts for lucky success motivate and justify risk taking. If we lower the payoffs for luck, we lower the willingness of investors to risk probably failure. that will slow economic activity and diminish the grown of wages... consumers and wage earners, not investors, capture almost all of the value from risk taking. Rapidly changing U.S. demographics will make it harder ... to pursue an investment based strategy.