In the end, commerce has proven to be the salvation of the poor, not charity

An interview with Edward Conard

by Adira Levine

The businessman and best-selling author discusses the financial crisis, economic growth and income inequality.This interview originally

 appeared in the August 14 edition of The Politic, the Yale Undergraduate Journal of Politics

http://www.edwardconard.com/

Edward Conard is a top-ten New York Times best-selling author of Unintended Consequences: Why Everything You’ve Been Told about the Economy is Wrong and a visiting scholar at the American Enterprise Institute. After earning his M.B.A. from Harvard Business School, Conard worked at Bain & Company and Wasserstein Perella. He was a partner at Bain Capital from 1993 to 2007 and headed Bain’s New York office starting in 2000. Conard received national media attention in 2011 for a then-anonymous contribution of $1 million to a Super PAC supporting the campaign of Mitt Romney, his former partner at Bain Capital. Conard currently sits on the board of directors of Waters Corporation.

The Politic: What do you see as the current direction of the economy?

There are two kinds of recessions. The most common recessions stem from temporary Keynesian-like lulls in demand. The economy declines briefly and then rebounds back to the prior trend line.

A temporary lull in demand can cause permanent damage to the economy. Displaced workers may never regain their prior productivity, for example. Keynesian stimulus attempts to temporarily inflate demand to avoid such displacement. It sacrifices long-term growth for short-term growth.

The second type of recessions, which are rarer, stem from permanent structural problems. Demand declines and grows from a permanently lower base, never rebounding back to the prior trend line. The economy can still achieve full employment but at lower wages than would have been the case had it rebounded.

Where the decline in demand is permanent, displacement is unavoidable. Keynesian stimulus becomes an expensive bridge to nowhere. Under these circumstances, a more optimal economic policy maximizes long-term growth.

Most of the arguments for Keynesian stimulus implicitly assume this recession stems from a temporary lull in demand. They often cite historical evidence, but most all the historical evidence is from recessions that stem from temporary lulls in demand. Advocates of Keynesian stimulus rarely acknowledge the difference between recessions that stem from the temporary lulls and permanent structural problems.

I believe the financial crisis exposed structural risks in our economy that we underestimated prior to the crisis. We assumed implicit government guarantees, which stand behind our banking system, mitigated the risk of bank runs because there hadn’t been a major run on U.S. banks since 1929. Despite the Fed’s successful intervention as the lender of last resort, we now realize there is much more risk of damage from bank runs than we realized. As a result, the economy has dialed back risk-taking in other areas to offset this now-recognized risk.

In my book, I predicted that fiscal and monetary stimulus wouldn’t have much effect on the recovery or cause inflation if we failed to mitigate the structural problems exposed by the financial crisis. We have not mitigated these risks.


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