May 18

The Wealthy Do Not Create Jobs

ScroogeAt the May 2012 TED conference in Long Beach, an interesting thing happened, a venture capitalist stood up before the audience and told the truth. One of the original investors in and current chief of Second Avenue Partners, an advisory group and investment company, Nick Hanauer, gave a six minute speech in which he detailed an obvious yet taboo fact, the wealthy do not create jobs. The talk was originally yanked from TED’s website, and later only released by request, which in and of itself speaks volumes. The essence of Hanauer’s confession is that the conventional wisdom that the wealthy are somehow responsible for the creation of jobs through entrepreneurship is false. The truth, he shrewdly points out, is that the economy is much more like an ecosystem, wherein each segment depends upon another segment for survival, and no one group is any more important than another. Alternatively, in a free market, it is the consumer who drives job creation, not the entrepreneur. The full text of the speech can be found here.

It should come as no surprise that the talk spawned a vitriolic response from many TED attendees, who blasted an initial decision to post the talk publicly, and from TED itself, which now treats the six minutes of truth telling as if it never happened, citing the “political” nature of the disputation. It is unclear to me when exactly basic economics became political. I would hazard a guess that it occurred somewhere between 1979 and the Republican Party’s complete assimilation by sociopathic billionaires and tax-cut hawks in 2008. What is so striking about the reaction to Hanauer’s words is that he did nothing more than lay out basic truths about supply, demand, production and employment.

That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is a “circle of life” like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

So when businesspeople take credit for creating jobs, it’s a little like squirrels taking credit for creating evolution. In fact, it’s the other way around.

Anyone who’s ever run a business knows that hiring more people is a capitalists course of last resort, something we do only when increasing customer demand requires it.  In this sense, calling ourselves job creators isn’t just inaccurate, it’s disingenuous.

He also lampooned another widely accepted theory, that tax cuts for the wealthy create jobs.

If it were true that lower tax rates and more wealth for the wealthy would lead to more job creation, then today we would be drowning in jobs.  And yet unemployment and under-employment is at record highs.

Hanauer’s ideas were delivered in such a matter-of-fact and simple manner that it left little room for ambiguity or misunderstanding. The economy is much like any ecosystem, or as he refers to it, a “feedback-loop.” Without consumers, entrepreneurs and businesses do not exist, and once a business does exist, it will not create new jobs until consumer demand not only dictates it, but when the capitalist is left with no other alternative. Hiring an employee is a last resort, rather than a noble calling.  He cleverly points out that the most fundamental reason that the middle class and poor consumers drive job creation is the difference in consumption levels. For example, he and his family own three cars, not three-thousand cars. But if three thousand consumers were given jobs capable of purchasing a car, then orders to manufacture cars would increase, and car manufactures would be forced by necessity to hire more employees. No matter how wealthy Hanauer becomes, he will never need more than three cars. He can never eat out at a capitalist’s restaurant more than seven times per week. It is an empirical impossibility. However, millions of new employees will eat millions of meals at restaurants, and therefore create a far greater number of jobs. Hanauer understands that forming a business does not occur in a vacuum. Without customers, there is no capitalist, and there are no employees.

I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.

Here’s an incredible fact.  If the typical American family still got today the same share of income they earned in 1980, they would earn about 25% more and have an astounding $13,000 more a year. Where would the economy be if that were the case?

Hanauer also points out that the wealthy have come to expect certain tax and other benefits in our capitalist system as a direct result of being deified as “job creators,” if even subconsciously. In other words, many rich Americans, even business owners, venture capitalists, and executives, may not be aware of how flawed the notion is that the wealth creates employment. The expectation of uncommon treatment under the law may be the by-product of an extraordinary campaign by a few motivated folks and wide acceptance of the scheme by a fawning electorate. Many wealthy individuals may actually believe that their wealth alone creates jobs, and left to their own devices, they could produce equal wealth absent consumers at all, notwithstanding the utter absurdity of the hypothesis. So-called “job creators” have been elevated to superhuman or even prophetical status, not simply by themselves, but by those of us who mistakenly believe it. The story is as old as capitalism itself. The poor father who must beg Ebenezer Scrooge for each and every penny he earns–no Scrooge, no job. When the fact of the matter is that if each of us were paid as little as the wealthy would prefer, the wealthy would lose their fortunes overnight. Without enough disposable income to purchase their products, employment would shrink, factories would close, and yachts would sit idle.

Significant privileges have come to capitalists like me for being perceived as “job creators” at the center of the economic universe, and the language and metaphors we use to defend the fairness of the current social and economic arrangements is telling. For instance, it is a small step from “job creator” to “The Creator”. We did not accidentally choose this language. It is only honest to admit that calling oneself a “job creator” is both an assertion about how economics works and the a claim on status and privileges.

The extraordinary differential between a 15% tax rate on capital gains, dividends, and carried interest for capitalists, and the 35% top marginal rate on work for ordinary Americans is a privilege that is hard to justify without just a touch of deification.

Much like a small farm pond, the economy relies upon the smallest among us to maintain the health of the whole. The water must be kept oxygenated by just the right number of plants and exposure to the air. Insects and other small animals must come to the pond in order to feed and to be fed upon by the more developed fish. The less developed fish and other animals must feed upon the waste of the plants and more developed fish in order to prevent the pond from becoming unable to sustain life. If any of the elements is removed, the pond and all within it will die. So too will the economy. Without those willing to risk capital in order to fund business ventures, consumers can not purchase goods to increase employment, but without employment and the subsequent income, those risking the capital lose everything. Because there are so far fewer capitalists required in relation to consumers in order to sustain a market economy, the consumers role is incontestably more important. As Hanauer correctly argued, try as they might, the wealthy simply can not purchase enough goods and services to drive job creation, while large numbers of consumers with disposable income can buoy an economy to unprecedented growth, and create countless jobs in the process.

The modern boycott is a striking example of Hanauer’s thesis. During an effective boycott, consumers refuse to purchase the goods and services of a particular capitalist. If a large enough number of consumers participate, the capitalist is forced to terminate employees due to decreased demand–remember, hiring employees is an absolute last resort, and also the first line of defense against falling sales–as well as to scale back payments to executives, owners, and shareholders. If the boycott continues for a long enough period of time, the resources of the capitalist no longer are able to fund the remaining liabilities, and the capitalist fails. By contrast, in a functioning market system, if a capitalist closes his or her doors, consumers are free to begin spending disposable income with a competing capitalist, who is then forced to increase employment in order to meet demand. In other words, in an efficient capitalist marketplace, the consumer is more important than that wealthy business owner.

The most striking, and in my view, the most telling passage in Hanauer’s soliloquy is also the most elemental.

It is astounding how significantly one idea can shape a society and its policies.  Consider this one.

If taxes on the rich go up, job creation will go down.

This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today’s economic landscape

Why is it that Democrats seldom challenge this idea? Cynically, one could easily draw the conclusion that the festering tumor of our campaign financing structure render Democrats and Republicans alike unable to challenge a notion as ridiculous as this, for fear of political reprisal. An idea that has long since been debunked by economists left, right, and center. Right wing groups have made it no secret that they will actively fund primary challengers to Republican incumbents who do not walk the line of tax cuts. Could Democrats have a more surreptitious agreement with their wealthy benefactors? I prefer to think it is a combination of a sincere misunderstanding of economics, a real fear that the public has so come to believe the notion of the rich as “job creators” that to say otherwise would be politically damaging, and an outright and not so subtle relationship with wealthy donors who expect tax cuts in return for now unlimited amounts of cash.

What I will never understand is how it is that those who would most benefit from reversing the current tax policies so ardently campaign against it. Perhaps they have been deified to the degree that they are incapable of understanding the disastrous consequences of their actions. Whatever the case, it is we the consumers and the middle class who hold the key to reversing this trend, and returning Hanauer and those who agree with his understanding of sound economics to their proper place in the halls of government, and to cast out those who wish to do harm to not only us, but themselves.

It is time for the consumer to rise up against those businesses that champion the misguided notion of wealth as job creation. It is as easy as getting to know your local business owners and spending your money accordingly. The sheer thought of this frightens the wealthy so that they spend billions each year blistering the airwaves with propaganda in an effort to prevent us from learning Hanauer’s elemental truth. It is as simple as avoiding the large corporations whose money is spent reinforcing these false, hateful and misguided ideas. Hanauer is right, the economy will ultimately shift so long as consumer spending remains constant or grows. Once the tax code is altered, there will be no shortage of opportunities for the “job creators” to get back to work. In fact, times will never be better for them.