Photo: 60 Minutes
I had high hopes that Presidential candidate Mitt Romney might have a compelling plan to fix the U.S. economy.After all, as Romney often observes, he has spent most of his life working in the private sector, buying and restructuring businesses.
And Mitt Romney’s overall economic plan certainly does have some positive points, at least with respect to streamlining the economy over the long term.
But unfortunately, Romney’s plan is not likely to help the economy out of its current funk.
Romney’s plan, in fact, suggests that Romney does not actually understand what’s wrong with the economy. The solution he is proposing–giving rich people and companies more cash to spend and invest–will not solve the problem the economy faces right now. So Romney’s policies, if fully implemented, aren’t likely to help anything.
(In fact, arguably, they will make things worse.)
Specifically, Romney’s policies are designed to give more money to wealthy Americans and companies, on the theory that they will then use this cash to invest in other companies and create jobs.
This treatment plan ignores two important things:
- The wealthiest Americans and corporations already have plenty of cash to invest. The reason they are not investing it aggressively is not that they don’t have it–it’s that the investments won’t produce a compelling return (because the customers of the companies they would be investing in, average Americans, are strapped).
- Contrary to common wisdom, rich people do not create the jobs in this country. Rich people (investors) help create jobs, but no sustainable job is created without the help of a healthy economic ecosystem–one that depends heavily on the financial health of hundreds of millions of American consumers.
The argument that “rich people create the jobs” is repeated so often that many people regard it as fact.
Specifically, the argument goes, entrepreneurs and investors, when incented by low taxes, build companies and create millions of jobs.
And these entrepreneurs and investors, therefore, the argument goes, can solve our nation’s huge unemployment problem — if only we cut taxes and regulations so they can be incented to build more companies and create more jobs.
In other words, this thinking goes, by even considering raising taxes on “the 1%,” we are considering destroying the very mechanism that makes our economy the strongest and biggest in the world: The incentive for entrepreneurs and investors to build companies in the hope of getting rich and, in the process, creating millions of jobs.
There have long been many problems with this argument starting with
- Taxes on rich people (capital gains and income) are, relative to history, low, so raising them would only begin to bring them back in line with prior prosperous periods, and
- Dozens of rich entrepreneurs have already gone on record confirming that a modest hike in capital gains and income taxes would not have the slightest impact on their desire to create companies and jobs, given that tax rates are historically low.
So this argument, which many people regard as fact, is already flawed.
But last year, a super-rich and super-successful American explained the most important reason the theory is absurd, while calling for higher taxes on himself and people like him.
Photo: National Taxpayers Union
The most important reason the theory that “rich people create the jobs” is wrong, argued Nick Hanauer, the founder of online advertising company aQuantive, which Microsoft bought for $6.4 billion, is that rich people cannot single-handedly create sustainable jobs, even if they found and build companies that eventually employ thousands of people.What creates the jobs, Hanauer astutely observes, is a healthy economic ecosystem surrounding the company, which starts with the company’s customers.
The company’s customers buy the company’s products, which, in turn, creates the need for the employees to produce, sell, and service those products. If those customers go broke, the demand for the company’s products will collapse. And the jobs will disappear, regardless of what the entrepreneur does.
Now, of course entrepreneurs are an important part of the company-creation process. And so are investors, who risk capital in the hope of earning returns. But, ultimately, whether a new company continues growing and creates self-sustaining jobs is a function of customers’ ability and willingness to pay for the company’s products, not the entrepreneur or the investor capital. Suggesting that “rich entrepreneurs and investors” create the jobs, therefore, Hanauer observes, is like suggesting that squirrels create evolution.
(Or, to put it even more simply, it’s like saying that a seed creates a tree. The seed does not create the tree. The seed starts the tree. But what creates the tree is the combination of the DNA in the seed and the soil, sunshine, water, atmosphere, nutrients, and other factors that nurture it. If you don’t believe this, try planting a seed in a desert, or on the moon. The seed won’t create anything. It will die.)
So, then, if what creates the jobs in our economy is, in part, “customers,” who are these customers? And what can government policy do to make sure these customers have more money to spend to create demand and, thus, jobs?
The customers of most companies, Hanauer points out, are ultimately the gigantic middle class — the hundreds of millions of Americans who currently take home a much smaller share of the national income than they did 30 years ago, before tax policy aimed at helping rich people get richer created an extreme of income and wealth inequality not seen since the 1920s.
The middle class has been pummelled, in part, by tax policies that reward “the 1%” at the expense of everyone else. (It has also been pummelled by globalization and technology improvements, which are largely outside of any one country’s control.)
But aren’t the huge pots of gold taken home by “the 1%” supposed to “trickle down” to the middle class and thus benefit everyone? Isn’t that the way it’s supposed to work?
Yes, that’s the way it’s supposed to work.
Unfortunately, that’s not the way it actually works.
And Hanauer explains why.
Hanauer himself takes home more than $10 million a year of income. On this income, he says, he pays an 11% tax rate. (Presumably, most of Hanauer’s income is dividends and long-term capital gains, which carry a tax rate of 15%. And then he probably has some tax shelters that knock the rate down the rest of the way).
With the more than $9 million a year Hanauer keeps, he buys lots of stuff. But, importantly, he doesn’t buy as much stuff as would be bought if that $9 million were instead earned by 9,000 middle-class Americans each taking home an extra $1,000 a year.
Because, despite Hanauer’s impressive lifestyle — his family owns a plane — most of the $9+ million just goes straight into the bank (where it either sits and earns interest or gets invested in companies that ultimately need strong demand to sell products and create jobs). For a specific example, Hanauer points out that his family owns 3 cars, not the 3,000 that might be bought if his $9+ million were taken home by a few thousand families.
If that $9+ million had gone to 9,000 families instead of Hanauer, it would almost certainly have been pumped right back into the economy via consumption (i.e., demand). And, in so doing, it would have created more jobs.
Hanauer estimates that, if most American families were taking home the same share of the national income that they were taking home 30 years ago, every family would have another $10,000 of disposable income to spend.
That, Hanauer points out, would have a huge impact on demand — and, thereby job creation.
It’s time we stopped mouthing the fiction that “rich people create the jobs.”
Rich people don’t create the jobs.
Our economy creates jobs.
We’re all in this together. And until we return to more reasonable tax policies that help the 99% instead of just the 1%, our economy is going to go nowhere.
Mitt Romney’s plan to fix the economy would put more cash in the pockets of the wealthiest Americans and take cash and benefits out of the pockets of everyone else.
No one likes paying taxes, so it’s no surprise that so many wealthy Americans support Mitt Romney. And there is also certainly an argument to be made that our government is too big and that one way to start curtailing the size of government is to cut taxes and deprive the government of revenue.
But that’s a different issue than whether Mitt Romney’s plan will help fix our ailing economy.
Unfortunately, given that the problem in the economy is not that wealthy investors and companies don’t have enough cash but that the middle-class doesn’t have enough cash, it probably won’t.
PS: This argument usually strikes a nerve, especially among wealthy entrepreneurs and investors who have always been credited with “creating jobs.” The two smartest arguments made by those who believe that rich people DO create the jobs are that 1) the success of Silicon Valley proves that entrepreneurs and investors create the jobs, and 2) the observation that brilliant entrepreneurs like Steve Jobs create demand out of thin air by inventing products people didn’t know they wanted. These arguments sound seductive and persuasive, but they miss the key point. Click this follow-up to see why: No, Entrepreneurs Like Steve Jobs Do Not “Create Jobs” By Inventing Products Like The iPhone
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