A few days ago, I wrote about why Mitt Romney’s economic plan won’t fix the economy.
I explained that I had had high hopes for Romney, given his business experience, but that his plan revealed that he either doesn’t understand the problem in the economy or doesn’t know how to fix it.
Specifically, I observed that Mitt Romney’s plan to fix the economy centres on giving more cash to the richest American companies and individuals so that they might invest it and, in so doing, “create jobs.”
And then I explained that the problem in the economy is not that the richest American companies and individuals don’t have enough cash to invest—they have plenty.
Rather, the problem in the economy is that the American middle class, which is the primary end customer for almost every business that rich companies and individuals might invest in, is broke.
And Romney’s plan does not include any way to get more money to the middle class.
(Basically, Romney’s plan is “trickle-down” economics: Give rich people more money, and eventually this money will work its way down to the middle class. If the problem in our economy were that there was a scarcity of investment capital, this might be an effective solution, but there is plenty of investment capital available. The problem in the economy is that the economy’s primary customers, the hundreds of millions of people in the middle class, are broke. And one reason they are broke is that this country has been trying “trickle-down” economics for more than a decade, with tax rates on the richest Americans almost as low as they have ever been. During that period, inequality has grown, economic growth has stalled, and average wage growth has stalled—to the point where the middle class has gone broke. What will create sustainable jobs in our economy right now, therefore, is not “richer rich people” but a healthier economic ecosystem, in which entrepreneurs, investors, employees, and customers are all healthy. And right now, the most important one of these elements, the customers, are sick.)
In any event…
After I articulated my frustration with Romney’s plan, I got many of the same notes I always get when I explain why his plan won’t work. The polite ones went something like this:
“While I enjoy your writing, you obviously have never owned or started a successful business…”
But that’s just the thing.
I actually have started and own (part of) a successful business.
The business that I started and own part of is the business that is making it possible for you to read this article: Business Insider.
Photo: National Taxpayers Union
When I started Business Insider 5 years ago, the company had one employee (me) and no revenue. We had some seed capital, which my partners and I supplied, but that seed capital would have lasted us no more than 12 months. Had the economic ecosystem not been healthy enough to support our product, the entrepreneur and investor (me) would have created exactly zero sustainable jobs.Fortunately, the market liked our product and our customers were healthy enough to want and support it. So the company grew. This enabled us to raise more investment capital, hire more employees, and get more clients. And these employees and clients kept creating demand and supporting us, so the company continued to grow. And so on.
Yes, in the years since we started the company, investors have been kind enough to give us cash to invest ahead of our revenue growth, which means that some of the ~100 jobs created at Business Insider so far have been temporarily subsidized by investors. But eventually—soon—Business Insider will be self-sustaining. And, thereafter, all of the jobs at the company will be created and maintained by 1) the attractiveness of the product produced by our team, and 2) the ability and desire of our clients to pay to support that product.
As the entrepreneur, I will probably still be driving the ship (unless I crash it into the rocks and get canned), but I certainly won’t be “creating the jobs.” What will create and sustain the jobs at Business Insider will be the market demand for our product and the healthy economic ecosystem around it.
With this in mind, here are a few key points to keep in mind about the way the economy really works, as opposed to how Mitt Romney says it works:
- No one likes paying taxes, myself included, but modestly higher taxes would not make me work any less hard or remove my incentive to help create a great product. If the government jacked the top marginal tax rate up to 75% or 90%, sure, that would remove some incentive. But no one is talking about jacking the top marginal tax rate up that high. Most reasonable people are talking about raising it back to the Clinton-era levels. (Whether this should be done in the face of the current weak economy is a different question.)
- Raising personal and corporate income taxes, in fact, might encourage us to invest more money in our business, not less, because then we would pay less in taxes. I don’t make millions of dollars, but if I did, and the government raised taxes on this income, I might decide to pay myself less and instead invest the cash in the business. This reinvestment would be good for the economy, because it would encourage us to spend more and hire more people.
- Entrepreneurs do not “create jobs.” My ego would like to believe that I “created” the ~100 jobs at Business Insider, but, alas, I’d have to be delusional to believe that. What created and sustains all of these jobs, including mine, is the quality of the product we collectively produce combined with the willingness and ability of our customers to support that product. In other words, what sustains the jobs is the relatively healthy economic ecosystem in which Business Insider operates, not the person who founded and owns it.
- Investors do not “create jobs.” Investment capital is an important part of the economic ecosystem, as are entrepreneurs. But investment capital alone cannot create sustainable jobs. Investors do not keep investing in businesses that don’t produce products the market wants and will pay for. And, eventually, no matter how much money is invested up front, unless the ecosystem supports a company, whatever jobs it temporarily adds will disappear.
- There is plenty of investment capital around right now—an astonishing amount, in fact. Most persuasive entrepreneurs with good ideas can raise all the seed capital they want right now. Banks have huge “excess reserves,” interest rates are very low, and stock valuations are reasonable (and, in some cases, high). The capital-availability part of the ecosystem, in other words, is healthy. It’s the demand side (customers) that is weak.
- “Uncertainty” about taxes and regulations plays absolutely no role in our corporate decision-making. For a while, one of the popular memes in Washington was that “uncertainty” about future policies was crippling the economy. This was a complete crock. At Business Insider, we have never once held off on making an investment or strategic or hiring decision because of “uncertainty” about future government policies. What affects our decision-making is uncertainty about the economy. And “the economy,” in this case, means the financial health of average Americans.
In other words, with all due respect to readers who think I don’t understand why Mitt Romney’s economic plan will fix the economy because I don’t own and run a successful business, I actually do own and run a successful business.
And what would make that business even more successful would NOT be cutting taxes for me or the company.
What would make Business Insider even more successful would be improving the financial health of America’s gigantic middle class, so that the middle class has more money to spend and our clients and our clients’ clients will be able to sell more products and services to them.And to be clear: If my own self-interest were the only thing at issue here, I would be very happy to have Mitt Romney cut my taxes. In fact, I would love to pay a tax rate as low as Mitt Romney does. This would allow me to save more money and thus be farther from going broke. It would also allow me to spend more money and thus generate some more revenue and profit for other companies.
But, critically, my personal spending power, and the spending power of other entrepreneurs and investors like me, is a drop in the bucket compared to the collective spending power of the hundreds of millions of Americans in the middle class. And it is those folks who need to drive our economic recovery.
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