Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Sunday, May 20, 2012

Job Creators, Middle Class, Republicans

Nick Hanauer - Venture Capitalist. HT DeLong.
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.

But sometimes the ideas that we know to be true are dead wrong. For thousands of years people were sure that earth was at the center of the universe. It's not, and an astronomer who still believed that it was, would do some lousy astronomy.

In the same way, a policy maker who believed that the rich and businesses are "job creators" and therefore should not be taxed, would make equally bad policy.

I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated.

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.

That's why our current policies are so upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer.

Since 1980 the share of income for the richest Americans has more than tripled while effective tax rates have declined by close to 50%.

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.

Another reason this idea is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don't buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally.

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?

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

We've had it backward for the last 30 years. Rich businesspeople like me don't create jobs. Rather they are a consequence of an eco-systemic feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit. That's why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So here's an idea worth spreading.

In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class, is the single smartest thing we can do for the middle class, the poor and the rich.

Thank You.


  1. It's interesting that I as a middle class person who probably makes a fraction of your income would not completely agree with your assessment. Perhaps it has to do with simple definitions and applications of the terms. It is hard to say. I will agree that your analogy of a circular system is accurate. I would say that without risk takers like you, risk averse people like me would not have jobs. I would attribute the widening gap between income earners to those with lower incomes feeling like they should finance their way to an appearance of greater wealth instead of living frugally and building wealth slowly. The jealousy of the "have-nots" toward the "haves" contributes to this more than we care to admit. Consumer debt in this country is just as ridiculous as the unsustainable levels of Federal debt...even more so. We need more people in this country making things at prices consumers can afford without debt. Sadly, we will not see days like this in our remaining lifetimes.

  2. Noheadwinds: I admire your eagerness, as a middle classian, to take onto your shoulders, on behalf of your fellows, some part of the blame for the Great Income Disparity (http://bit.ly/JdVlzr). To believe you are to blame, you must believe that the credit crisis was caused in substantial part by the government/fannie/freddie/cra. This is a fav. meme of the Republicans, one of which I used to be. It is utterly and completely untrue. (http://bit.ly/Je2zDP), http://bit.ly/Je2EXS, etc)

    I would, therefore, gently urge you to disburden yourself of your guilt. You bear no measurable responsibility for the crisis. It was entirely the doing(s) of the Cult of the Invisible Hand (http://bit.ly/JdVlzr).

    Finally, on the debt wars, I do believe you have been too much with Fox, for things are not as you seem believe they are. But that's a bedtime story for another day.

    Be well