Confi – Who Creates Jobs?
We recently came across the fascinating article by Nick Hanauer, serial entrepreneur and as of 2007, even more phenomenally wealthy from having sold aQuantive to Microsoft for $6.4 billion. Being the first non-family investor into Amazon certainly didn’t hurt his net worth either. While written eight months ago, it reads just as well now, if not more so. The context of the piece comes as he, in this super-charged election year, expounds upon potential policy and its impact on the economy.
The title of his article, “Raise Taxes on Rich to Reward True Job Creators,” should leave no one without an initial opinion. And, he quickly makes clear his views when he writes, “I’ve never been a ‘job creator.’ I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.” Hanaeur follows up the statement with, “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 the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.”
As for rich people and job creation, we can only say that both in the past and now, we struggle making sense of the term “trickle down economics.” Let’s take for example someone who gets to live the dream…not quite Hanauer level but still Mega Millions worthy. They sell a business for $100mm. If they live in New York City, they will pay 15% federal capital gains and about 12%+ for various state and city taxes (except they will have some great family planning to keep it lower). Some percentage of the above, they will keep ready to splurge – for a (bigger) house, boat, cars, travel, zoo, etc. Some percent they will invest. It’s very hard to imagine them not having $50mm to invest.
What then comes of the $50mm? How much of that trickles down? As Hanauer says, “The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000.” Yes, some of that $50mm gets put to work by those with whom they invest – big debt funds, bonds for cities, banks to loan, but how much is really making a difference? How much is not just creating jobs but making a change in the economy. Once again, Hanauer: “If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.” It’s impossible not to love that.”
Does the middle class deserve more? Lower middle? Lower? What about saying that whoever will have a larger percent of that incremental cash will go directly into the economy does? As to the answer for our country’s debt is taxing income above a certain amount the right way to create incremental revenue for others? Higher federal and state income taxes would probably impact people’s decisions and arguably lead to increased cheating (see Dan Ariely’s amazing book), not saying that from personal experience of course. Higher capital gains would be a bummer, but it probably wouldn’t lead to increased bad behavior or a decrease in good economic behavior.
It would be nice to think entrepreneurs and other business creators (large and small) should get more credit than Hanauer assigns. Then again, as for who creates jobs (presuming it is not the rich), it could be chicken and the egg. How does the middle class earn its middle class wages if not for the creation of industries that lead to more middle class jobs? If possible, it would be great to shift the talk from “who” to making sure the system encourages growth, that the virtuous cycle Hanauer references works, i.e., are incentives aligned so that those who want to create businesses (and if they are lucky, large wealth) can, and the huge consumer group has money to spend? If a policy doesn’t help that, don’t do it.
So while trickle down remains a mystery, at one level it’s easy to see that it can work, but it depends on where the trickle starts. The beauty of entrepreneurs and other businesses is that even if the money didn’t originate with them, they will figure out a way to have it trickle back up. We may not know who creates jobs, but we do know who spends the biggest percentage and would spend more had they more.
