WV Center on Budget and Policy > Blog > Economic Development > The Middle Class Creates Jobs, Not Business

The Middle Class Creates Jobs, Not Business

Brad Delong sends us to this great speech (and presentation) from venture capitalist Nick Hanauer, which was recently banned from TED. More on that here.

His remarks remind me of the Robert Reich axiom: You can’t have a strong economy without a strong middle class. While businesses and the 1% love tax cuts, it has more to do with rent-seeking instead of economic growth. Businesses need customers i.e. aggravate demand, not tax cuts that make up less than three percent of the cost of doing businesses. And as Sean points out, we hear this all the time in West Virginia – especially about the business personal property tax. All together, this tax makes up less than one half of one percent of the cost of doing business. Econ 101 would tell us that reducing your business costs by 0.5% would not be a big enough incentive to drive business location decisions and that this cost could easily be made up by increased productivity, lower compensation and utility costs, and cheaper occupancy costs. It really is just a matter of mathematics.

At any rate, this is a great speech:

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.

2 Responses to “The Middle Class Creates Jobs, Not Business”

  1. skitter says:

    Thought I’d let you know there’s now a link to the video: http://wwwyoutubecom/watch?v=bBx2Y5HhplI

    And as much as I agree with the message, I have to side with the TED organizers who say it’s entirely political, and it’s dependent on other political foundations.

    The wealth of the superrich, by and large, is based on stock values, options, and other financial manuevering. And when I say that investment income should be taxed at the same rate as wages, that’s a purely political opinion, and it would not do much to close the income gap. The middle class has access to the same things, in a general sense, but never on the same scale.

    His last sentence is about making investments in the middle class, which we tend to be terrible at, from education, to child care, to clean air and water, to broadband access. If he actually had something to say about improving those areas, rather than just how to fund them, that would be the real idea worth spreading.

  2. Richard Slawson says:

    It is a shame that TED would declare a discourse on economics political and remove it from its website. Their action is more than political, it’s an act counter to free speech. This move has tarnished TED’s reputation.

    Even further, the commentary is completely in line with economic theory – Keynesian – that has been followed in University study for almost 100 years. Economic study is political because governments have follow its theories throughout history.

    Please, everyone email TED and ask that they follow ethical free speech policy and put Mr. Hanauer’s commentary back up on their site.

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