Rich People Don’t Create Jobs

So, if rich people do not create the jobs, what does?

A healthy economic ecosystem — one in which most participants (especially the middle class) have plenty of money to spend.

Over the last couple of years, a rich investor and entrepreneur named Nick Hanauer has annoyed all manner of other rich investors and entrepreneurs by explaining this in detail. Hanauer was the founder of online advertising company aQuantive, which Microsoft bought for $6.4 billion.

What creates a company’s jobs, Hanauer explains, is a healthy economic ecosystem surrounding the company, which starts with the company’s customers.

The company’s customers buy the company’s products. This, in turn, channels money to the company and allows the company to hire employees to produce, sell, and service those products. If the company’s customers and potential customers go broke, the demand for the company’s products will collapse. And the company’s jobs will disappear, regardless of what the entrepreneurs or investors do.

Now, again, 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 the company’s 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 actually grows and sustains the tree is the combination of the DNA in the seed and the soil, sunshine, water, atmosphere, nutrients, and other factors that nurture it. Plant a seed in an inhospitable environment, like a desert or on Mars, and the seed won’t create anything. It will die.

I found this explanation by Henry Blodget of Business Insider helpful in clarifying the limits of supply-side economics. His simple analogy on seeds is perfect in addressing the myth that “Rich people create the jobs.”

We, the people, are the true creators of jobs. Not the companies, entrepreneurs and rich investors who keep trying to sell themselves as saviors of unemployment.

ed-ao139_stevem_g_20110825162903For decades, neo-conservative politicians and economists have pushed the idea of ‘trickle-down economics’ as a reason to cut taxes for the wealthy and remove government regulations. However, the opposite appears true. A Washington Post article shows recent trends that lower taxes correlate with lower growth. Understanding this is important because companies and the wealthy lobby governments to create tax laws that disproportionately help themselves, while placing much of the burden from revenue generation to low-income workers.

Revenue from income and corporate taxes helps fund the schools that educate a workforce. It provides for health care so that workers can get back to work. And it provides welfare, like unemployment benefits, for when the short-term employment that entrepreneurs and new businesses actually create disappears. A functional society filled with well-paid employment opportunities actually creates its own self-sustaining jobs.

Data from the Economic Policy Institute shows the result of tailoring taxes under the belief that “Rich people create the jobs”. In the United States, from 1917 to 1981, the top 10 percent captured (only!) 31 percent of the growth in incomes. Following the presidency of Ronald Reagan, they have taken all of it.

The 1980s free-market/smaller-government system of ‘Reaganomics’ (also used by Margaret Thatcher in the U.K.) has left a legacy of declining incomes for nine out of ten workers over the past two decades. In addition to a lack of job creation, policies like tax cuts for the rich don’t increase incomes for workers either.

income-inequality-1989-2008

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