Job Creation Versus New Creations

James Banks: higher taxes may not affect the 1%. They may not even affect jobs. But they do affect the future.

[twitter-follow screen_name='humanepursuits']

Nick Hanauer, one of the most important tech entrepreneurs you’ve never heard of, argues on Bloomberg Businessweek that he’s not a job creator and it’s time to raise his taxes. This is not news: A super-rich cohort ranging from Bill Gates and Warren Buffett to Stephen King and Matt Damon has said the same thing.

But Hanauer raises a point that he claims highlights a fallacy of contemporary Republican thought:

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.

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.

Unless you’ve been away on another planet since George H. W. Bush called the Supply Side school “voodoo economics,” you have probably heard claims like Hanauer’s before. You might agree if you subscribe to the New York Times and disagree if you drink in the Wall Street Journal’s op-ed page with your morning coffee.

I’m a WSJ subscriber, but I think that Hanauer is basically correct that millions of working- and middle class Americans do more to sustain employment than thousands of billionaire venture capitalists. There were probably dozens of Amazon.coms, but only the one that millions of people used could sustain a workforce the size of a small city.

Hanauer goes on to offer some not-so-unreasonable policy recommendations, like fractionally increasing the marginal tax rate on top-earners to extend the payroll tax for another year. It might be a good idea. While still in this redistribution territory, we might consider limiting Social Security benefits for high-income recipients who use the checks for the annual trip to Vegas or the Riviera, instead of covering the costs of living.

So far, so good. Yet, even so, and nonetheless . . .

There’s another side to this argument which Hanauer appears to see not observe.  He writes:

. . . 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 average 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, I go out to eat with friends and family only occasionally.

In spite of having amassed an enormous fortune, in many ways his spending habits approximate those of John Q. Public.  But this argument can also be reversed: John Q. Public, in spite of not having amassed an enormous fortune, is able to follow many of the same spending habits of one of America’s most successful venture capitalists.

I am not sure that I can insert myself in as an adequate approximation of John Q. Public, but, as a starving graduate student, it is unlikely that I am erring in the wrong direction.  Based on my own experience, I can say with reasonable confidence that, unlike Nick Hanauer, I do not have a private jet. Nonetheless, I manage to work an airplane trip into my budget every couple of months and my mobile and laptop performs the same basic functions as those possessed by the world’s top ten hedge fund managers.  My residence might not have a permanent staff or award-winning rose bushes, but it stays warm in the winter and has a monthly lawn and indoor cleaning service.

This isn’t to say that all is well and good for the majority of the middle class. I wouldn’t be qualified to make such a broad statement: I have no children and, therefore, don’t worry about sending them to college; I have no housing mortgage to pay down; I don’t suffer from any life-threatening illnesses. But, as bad as things are for many people, education, housing and healthcare can now be enjoyed by most everyone except the very poor.

The rich might not instigate the innovation which has provided goods and services at increasingly affordable prices for the past three decades, but unless they are hiding all of their money in a safe deposit box or under their mattress (in $10,000 bills, perhaps?), then their money was out in the world doing something. If they aren’t investing it, then their bank probably is. Unfortunately, the more of their income the government skims, the less money their banks will have to dole out.

Would this halt economic growth and send millions of workers to the breadline? Probably not. But it would create a world with less disposable money to pay for research and development. Whereas consumption covers the production cost of a good that already exists, only investment pays the same price before the good even exists. Maybe we have reached the point where we can afford a little less innovation. Perhaps there is more need for consolidation than innovation. A slightly more progressive tax system might stave off misery in the present: but we should remember that higher taxes don’t erode jobs, they erode the future.


James Banks is a doctoral student at the University of Rochester where he is pursuing studies in English Renaissance and Restoration Literature.  Previously, he worked in nonprofit administration in the District of Columbia and northern Virginia. He is also a contributor at Via Meadia and has written for “The Intercollegiate Review,””First Principles,” “The Foundry,” and other publications. He is an alumnus of the University of Idaho (B.A. 2008) and the University of Rochester (M.A. 2010) and lives in upstate New York where he serves in the NY Army National Guard (though the views he expresses on this blog are his alone).

Comments are closed.