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Aaron Regunberg: The Real Job Creators

Friday, July 20, 2012

 

“Job creators.”

That’s a phrase we hear a lot of lately—from the national Republican Party and Fox News, naturally, but also here in Rhode Island, where our media and the leadership of each of our parties (Republican and Democrat, not to mention Ken Block’s Moderate Party) have all fully bought into the idea that the fate of our economy rests in the hands of the wealthy few, the “job creators.”It’s been the dominant frame in the U.S. since Reagan consolidated his once radical supply-side theories as mainstream economic policy—cut taxes on the rich, deregulate business, support “job creators” in whatever ways we can, and watch the prosperity flow.

Problem is, this framework is completely and utterly false.

I don’t mean that we shouldn’t be doing all we can to support America’s job creators. I just think that for the last 30 years the American people have been lied to about who those job creators really are. So let’s be clear: millionaires and billionaires do not create jobs. Middle-class consumers do.

I think the best way to introduce this idea is with a quote from Nick Hanauer, a multi-millionaire venture capitalist whose TED talk earlier this year received a lot of attention. Nick said, “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.”

In my opinion, this ‘feedback loop’ concept is a really good way of looking at how job creation actually happens. As John Harvey wrote in Forbes last month, “No matter how much you lower costs, if you don’t have more customers, you won’t hire more workers.” We can gut regulations and cut taxes on the rich as much as we want (and for the last 30 years that’s exactly what we’ve done), but if the demand for goods and services does not change, firms have zero incentive to expand employment and every incentive in the world to simply earn higher profits while continuing to produce at the same level. Of course, that’s exactly what we’ve seen happen recently—corporate profits are up at pre-recession levels or higher, but no corporations are investing in job growth because demand remains so low. On the other hand, if we ignore the right’s calls for lower taxes and less regulation but are able to increase demand, businesses will respond to the incentive and begin hastily adding new workers.

What this means, of course, is that job creation does not run through the Swiss bank accounts of the 1%, but rather the worn-out wallets of America’s working families. As Mr. Hanauer continued in the speech quoted above, “There can never be enough super-rich 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…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.”

Again, demand is what creates jobs. Companies don’t hire because they have more money in their bank accounts or because they want to make the world a better place. In fact, the folks we keep calling “job creators” have the opposite interests. Employees are a cost (often a business’s largest cost) and so every “job creator’s” rational goal is to reduce, not increase, the number of workers they need to pay. Hiring more people is a capitalist’s course of last resort, something they only do when increasing customer demand requires it—in other words, when enough people have the money to buy what they’re selling.

For anyone who doubts this fundamental economic concept, Harvey’s article asks a great question: what do you really think caused firms to lay off so many workers that unemployment jumped from 4.4% in May 2007 to 10% in October 2009 (and, as we all know, higher than 11% here in Rhode Island)? Was it a sudden spike in business regulations and taxes on high-income earners (hint: this didn’t happen), or a collapse in demand? I don’t know anyone who honestly believes the former.

And this is a really critical point. If we know who the real job creators are, then we know what the real problem is—middle class consumers don’t have the money to buy things anymore, because many of them aren’t middle class anymore. And while this is a problem that’s been greatly exacerbated by the Wall Street greed-inspired recession that began in 2008, it’s been a long while in the making. For the past 30 years, our major political and economic policies have been aimed at benefiting the wealthy (because we kept calling them the “job creators”) at the expense of America’s real job creators. Every time we’ve cut taxes on the wealthy, forcing federal, state, and local governments to either raise taxes on working families or cut services and programs that benefit them; every time corporate leaders have laid off workers and shipped their jobs overseas to increase their bottom line; every time companies have busted their unions, depriving their employees of the protections of collective bargaining so they could cut wages and turn middle-class jobs into poverty jobs; every time we’ve engaged in these systemic transfers of wealth upwards, we’ve decreased consumer demand and made our economy weaker.A lot weaker—in 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 (another fact from Mr. Hanauer). Where would the economy be if that were the case?

So if we really want to strengthen the American economy—and if we really want to improve Rhode Island’s horrifying unemployment problem—we need to do a major reordering of our priorities. Instead of tripping all over ourselves to try to lure wealthy entrepreneurs to Rhode Island and pamper high-income earners once they’re here, our focus should be on strengthening consumer demand. That means increasing investments in the services that working families depend on, like transportation. It means ending our reliance on regressive taxes (property taxes, car taxes) that hit working families hardest, and shift those burdens back to those who can afford them. And it means strengthening private-sector unions and increasing the minimum wage, which are (as far as I can tell) the best possible ways to ensure that working folks earn a living wage.

If we start doing these things—if we start supporting the real job creators, making sure average Rhode Islanders have money in their pockets—demand for goods and services will increase, and hiring will follow. It’s a feedback loop, and we can decide which way the loop spirals, up or down. I, for one, have had enough of the right-wing’s downwards spiral, and am ready to try the other way. How about you?

 

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Comments:

This is far too rational/based in conventional macro for GLP and its readers

Comment #1 by Tom Phillips on 2012 07 20

The people on the right won't like this article. I wonder if they will dispute it?

Comment #2 by Patrick Boyd on 2012 07 20

Yes, its the republicans in the ga that have put us in this terrible mess. If only we could get some liberal pro labour politicians elected to the ga we would be out of this mess in no time.

Comment #3 by george pratt on 2012 07 20

It is not a feedback loop. it is a circular argument. The only real point here is the Tax-the-rich approach of liberals like Mr. Regunberg. Another way to put money in the pockets of the middle class, by the way, is to lower taxes across the board. By cutting spending, privatizing state services, regionlizing municipalities, and consolidating all governmental operations, we could save a lot of money. I once argued that we could be better served by privatizing theRMV. I used my positive experience at AAA to support my argument. Some liberal responded that everybody should be able to use AAA, not just the members. Sure showed me! Actually, that liberal was right. Privatize The RMV, let AAA bid on the work, and open it up to all. Less spending equals lower taxes, equals more money in the pockets of the people.

Comment #4 by Michael Trenn on 2012 07 21

Middle-class consumers don't directly create jobs in service-based and product-based companies that don't even cater to consumers. There are a lot of jobs that are B2B (Business to Business), and they have become an increasingly large portion of the business in existence, especially small businesses. It's indeed very circular, and the more you tax any part of the circle, the less people the system employs overall.

Middle class consumers don't buy advertising, marketing services, commercial janitorial services, computer network and infrastructure management services, payroll management services, commercial construction services, debt collection, and countless other products and services that are provided by similar businesses that make up a *huge* portion of the companies and businesses that employ people.

If you want to create a lot of private-sector jobs, a good start would be to contract the providing of many of the services provided by government to private sector companies in a very public competitive bidding fashion (we already do it for large construction and infrastructure projects, but many other services can easily also be done that way). It would take taxpayers off the hook for pensions and long-term benefit promises *permanently* and provide long-term job creation in the private sector.

In the end, lower taxation via a truly fair flat tax system without loopholes, and less government and less government employees should be part of any solution. Raising taxes and government revenue on certain groups isn't a viable solution for any long-term economic growth. Lowering taxes for everyone, on the other hand, is.

Comment #5 by Russ Hryzan on 2012 07 21

You know the middle class is a reference that Obama has used ever since he has been in politics to the point that it is impossible to determine what exactly it means, well of course it means the down trodden from the rich. But this polarization of class of people is a favorite in 3rd world countries as there is vast differences in classes of people. In the USA we really have the dependent on government class and the not dependent on government class.
Jobs are created by demand and supply of good and services. Our government has let us down by not trying to strengthen our competitive capabilities on a global front, hence so many jobs have gone off shore for competitive reasons.
Arron's thoughts are true to the Democratic line share the wealth not work for the wealth. To keep our depend on government class of unionized people with contracts that enrich them at the cost of every non-union person is not a good thing. We need to compete not expect hand outs and welfare for all. Not building a taxable base of employment and employees is the missing link in RI, period.

Comment #6 by Gary Arnold on 2012 07 21




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