"The Rich Create Jobs" - "Only the rich hire anyone"

[The Gorn]

Let's discuss this conservative talking point in depth.

My take:

At a superficial level this appears true. Only a corporation or a wealthy individual can afford to directly employ workers.

At an overall-society level, I say that the recurring conservative statements that the rich must be protected from added taxation, and should also be expected to munificently employ select peasants as they deem fit, and this will "fix" unemployment, is patently false.

For the exact same reason that the wealthy "cannot possibly" be expected to fund a significant reduction of the deficit. They really don't possess enough wealth and they are not great enough in numbers to do either thing - effectively reduce the deficit, or effectively make new employment happen.

The real truth of who "hires" or "employs" anyone in any society is this: It is the aggregate demand in society that results in demand that leads to employment.

Aggregate demand, as in - millions of people purchasing goods and services. Buying movie tickets or snowblowers or eating out or buying cars or smartphones or hiring a carpenter to remodel their bathroom or buying the proverbial granite countertop that makes them feel oh so important (kudos to PhilFromNy for this great sound bite on the cud chewing, clueless, middle class US bourgeoisie.)

As a purchaser of a vehicle I am indirectly providing employment to all of the individuals who worked in the entire supply chain that resulted in that vehicle becoming available for me to buy. If I don't have a job, I don't contribute to that chain of events. Multiply across the economy.

The siege mentality of high earners is a protective reaction to what they probably really know as the truth but won't say: the little people with low means are the platform upon which their wealth was created.

I'm not arguing socialism but I am also arguing against the prevailing conservative view of the well off as a sainted class.

They owe "the people" just as much as I owe anyone who ever employed me - which I actually do, in the sense of providing me with opportunity.

Here is the REAL LIFE role of business owners and the highly affluent:

They are the "lens", the magnifier, the catalyst for economic activity. 

They are a conduit through which opportunity passes and becomes real economic activity.

Without them and their capital economic activity would occur on a very low, agrarian, subsistence self employment level.

You absolutely need entrepreneurs in an advanced society. You need VCs and bankers. They take huge risks which should be compensated. You also need opportunities for profit in society.

But they're not sainted or more virtuous than anyone else.

I think our society "needs" (in the way that ideally, it should happen but will not) to develop an understanding of the synergism between little poor unimportant worthless people, and all so important, mighty and Godly big business.

[Walter Mitty]

If I thought I had a snowball's chance in hell of persuading anybody, I'd offer a seriously different opinion on this subject.  But I have begun to realize that my power to persuade is just about nil, even when I'm right.

[The Gorn]

Please offer it...

[Richardk]

I'm thinking 'follow the money'. Whose wealth is increasing while the middle class is disappearing?

Everyone wants something for nothing yet who is getting squeezed? Jobs are disappearing while others are working harder. It's not that we've become so productive that we don't need people anymore. Instead we ask more of our workers and send the rest to where the workforce is cheaper.

If only the rich hire then why aren't we booming with jobs since the upper class is growing?

[Walter Mitty]

OK.  This is going to be a long slow process.  And I'm still suffering with a browser that can't edit large posts when interacting with this website.

I'm going to start with an area where I agree with your observation.  You are right when you point out that the amount of funding that could be gotten from the rich is insufficient to largely redcuce the deficit and also insufficient to deal with the joblessness crisis.  But that does not build the case for taking a larger percentage of their income away from them, and applying it to the spending that's causing the deficit.  That might or might not be true.

The question of how much of the load is the "fair share" of "the rich" is a pretty subjective one, and one which we will be debating long after the present crisis is history. 

But one point I do want to make is that the Bush tax cuts increased the percentage of the load born by the rich.  It didn't decrease it.  And the arguments that the fair share should be higher are being made in the context of an argument that the Bush tax cuts should be repealed.  Well, actually, the left doesn't want to repeal the entire Bush tax cut.  They want to keep the tax cut for the middle class, but they want to repeakl the tax cut for the rich. 

The arguments made for this separation of the Bush tax cuts into two parts are multiple ones.  One is based on the growing gap between the rich and the poor, or more precisely the growing gap between the rich and the middle class. More later.

[Walter Mitty]

Continued. 

But this argument depends on the notion that the growing separation between the rich and the middle class is a consequence of government policy.  I would argue that it isn't.  It's a direct consequence of the following:  the rich and the soon to become rich save a large share of their income and the poor and the soon to become poor live beyond their means. 

And this leads me to the second part of the argument about separating the Bush tax cut.  The argument is that people who take their money to the bank are harming our economy, while people who rush out and spend it on consumer items are helping the economy.  And this is the heart of my disagreement with you.

The state of the economy is only partly a matter of the demand side.  The other part is the supply side.  I know, I know, "supply side economics" got a bad reputation during the Reagan years.  But the relationship between demand and supply is a complex one.  Determining a market clearing price is only one way that the two interact. 

I freely concede that the reason businesses aren't borrowing more to expand right now is that their sales forecasts don't justify expansion.  But that doesn't mean that we can resolve the crisis merely by stimulating demand.  If the crisis is to be reversed, it means we are going to have to save more of the wealth we produce, and spend less percentage wise.  More later.

[Walter Mitty]

Furthermore, the argument that tax cuts for the middle class immediately translate into higher consumer demand is not backed up by the facts.  When the tax rebate checks went out a year or so ago,  what did the the middle class do with the windfall?  According to the measurements taken,  a large percentage of the windfall went into reducing consumer debt, mainly credit card debt. 

That's "taking it to the bank"  just as surely as building up savings accounts is. 

The same thing is happening with the Obama tax cuts,  the payroll tax cuts. 

The high level of consumer debt is part of the present crisis.  So is the high level of corporate debt.  So is the high level of public debt.  Increasing one kind of debt in order to reduce a different kind of debt is rearranging the deck chairs on the Titanic. 

[Walter Mitty]

Continued.

The rich don't create jobs by running out and hiring people.  Most of the people who hire are entrepreneurs.  The reason Steve Jobs hired a lotof engineers is not because he had a lot of money.  It's because there was a lot of work he needed done in order to pursue his vision.

So, if the rich don't create jobs,  what's the relationship between rich people and jobs?  Simple.  The rich save their money in the bank, or invest it.  Those funds are borrowed by people with a business plan, and those are the people who hire people. 

There's another place the banks can get money.  From the Fed.  We've previously discussed where the Fed gets money from.  And it has gotten trillions from that source in the last couple of years.  So what's the difference between money saved by the rich and money invented by the Fed, when it comes to creating jobs?  It's simple:  money saved by the rich is a token of real wealth, while money invented by the Fed is a token of imaginary wealth. 

I'm not saying that the Fed can't do any good, or that loose monetary policy can't occasionally be used to correct temporary imbalances.  It can.  But I am saying that it takes real wealth to build more wealth.  It can't all be done on imaginary wealth.  The reason poverty is on the increase in America is that real wealth is declining.  And the Fed can't  turn that around all by itself.

But regardless of whether the dollars in the bank came from savings or from the Fed, who detemines which applicants get loans and which ones don't?  Continued...

[DG9]

So, if the rich don't create jobs,  what's the relationship between rich people and jobs?  Simple.  The rich save their money in the bank, or invest it.  Those funds are borrowed by people with a business plan, and those are the people who hire people.

That is what is happening, but the money is being invested on a global rather than national (as in the US) basis for the most part.  It is just a shift like when a new main highway bypasses a town that was formerly on the old main highway, as when the interstates were built.  The middle class now live in that town...

[Walter Mitty]

DG9,

Interesting.  Is that US saved money?  Or is it savings from places like the UK and the Netherlands?  It's incredible how much corporate wealth in the US is really owned by citizens or banks in those two countries.  Never mind how much public debt is owned by China.

Do you think the left or the right are about to embark on a program to pen in US money wealth, and prevent it from crossing borders?  It seems to me that I can hear a little anti global sentiment in the tea party, in the occupiers, in the anarchists who show up at all the economic summits,  and in Al Qaeda.

I confess to a little anti global sentiment myself.  But I shudder to think of what would happen if global trade were to collapse. 

[Carrie Cobol]

You guys all have great points, and this is a very nice discussion of a complex topic.

Adding to what you've already said, I think we're still in the deflation stage of a bubble:  for over a decade the middle class of this country were using debt to have a higher lifestyle than their incomes really allowed.  It was strongly encouraged by economists in order to have a fat consumer economy.  Now everybody's learned the hard lesson and are trying to pay down their debts and live only on earned income.  To summarize, the bubble was the consumer economy which was inflated by too much debt.  (Which Walter did touch upon.)  But we're in the deflation stage, it's not fully popped yet.  Which means we're not at the bottom yet.  We're still trying to figure out how to have a properly healthy economy.  Is it consumer based, or savings based?  And then add the global economy to the formula and I think nobody really knows where this will all end up.

[Walter Mitty]

Carrie,

I think you are right.  And I don't think any politicians are willing to say that the bubble has to finish deflating before recovery can begin.  What's likely to happen is that, whoever prevails in November of 2012, they are going to try to mount a rapid recovery, with the result of starting a new bubble.

I think there has to be a balance between consuming and saving.  Without consuming,  you don't get the urge to expand.  And without saving, you don't have the means to expand. 

[Walter Mitty]

...continued.

In a rational world, the loan applications that get honored would be the ones with the soundest business plan.  As we've seen from the mortgage bubble and its aftermath, the banks don't always do a good job of determining which loans are the soundest ones. 

But they do do a generally good job.  And they do a better job when the ones who make bad choices are allowed to fail.  If more banks had been allowed to fail in 2007, the panic would have been sharper and deeper than it was.  But we might be on the road to recovery now.  As it is, I think we're still in denial.

[Walter Mitty]

Aonther real fear I have is that loan applications will be increasingly judged by their political correctness and less and less by the chances for repayment. 

Sooner or later, the federal SBA will take over the issuing of all small business loans that are underwritten by the government, and all other loans will become prohibitively expensive.  And as dedicated as the civil servants at SBA are, sooner or later the urge to judge loan applications on their "social merits" will prevail. 

[DG9]

Is that US saved money?

 

Good point.  Large corporations and extremely wealthy individuals are global entities looking for the best bang for the buck, just as most middle class folks do when shopping at W@lm@rt.  One thing for sure, no easy answers.