For three decades, we have been told that “trickle-down” economics that benefit the wealthy is the key to creating jobs. But that's baloney. The evidence shows that ordinary people, not the rich, are the real job creators.
Conservatives like to promote a simplistic view that all you need are capital (cash or goods that produce income) and entrepreneurship in order to create wealth. They maintain that wealth, in turn, spurs rich people to do productive things, like creating jobs, and so the more concentrated wealth is, the more jobs are created. If you tax the rich, they argue, then jobs will be destroyed. Mitt Romney frequently echoes this line of thought by promoting economic programs that would give enormous tax breaks to the wealthiest 1% and concentrate wealth in their hands. Romney, who paid 13.9% in taxes in 2010 and likes to tout himself as a job creator, has just announced a plan that calls for preserving the Bush tax cuts for the wealthy, lowering the corporate tax rate, and repealing the estate tax.
Turns out, this 'trickle-down' mythology it is horribly wrong, and the 99 percent has paid for it. There’s a reason why the Wall Street Journal acknowledged that George W. Bush, the last trickle-down president, had the worst job creation record in U.S. history. So before we consider having another trickle-downer in the White House, let’s talk about the failure of this idea and why if you want to see a real job creator, you should look in the mirror.
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Who Really Creates Wealth and Jobs?
Let’s start with the first contention – that capital and entrepreneurship are all you need to create wealth. At best, this is a half or quarter truth. Capital and entrepreneurship are certainly factors in the creation of goods and services in our economy, along with labor, resources, technology and social capital, among others. But they are by no means the most important factors. The most important factor in the whole list is labor – the human beings who create products or offer services and are paid in wages.
If you really want to see a wealth creator, just look at the grocer, the nurse, the software developer, the accountant, and the civil engineer. They are all creators of wealth. Chances are, you are a wealth creator.
And remember, creating goods and services is just half the story in producing wealth. Right now, businesses are far less worried about a lack of cash than a lack of confidence that consumer demand will pick up in the future. Unless there is consumer demand, there is no production and no wealth at all. No one is going to make a new MP3 player unless people want to buy it and have the money to make purchases. In this sense, consumers are job creators, too.
As Nick Hanauer, founder of Second Avenue Partners, recently told Bloomberg:
“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.”
In other words, job creation is related to demand. When regular people have spending power, they demand products and services, which leads to more jobs for others to make the things they want.
Does Making the Rich Richer Create Jobs?
Conservative economic policies are often aimed at concentrating wealth into the hands of the few. Does that create jobs? If you look at the Congressional Budget Office’s analysis of income distribution in the U.S. through 2007, you can see that the concentration of wealth in the 1 percent has reach a 100 year high, and that the concentration of wealth has really taken off in the last couple of decades.
So why didn’t job creation take off, too? The fact is that whatever role of capital plays in job creation, concentration of wealth is not necessary – and may even be counter-productive. In a modern economy, capital comes from a variety of sources including internal funds of corporations, the banking system, and the financial markets. Rich people really only play a substantial role in the last source – financial markets. When more and more money is funneled into the hands of the rich, they tend save and invest in financial assets, rather than in job creating businesses. Concentrated wealth has been directly associated with causing wages in America to stagnate and has resulted in wealthy people shipping jobs overseas to improve their personal profits. In reality, it has been a job destroyer.
The rich have largely gotten richer through an explosion in the compensation of CEOs and other high ranking corporate officials – which the very same people who controlled publicly held companies in the U.S. awarded to themselves in the form of outlandish “performance” bonuses. The companies justified these levels of compensation to their shareholders and to the public by relying on increases in the price of their companies’ stock and the corresponding increase in shareholder value of their companies. And, indeed, the period starting in the 1980s corresponded to an historic bull market run in U.S. stock markets.
The single most important factor determining the level of stock prices is corporate earnings. That's why the historic increase in stock prices also corresponded to the highest recorded levels of corporate profits in U.S. history. And how did corporate management in the U.S. increase corporate earnings during this period? By strictly controlling labor costs, the biggest single factor in the cost of production. The corporateers held down labor costs by subjecting U.S. operations to foreign competition and by outsourcing production to foreign countries. So, at the same time that corporate compensation was sky- rocketing, salaries and wages to rank and file workers were stagnating or declining. As an economist might say, the economic return to capital went up at the expense of economic return to labor. Corporate chieftains cleverly camouflaged the situation and made it more palatable to shareholders and regulators by paying the bonuses in the form of stock options which corporate management liberally priced (in many cases after the fact, illegally and adversely to the interests of then-existing shareholders ) to take full advantage of stock market increases.
Bottom line: Rather than creating jobs and raising all boats, all this 'trickle down' economics has benefited the 1 percent only – and tends to sink everybody else. That's why the rich are now flush with private jets and more money than they can possibly spend, while ordinary Americans have been left with flat wages and food stamps.
So why does the trickle-down myth hang on? President Obama recently suggested it's because this fairy tale “speaks to our rugged individualism and our healthy skepticism of too much government.” The President thought that this was “in America's DNA.” But the President seems to have forgotten that Roosevelt's New Deal, a series of programs designed to promote economic equality and benefit ordinary people rather than the rich, was the most popular political program in the history of the United States. If we remember that, it becomes very clear that there is something else in our DNA — a sense of fairness and a notion that the hard work of honest citizens is worth more than fatcat financiers hoarding resources and shipping jobs overseas.
We are not a country of aristocrats and peasants who labor at their pleasure. We are a country of proud and free citizens whose labor, investment, and ideas really drive the American economy. Not Mitt Romney's latest Goldman Sachs windfall.