Who’s The Job Creator? The Answer Is No Surprise

“President Romney introduces tax cuts and reforms that reward job creators, not punish them,” the voice-over says as video of Romney’s speaking at various campaign events across the country plays.”  [ABC]

The Republican presidential candidate has a message, Day One, “introduce tax cuts and reforms that reward job creators…”  Really?  Who are those job creators?  Hint: They aren’t the Financialists of the private equity management firms.   If you happen to have stumbled on the DB post for December 2, 2011, then you’ve already guessed the answer. If you’ve been a reader since wayback times, like February 3, 2009, then you’re ahead of the game:

“For all intents and purposes, it seems as though the House Republicans have completely forgotten that there are two sides to the fundamental economic equation for an equilibrium price: Supply and Demand. For that matter, they don’t even appear to be taking the interests of the suppliers into consideration either. Evidently, they don’t understand that when you “spend, spend, spend” you are buying “things, things, things” manufactured by companies that make their livings from “orders, orders, orders.”

That’s right, in an economy predicated on consumer spending the real job creators are Consumers.  However, no one really needs a liberal blogger to tell them that, why not listen to someone in the financial sector who demonstrates comprehension of the whole Supply and Demand thing, fund manager Nick Hanauer:

“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.”

But what of David Brooks’ rejoinder that without financiers there would be no manufacturing? [PBS]   There are a couple of holes in the fabric of this clichéd argument.   First, as Hanauer explains:

“It is unquestionably true that without entrepreneurs and investors, you can’t have a dynamic and growing capitalist economy. But it’s equally true that without consumers, you can’t have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.”

There’s a second problem as well.  Brooks’ assertion that it’s the financial sector that floats all the manufacturing boats is true, but when he called out those who feel more regulation is necessary as “financial illiterates,” he’s gone a step too far.  The muck into which he’s stepped is that the Econ 101 textbook theory of financial operations upon which he’s basing his objection is outdated by at least 30 years.  Yes, once upon a time the financial sector did old fashioned “boring banking” in which the emphasis in the investment houses was geared toward underwriting capital accumulation plans for clients.   Not any more.

Brooks’ may have missed or forgotten the memo from May 1, 1975 when the old system of fixed commissions for trading securities were abolished, setting off a squeeze on brokering revenues.  Ye olde Broker-Dealer was going the way of the DoDo.  Then Salomon Brothers pioneered the Proprietary Trading Desk.  Salomon began betting on the market with its own money while buying and selling securities for its clients.  Remember Salomon Brothers?  It was the subject of Michael Lewis’s popular book, “Liar’s Poker.”   We also remember that Salomon Brothers became Salomon Smith Barney, and became extinct in 2003.

September 11, 2001– the day the towers went down and the Fed dropped a money bomb. The Fed decided to institute a sharp drop in interest rates and the housing boom was on.  Enter securitization, as a means by which the investment bankers could recoup profits lost or  squeezed by the decline in revenues from the old core securities sales businesses because their commissions had shrunk to fractions of a percentage point per trade.  So, how would more money roll in?

Investment banks also expanded into the underwriting and selling of complex financial securities, such as collateralised debt obligations. They were aided by the Federal Reserve’s decision to cut US interest rates sharply after September 11 2001. That set off a boom in housing and in mortgage-related securities.

The catch was that investment banks were taking what turned out to be life-threatening gambles. They did not have sufficient capital to cope with a severe setback in the housing market or markets generally. When it occurred, three (so far) of the five biggest banks ended up short of capital and confidence. [FTGapper]

By the end of the debacle there wasn’t a single old fashioned investment bank left on Wall Street.

In short, it doesn’t matter how much money Wall Street could infuse into a hypothetical Ultimate Frying Pan, Inc. if there is no demand for the product there will be no industrial expansion required.  Secondly, if underwriting Ultimate Frying Pan, Inc. is performed by Dewey, Grasp, & Grabbe we can be fairly certain that collateralized debt obligations and credit default swaps will not be far behind.

The “reward the job creators” argument falls apart in two directions so far: (1) the real job creators are middle class Americans who create demand for goods and services; and (2) the notion that financiers are the primary job creators requires that we ignore the last 37 years of Wall Street investment house history.   But, wait, there’s more.

The function of companies like Bain Capital and other alleged job-creators is NOT job creation.  The purpose of the $60 billion under management Bain operation is to maximize shareholder value.  Give Mr. Romney his due, he was a pioneer in revamping private equity management to the purposes of (1) growing earnings, (2) increasing dividends, and (3) increasing share prices.  [DB Romney & Shareholder Value]  If jobs are created in the process, fine, but if jobs are sent off shore or eliminated entirely that is of no particular concern to the Financialists.  Their bottom line is the shareholder value NOT the value of a trained workforce, an economically healthy community, or even an economically vibrant nation.

For the Wall Street investors who are supporting the Romney campaign, if the shareholders are happy, their proprietary trading desks are profitable, and the fees and commissions are rolling in All Is Well.  What happens on the factory floor, in the local restaurants, at the local car dealership, or in the local barber shop is of no particular concern.

As the arguments are refined we may see that in some cases Bain Capital was a venture proposition, in others a vulture, and in still others a combination of both.  The epithets will fly because this is a campaign season, but the political spiels should not gloss over the fact that the 2012 elections will highlight the very different economic perspectives of the GOP and its Wall Street financiers, and the Democrats who place more emphasis on the capacity of consumers to keep the demand side of the classic economic equation operational.

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References and Recommended Reading:  Benjamin Wallace-Wells, “The Romney Economy,” New York Magazine, Oct. 23, 2011.   “Romney The Revolutionary,” The Economist, Jan. 14, 2012. DB “Romney and Shareholder Value, May 15, 2012.   Pete Kotz, “Romney American Parasite,” Village Voice, April 18, 2012. Nick Hanauer, “Reward True Job Creators,”  Bloomberg, Nov. 30, 2011.   Ezra Klein, “Hanauer’s Talk On Taxes,” Washington Post, May 17, 2012.   CAP, “Middle Class, Inequality, and Economic Growth,” on-going issues, links.  Economic Policy Institute, “Romney Budget vs. the Budget For All,” May 17, 2012.