It is inevitable. When anyone suggests that the top 1% pay a bit more for the comforts of life in a civilized society – comforts like defense, police protection, firefighting services, a judicial system for the resolution of complaints and the enforcement of contracts, to name but a few – someone will wail, “You Can’t Tax The Job Creators.” [C&L] There is a philosophical side to the refutation of this old whopper:
“Great success should be celebrated, but not institutionalized. When we tax working Americans at a higher rate than billionaires, it is bad for business. When we tax the small business more than our largest corporations, it is similarly bad for business. When we give tax breaks to the wealthiest while excluding those in the middle and the bottom, we slow down our economy by slowing down the rate of idea creation, because so many are excluded from the process of solving our nation’s problems.
Small adjustments in how we run our system can make a huge difference to our economy and our country. A truly capitalist system structured to maximize the participation of the many rather than the advantages of the few will generate more jobs, growth, and prosperity. Additionally, being fairer and more inclusive will increase solidarity in our country, creating yet another positive feedback loop of ever-increasing cohesiveness and patriotism.” [Atlantic]
One might have hoped this old “Job Creator” canard had dissipated along with the four excuses Republicans always bring to the fore, however that’s not to be. The Voodoo Economics and attendant statistical gymnastics associated with the Trick Down Hoax are nothing if not tenacious. The tenacity is impressive since it has maintained a hold on media types long past its sell-by date.
The hard truth is that the ultra-rich do not create jobs. Wall Street financiers do not create jobs. Investment bankers do not create jobs. In fact, no single segment of our economic ecosystem creates jobs. Jobs are the result of a combination of elements which taken together form our capitalist system.
The classic Capitalist chain begins with a person who has an idea. Investors may be induced to support this idea with some money. The idea (product or service) hits the market. Now comes the important part – it doesn’t matter how good the idea might be, or how much investment is poured into the project – IF there are no customers for the product or service. All three legs of the stool have to be solid before any weight can be placed on it.
The “Job Creator” notion works IF and only IF we take the third leg off the stool. Until someone buys the product or service, and that someone is joined by enough other customers to make the idea profitable there are no real jobs created – only paper prospects. Let’s look at some real world examples.
Some products are too far ahead of their time. Witness the fate of Norman Bel Geddes’ 1933 Roadster design for the Graham-Paige Company. [RoadTrack] The Depression didn’t help – there weren’t customers for the stylish automobile, and Graham-Paige was eventually sold to Kaiser-Frazier. However, our best example for “too far ahead of the customer curve” may well be the 1898 Lohner-Porsche hybrid – yes, that’s HYBRID as in combination gasoline and electric car. [Wired] All the investment in the manufacturing capacity of Graham-Paige or Lohner-Porsche couldn’t bring the idea to fruition and to profitability without customers. Ultimately, the investors in these ideas didn’t create a single job.
Some products are behind the curve. Remaining in the automotive realm, there’s the venerable Edsel example. The Flop Heard Round The World. When the car without customers was finally euthanized in November 1959, some $250 million (or about $2 billion in today’s dollars) had been sunk into the flop. Again, lots of investment, lots of marketing, and ultimately no permanent jobs created by this machine which hit a saturated market.
Some products glitched. Apple poured a ton of money into the Newton. Remember the Newton? Not too many people do, but this personal assistant tool was the predecessor of the Palm Pilot. Two major problems beset the early model PA, the writing recognition was literally laughable, and the price was too high. [DailyFin] Customers stayed away in droves. Apple’s employment numbers didn’t increase because of the investment in the good old Newton.
Some products fail because of poor marketing. All we might have to say here is “BetaMax,” or “New Coke?” Herein we have products, especially the BetaMax, which were essentially good products, for which there was a market, but the corporations never connected the customers and the products in a way to make the launch profitable. At least the two gave business schools some quality examples of marketing failures to add to their curricula.
The examples lead to a rational conclusion:
“Investment capital is an important part of the economic ecosystem, as are entrepreneurs. But investment capital alone cannot create sustainable jobs. Investors do not keep investing in businesses that don’t produce products the market wants and will pay for. And, eventually, no matter how much money is invested up front, unless the ecosystem supports a company, whatever jobs it temporarily adds will disappear.” [BusinessInsider]
Along with the 1933 Roadster, the 1898 Porsche Hybrid, the Newton, BetaMax, New Coke, and the Edsels. The emphasis on investment to the exclusion of focus on the real economy kicks at another leg of the stool. It’s not like we haven’t been warned; there is this comment from James Tobin, a member of President Kennedy’s Council of Economic Advisers, from back in 1984:
“I confess to an uneasy Physiocratic suspicion…that we are throwing more and more of our resources…into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity.” [MonthlyReview]
What happens if “more and more of our resources (capital)” is directed toward “financial activities remote from the production of goods and services?” Financialism. Our financialists would have us believe that not only are they the ultimate essential feature of the free market system, but that their wealth is creating wealth for everyone. Leaping to that insular conclusion means a long swim back.
The accumulation of corporate cash under the financialist perspective, combined with the Shareholder Value Theory of Everything, is a recipe for stagnant wages, which translates all too quickly into decreased demand for goods and services. But, the people on top are doing nicely, thank you very much.
“When firms do use this money, as opposed simply to piling up cash, it is frequently to pay dividends to stockholders, buy up other companies, or else to buy company stock in the hope of driving share prices up: a pure speculative endeavor. In 2013 corporations authorized $755 billion to buy back shares of stock. Failure to absorb the enormous economic surplus and its use instead for speculation means that the actual rate of growth of the economy slows down in relation to its potential rate of growth. To the extent that corporations do continue to invest in this kind of economic environment it often serves to displace labor and decrease their unit costs of production, increasing the overall surplus at their disposal. The capital formation that does occur under these circumstances is therefore unable to lift the economy out of its general listlessness.” [MonthlyRev 5/14] (Emphasis added)
Or, those who are primarily interested in “capital formation” are missing the point – and they cannot create “jobs” much less “general prosperity.” The self same interests which are slowing down the economy’s rate of growth are exactly those who are trying to tell us they are responsible for it. Good Grief. This is all rather like having the man who has tied a thick elastic band to the rear axle of your vehicle tell you that any forward progress you make is due to his exertions.
And the level of the capital gains tax on all this speculation? What does that do? Economics professor Leonard Burman dropped this little bombshell in the midst of a joint meeting of the Senate Finance Committee and the House Ways and Means Committee in 2012:
Go ahead, try to find a statistically valid relationship between the rate of the capital gains tax and the economic growth line. Good luck. Professor Burman’s conclusion:
“Does this prove that capital gains taxes are unrelated to economic growth? Of course not. Many other things have changed at the same time as tax rates on capital gains and many other factors affect economic growth. But the graph should dispel the notion that capital gains taxes are a very important factor in the health of the economy. Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.”
What Do We Know?
We know that a generally more prosperous economy encourages ideas (for new economic enterprises), and that while investment is a key element in the process it is not exclusive – product timing, development, and marketing also play crucial roles. We know that vast capital accumulation doesn’t automatically mean economic growth. We know that capital accumulation diverted into speculation in exotic financial paper can be a drag on the overall economy; and, we know that there’s no statistically valid correlation between the level of the capital gains tax and the level of economic growth.
So, taxing those self-anointed “Job Creators” may not be so bad an idea after all.