Biggest lie in politics right now: Millionaires and billionaires are job creators.

Biggest lie in politics right now:  Millionaires and billionaires are job creators.

The Truth: You and I making less than $100K are the job creators because we create jobs by spending almost all (if not all) the money we take home.  There is no job creation unless there is a demand for product.

A $5000 tax cut to a millionaire does not create more product demand.  Millionaires already have more than enough money to spend.  But if I get $300 extra in cash, every cent of it leaves my possession.  Some of it will go to the Kowalski family, some of it will go to Target, some of it will go to my church, some of it might go to Best Buy, maybe a movie theater and local restaurant.  All of it is profit to the location I deliver it.

$5000 in tax cuts to a millionaire or billionaire is nothing more than additional profit and investment cash.  A tax cut for the wealthy does not create more demand.  You and I having cash in our pockets to spend creates product demand.  You and I having cash in our pockets to spend creates jobs.  You and I are the job creators.

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8 thoughts on “Biggest lie in politics right now: Millionaires and billionaires are job creators.”

  1. I don’t know that this tells the whole story, though, because there are a lot of things that doesn’t account for.

    The whole “spending money” thing, for example, isn’t universally good. This is why the housing bubble happened. Politicians and central bankers were only interested in boosting GDP and home ownership (and it had been this way for many years, mind you). Just a few years ago, the Fed aggressively lowered interest rates, passed legislation allowing for the easing of standards for mortgage lenders, loan insurance schemes through federal agencies (e.g. Fannie Mae, Freddie Mac, and the FHA, all of which owned about 97% of the mortgages after the boom settled), and, overall, stimulated massive spending which created employment and wealth for all industries involved–especially as housing prices continued to skyrocket.

    The odd thing is that mainstream economists dismissed entirely the notion of a bubble, and made financial recommendations on the presumption that housing prices could only continue to climb (which is why many “experts” suggested, for example, that people take out massive mortgages, and never pay them back).

    Eventually, that bubble popped because of all the malinvestments (all the loans, construction, etc.). Typically, interest rates are a factor of savings rates (plus or minus risk, of course). Higher savings lowers interest rates as a signal to the market to invest in higher-order goods, like housing. The Fed’s expansion of credit did the same thing, however, because it lowered interest rates, thereby sending signals to the market which would normally indicate an increase in savings (i.e. deferred consumption). Unfortunately, the savings weren’t there, which meant not only that these malinvestments were unsustainable due to a resource shortage, but also that, because the interest rates weren’t a product of increased savings, there wasn’t actually any demand for these things. In other words, all the spending, lending, and building had been going to finance false employment. Those jobs, those assets, those loans–they needed to be liquidated. Badly. You also get into high default rates because of a massive push toward packaging and selling of subprime loans, strategic defaults following plummeting home values, and stuff like that, but the rest is basically history.

    As that liquidation happens, the market allocates those misplaced resources to more productive uses, and the malinvestments are purged through bankruptcy, cost-cutting, or some some method (assuming no further governmental intervention, of course). After the purge, everything is all well again, and the economy moves on.

    I say all that to point out spending isn’t something which categorically creates jobs. At least, it’s not the source of employment. To have jobs, you have to have productive capacity first. You can have all the money and demand you want, but, if the capital isn’t there to produce televisions, you’re not getting a television. In a totally free economy, you’re right that demand helps to sustain employment, “Stimulate aggregate demand” policies have been tried in the past, and they’ve failed miserably.

    I obviously don’t deny that giving a millionaire $5000 likely won’t result in massive job growth, but that doesn’t imply that tax cuts are the big reason for unemployment. In addition to bubbles, you have problems like corporate subsidies, where money is basically handed to companies–typically, oil and other fossil fuels–for some inscrutable reason. This pulls capital away from more productive sectors, and doesn’t do much more than secure reelection or allow for tax money to buff an executive’s bonus check. The same for agricultural subsidies, except, instead of paying big executives (agribusiness being an exception to this), you’re paying farmers to overproduce corn and other agricultural goods. Then you have the lower-order production of corn ethanol, high-fructose corn syrup, and so on (with its own share of tariffs and subsidies), but it pulls away productive capital nevertheless. You could also cut defense spending, which could funnel money back into taxpayer hands. Eliminate loan guarantees, not only for homeowners, but also for student loans (which have become a nightmarish system). Get rid of mortgage interest deductions and failed “adjustment” programs. Kill entitlements and stimulate the development of a whole new (productive) investment/retirement industry (investment, by the way, being extremely productive/critical in creating wealth and employment). There are so many things you can do which don’t involve tax increases (increases which, apart from only being a drop in the bucket, and therefore useless as anything but a political gesture, also fail to fix the spending problem by simply offering a larger buffer zone between total assets and total spending).

  2. Your argument assumes that all millionaires are collecting checks for over a million dollars from their employers, or that it’s reflecting a million dollars in pure profit for a business owner. The problem is, that’s just not the case for many people who are considered millionaires. A small business owner may report well over a million dollars in revenues, but that doesn’t take into consideration expenses. Expenses may leave that same person with more like $60,000 in real income.

    I don’t think cutting the taxes of Allina’s CEO is going to create a bunch of jobs, but I do think cutting the taxes of the owner of Joe’s Machine Shop will. That probably speaks to problems with the tax code as much as anything though.

    1. Joey, you’re confusing revenues and income. A business owner with $1 million revenues and $60,000 income would pay taxes only on the $60,000 income. Joe the Machine Shop guy would be nowhere near a tax increase, and raising taxes on million dollar incomes wouldn’t affect him at all. Hope that helps.

      1. Dipper, I understand the difference between revenues and income. To really break this down you’d have to get into the nuances between C-corp and S-corp and other ways to structure a company and file taxes. Suffice it to say our tax system is complicated and broken and there aren’t enough people on either side of the aisle willing to actually change it.

    2. Joey I think you are kind of right about Joe’s Machine Shop. My point is there still needs to be demand for a product or service. If you and I don’t have money to spend, we are not going to spend it at Joe’s Machine Shop. Joe is going to have a little extra money to spend, but he isn’t really increasing his revenues to higher levels going forward, he just has a little extra money. Don’t get me wrong, a little extra money is good for the economy, but that is not who we are talking about when we talk about millionaires and billionaires paying more taxes.

      My wife ran a candy store for us in Burnsville in the mid 90s. She worked about 60 hours a week and only took home $500 a week in income. Net profits of the business were basically break-even, but it grew substantially every year. When we were about to have our second child, we realized we couldn’t keep spending the time on the business and sold it for a small profit. When it was sold, there were 4 part-time employees. They were hired to help with increased demand, not because we wanted to keep taking home only $500 a week. Demand drives jobs, doesn’t matter what type of business or corporation it is.

      We sold a growing business in 1999, but within a few years the business under new owners failed because of demand. The economy died and specialty candy products are a luxury item. People were not spending money because the economy sucked. Then we go from an annual budget surplus to two expensive unfunded wars, huge tax cuts without equivalent spending cuts, and it is an economy heading for rapid failure because of it. When that happens, it is the people making less that suffer, and the people making less than $250,000 as a family or $125,000 and a single person, make up 97% of the population. That remaining 3% can’t keep the economic spending going on their own, the other 97% have to chip in and spend money.

  3. Steve,
    Your story of the candy store is appropriate …. the business owners that I talk to commonly only cite two problems :
    #1. They need more demand;
    #2. The banks are still too tight with money

    Any business owner worth anything knows that there are so many “benefits” available to the owner that can be used to “manage” the tax consequences — healthcare coverage, KOEGH, auto, life insurance, etc. The smart business owner will assess his profitability and make a capital investment when favorable … so if the government really wanted to spur re-investment they should increase tax rates … then business-owners will be encouraged to make capital purchases rather than giving the monies to the tax man. Remember if a business does not make any money, it does not pay taxes … and don’t forget about Tax Loss Carryforward.

    That said, there are jobs being created … just this week, General Electric announced that it will increase its Radiology business in China … re-locating that business segment’s headquarters there. Look at Caterpillar and how it has expanded its manufacturing operations in Brazil.
    Conversely, there are some jobs that have demand but there are not enough qualified candidates or even insufficient number of applicants. You may have seen the reports of Microsoft and other IT and gaming companies that have unfilled jobs, but in my area, just last month a large industrial unionized company held a job fair hoping to hire 50 more workers … they got only ten.

    Lastly, a question … is part of the problem that passive ownership results in taxes being paid at a lower capital gains rate than the Worker who pays based on earned income ?

  4. Oh, I should have cited an example of a local small business that has been in the news lately …
    Bachmann’s 2010 financial disclosures reveal a modest financial portfolio. Along with her congressional salary, she reported their two counseling clinics make no profit aside from her husband’s annual salary, which is not disclosed.

    That’s right … two clinics but NO Profit … they must do a lot of charity work … apparently Pray Away The Gay is not a profitable venture .

  5. As it happens, I stumbled across your post shortly after writing something similar on my own blog:

    http://theblogthatwasthursday.wordpress.com/2011/08/06/do-the-rich-takes-risks/

    The idea that the rich and particularly the super-rich are the drivers of job creation is flat-out untrue. The Republicans have repeated it so often that many people have probably assumed there has to be some truth to it, but there just isn’t. Right now, as you read this, America’s wealthiest corporations are sitting on huge piles of cash that they could invest, but they’re choosing not to do so.

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