Saturday, December 17, 2011

Finally, A Rich American Destroys The Fiction That Rich People Create The Jobs

Finally, A Rich American Destroys The Fiction That Rich People Create The Jobs

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60 minutes child homelessness truck

Image: 60 Minutes

America's real job-creators...who can't afford to create any jobs.

In the war of rhetoric that has developed in Washington as both sides blame each other for our economic mess, one argument has been repeated so often that many people now regard it as fact:

Rich people create the jobs.

Specifically, entrepreneurs and investors, when incented by low taxes, build companies and create millions of jobs.

And these entrepreneurs and investors, therefore, the argument goes, can solve our nation's huge unemployment problem — if only we cut taxes and regulations so they can be incented to build more companies and create more jobs.

In other words, by even considering raising taxes on "the 1%," we are considering destroying the very mechanism that makes our economy the strongest and biggest in the world: The incentive for entrepreneurs nd investors to build companies in the hope of getting rich and, in the process, creating millions of jobs.

Now, there have long been many problems with this argument starting with

  1. Taxes on rich people (capital gains and income) are, relative to history, low, so raising them would only begin to bring them back in line with prior prosperous periods, and
  2. Dozens of rich entrepreneurs have already gone on record confirming that a modest hike in capital gains and income taxes would not have the slightest impact on their desire to create companies and jobs, given that tax rates are historically low.

So this argument, which many people regard as fact, is already flawed.

But now a super-rich and super-successful American has explained the most important reason the theory is absurd, while calling for higher taxes on himself and people like him.

US Income Tax Top Bracket

Image: National Taxpayers Union

THE TRUTH ABOUT TAX RATES: Click to see how low today's really are.

The most important reason the theory that "rich people create the jobs" is absurd, argues Nick Hanauer, the founder of online advertising company aQuantive, which Microsoft bought for $6.4 billion, is that rich people do not create jobs, even if they found and build companies that eventually employ thousands of people.

What creates the jobs, Hanauer astutely observes, is a healthy economic ecosystem surrounding the company, which starts with the company's customers.

The company's customers buy the company's products, which, in turn, creates the need for the employees to produce, sell, and service those products. If those customers go broke, the demand for the company's products will collapse. And the jobs will disappear, regardless of what the entrepreneur does.

Now, of course entrepreneurs are an important part of the company-creation process. And so are investors, who risk capital in the hope of earning returns. But, ultimately, whether a new company continues growing and creates self-sustaining jobs is a function of customers' ability and willingness to pay for the company's products, not the entrepreneur or the investor capital. Suggesting that "rich entrepreneurs and investors" create the jobs, therefore, Hanauer observes, is like suggesting that squirrels create evolution.

(Or, to put it even more simply, it's like saying that a seed creates a tree. The seed does not create the tree. The seed starts the tree. But what creates the tree is the combination of the DNA in the seed and the soil, sunshine, water, atmosphere, nutrients, and other factors that nurture it. Plant the seed in an inhospitable environment, and it won't create anything. It will die.)

So, then, if what creates the jobs in our economy is, in part, "customers," who are these customers? And what can government policy do to make sure these customers have more money to spend to create demand and, thus, jobs?

The customers of most companies, Hanauer points out, are ultimately the gigantic middle class — the hundreds of millions of Americans who currently take home a much smaller share of the national income than they did 30 years ago, before tax policy aimed at helping rich people get richer created an extreme of income and wealth inequality not seen since the 1920s.

50s housewife

She'd like to create jobs. But she can't afford to anymore. Click to see how extreme inequality has gotten.

The middle class has been pummeled, in part, by tax policies that reward "the 1%" at the expense of everyone else.

(It has also been pummeled by globalization and technology improvements, which are largely outside of any one country's control.)

But, wait, aren't the huge pots of gold taken home by "the 1%" supposed to "trickle down" to the middle class and thus benefit everyone? Isn't that the way it's supposed to work?

Yes, that's the way it's supposed to work.

Unfortunately, that's not the way it actually works.

And Hanauer explains why.

Hanauer takes home more than $10 million a year of income. On this income, he says, he pays an 11% tax rate. (Presumably, most of the income is dividends and long-term capital gains, which carry a tax rate of 15%. And then he probably has some tax shelters that knock the rate down the rest of the way).

With the more than $9 million a year Hanauer keeps, he buys lots of stuff. But, importantly, he doesn't buy as much stuff as would be bought if that $9 million were instead earned by 9,000 Americans each taking home an extra $1,000 a year.

Why not?

Because, despite Hanauer's impressive lifestyle — his family owns a plane — most of the $9+ million just goes straight into the bank (where it either sits and earns interest or gets invested in companies that ultimately need strong demand to sell products and create jobs). For a specific example, Hanauer points out that his family owns 3 cars, not the 3,000 that might be bought if his $9+ million were taken home by a few thousand families.

If that $9+ million had gone to 9,000 families instead of Hanauer, it would almost certainly have been pumped right back into the economy via consumption (i.e., demand). And, in so doing, it would have created more jobs.

Hanauer estimates that, if most American families were taking home the same share of the national income that they were taking home 30 years ago, every family would have another $10,000 of disposable income to spend.

That, Hanauer points out, would have a huge impact on demand — and, thereby job creation.

It's time we stopped mouthing the fiction that "rich people create the jobs."

Rich people don't create the jobs.

Our economy creates jobs.

We're all in this together. And until we return to more reasonable tax policies that help the 99% instead of just the 1%, our economy is going to go nowhere.

Raise Taxes on Rich to Reward True Job Creators

Raise Taxes on Rich to Reward True Job Creators: Nick Hanauer

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Dec. 1 (Bloomberg) -- It is a tenet of American economic beliefs, and an article of faith for Republicans that is seldom contested by Democrats: If taxes are raised on the rich, job creation will stop.

Trouble is, sometimes the things that we know to be true are dead wrong. For the larger part of human history, for example, people were sure that the sun circles the Earth and that we are at the center of the universe. It doesn’t, and we aren’t. The conventional wisdom that the rich and businesses are our nation’s “job creators” is every bit as false.

I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. in 2007 for $6.4 billion. I was also the first non-family investor in Amazon.com Inc.

Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

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.

Theory of Evolution

When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution. In fact, it’s the other way around.

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.

That’s why our current policies are so upside down. When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.

And that’s what has been happening in the U.S. for the last 30 years.

Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.

One reason this policy is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.

It’s true that we do spend a lot more than the average family. Yet the one truly expensive line item in our budget is our airplane (which, by the way, was manufactured in France by Dassault Aviation SA), and those annual costs are mostly for fuel (from the Middle East). It’s just crazy to believe that any of this is more beneficial to our economy than hiring more teachers or police officers or investing in our infrastructure.

More Shoppers Needed

I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.

If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.

It is mathematically impossible to invest enough in our economy and our country to sustain the middle class (our customers) without taxing the top 1 percent at reasonable levels again. Shifting the burden from the 99 percent to the 1 percent is the surest and best way to get our consumer-based economy rolling again.

Significant tax increases on the about $1.5 trillion in collective income of those of us in the top 1 percent could create hundreds of billions of dollars to invest in our economy, rather than letting it pile up in a few bank accounts like a huge clot in our nation’s economic circulatory system.

Consider, for example, that a puny 3 percent surtax on incomes above $1 million would be enough to maintain and expand the current payroll tax cut beyond December, preventing a $1,000 increase on the average worker’s taxes at the worst possible time for the economy. With a few more pennies on the dollar, we could invest in rebuilding schools and infrastructure. And even if we imposed a millionaires’ surtax and rolled back the Bush- era tax cuts for those at the top, the taxes on the richest Americans would still be historically low, and their incomes would still be astronomically high.

We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.

(Nick Hanauer is a founder of Second Avenue Partners, a venture capital company in Seattle specializing in early state startups and emerging technology. He has helped launch more than 20 companies, including aQuantive Inc. and Amazon.com, and is the co-author of two books, “The True Patriot” and “The Gardens of Democracy.” The opinions expressed are his own.)

To contact the writer of this article: Nick Hanauer at Nick@secondave.com.

THE TRUTH ABOUT TAXES: Here's How High Today's Rates Really Are

HE TRUTH ABOUT TAXES: Here's How High Today's Rates Really Are

US Income Tax Top Bracket

Image: National Taxpayers Union

History of the top income tax bracket, 1913-2008.

As the US struggles with a massive budget deficit, the conversation has obviously turned to taxes.

Specifically, what should be done with them.

Obviously, no one likes paying higher taxes, and everyone likes paying lower taxes. But we live in the real world, not fantasy-land. And in the real world, sometimes people have to do things they would prefer not to do--like pay taxes.

But the disagreement on this issue, as well as the facts surrounding it, is intense.

Democrats, to the extent they care about the budget deficit, want to raise taxes, which they say are too low--especially on rich people.

Republicans, meanwhile, generally say that taxes are far too high and that the budget deficit should be addressed with spending cuts. To get the economy back on track, Republicans argue, you need to give Americans an incentive to work hard--by letting them keep more of what they earn. Republicans also argue that raising taxes would clobber an already fragile economy.

So who's right?

Are taxes too high? Or are they too low?

Do high tax rates on "rich people" create a lazy population in which no one has an incentive to work hard?

And what about the Republican mantra that cutting taxes is always good for the economy, while raising taxes is always bad?

Thanks to the Tax Foundation and other sources, we've analyzed tax rates over the past century, along with government revenue and spending over the same period.

This analysis revealed a lot of surprising conclusions, including the following:

  • Today's government spending levels are indeed too high, at least relative to the average level of tax revenue the government has generated over the past 60 years. Unless Americans are willing to radically increase the amount of taxes they pay relative to GDP, government spending must be cut.
  • Today's income tax rates are strikingly low relative to the rates of the past century, especially for rich people. For most of the century, including some boom times, top-bracket income tax rates were much higher than they are today.
  • Contrary to what Republicans would have you believe, super-high tax rates on rich people do not appear to hurt the economy or make people lazy: During the 1950s and early 1960s, the top bracket income tax rate was over 90%--and the economy, middle-class, and stock market boomed.
  • Super-low tax rates on rich people also appear to be correlated with unsustainable sugar highs in the economy--brief, enjoyable booms followed by protracted busts. They also appear to be correlated with very high inequality. (For example, see the 1920s and now).
  • Periods of very low tax rates have been followed by periods with very high tax rates, and vice versa. So history suggests that tax rates will soon start going up.

Don't take our word for it, though.


Let's begin with a look at the top income tax bracket since the federal income tax was started in 1913. As you can see, relative to history, it's currently VERY low.

Let's begin with a look at the top income tax bracket since the federal income tax was started in 1913. As you can see, relative to history, it's currently VERY low.

US Income Tax Brackets 1913-2011

Image: National Taxpayers Union

And before you protest that INCOME taxes may be low, but the government is now gouging us a thousand new ways, note that total government tax revenue (federal, state, and local) is actually now lower than pretty much any time in the last 40 years. (Not as low as it was in the first half of the last century, though!)

And before you protest that INCOME taxes may be low, but the government is now gouging us a thousand new ways, note that total government tax revenue (federal, state, and local) is actually now lower than pretty much any time in the last 40 years. (Not as low as it was in the first half of the last century, though!)

Federal Government Revenue

Image: US Government Spending

The federal portion of that tax revenue--the blue part in the chart below--is in the same range as it has been in since 1950 (15%-20% of GDP). State (red) and local (green) tax revenues are in a similar long-term range. (State revenue has actually shrunk of late).

The federal portion of that tax revenue--the blue part in the chart below--is in the same range as it has been in since 1950 (15%-20% of GDP). State (red) and local (green) tax revenues are in a similar long-term range. (State revenue has actually shrunk of late).

US Government Revenue Federal State Local

Image: US Government Spending

And in case you're curious about the composition of that tax revenue... About a third (blue) is income tax. Another third is "value added" tax--property taxes, sales taxes, and tariffs (green). And another third is business tax (yellow) and social taxes (red).

And in case you're curious about the composition of that tax revenue... About a third (blue) is income tax. Another third is "value added" tax--property taxes, sales taxes, and tariffs (green). And another third is business tax (yellow) and social taxes (red).

US Government Revenue By Source

Image: US Government Spending

Here's another look at how consistent the federal "take" has been as a percentage of GDP, going all the way back to 1950. Federal revenues have been 15%-20% of GDP, like clockwork (blue line). Of course, spending has usually been higher than this revenue--20%-25% of GDP. We just can't seem to live within our means.

Here's another look at how consistent the federal "take" has been as a percentage of GDP, going all the way back to 1950. Federal revenues have been 15%-20% of GDP, like clockwork (blue line). Of course, spending has usually been higher than this revenue--20%-25% of GDP. We just can't seem to live within our means.

Federal Revenues And Outlays 1935-2010

And here's another look at federal spending as a percent of GDP for the past century. It's not way out of whack these days, at least relative to the last 60 years. But, thanks to the stimulus, it's higher than it has been since World War 2. (And the Republicans are probably right--it's too high).

And here's another look at federal spending as a percent of GDP for the past century. It's not way out of whack these days, at least relative to the last 60 years. But, thanks to the stimulus, it's higher than it has been since World War 2. (And the Republicans are probably right--it's too high).

Federal Government Spending As A Percent Of GDP

Image: US Government Spending.com

And now for a closer look at those income taxes--the ones everyone loves to fight about. First, a refresher course: Here are the current federal income tax rates. 10%-25% rates for most people, and 35% in the top bracket (over $379,000).

And now for a closer look at those income taxes--the ones everyone loves to fight about. First, a refresher course: Here are the current federal income tax rates. 10%-25% rates for most people, and 35% in the top bracket (over $379,000).

2011 Income Tax Brackets

And now, finally, a reminder of where that top bracket (35%) sits in the history of top tax brackets. (It's very low). Let's take a closer look at that history...

Let's start in 1921, before the boom/bubble decade that became known as the "Roaring 20s." The income tax scale in 1921 was very broad, and the top rates were high. The top bracket, for those earning over $1 million (many millions in today's dollars) was 73%.

In 1924, tax rates were cut. The top rate was slashed from 73% to 46%. And the top bracket was reduced to $500,000 of income (again, many millions in today's dollars).

The next year--1925--the tax cuts continued. The top rate was slashed to 25%, down from 73% just two years earlier. The highest wage earners--those who made $100,000 and up--got to keep a vastly larger share of their income than they had only a few years previously.

And what happened to the economy? For a few years, from 1925-1929, the economy and stock market boomed. The decade became known as the "roaring 20s." Inequality--the difference in wealth between the top earners and everyone else--also soared to unprecedented levels. Then the bottom fell out.

And what happened to the economy? For a few years, from 1925-1929, the economy and stock market boomed. The decade became known as the "roaring 20s." Inequality--the difference in wealth between the top earners and everyone else--also soared to unprecedented levels. Then the bottom fell out.

Image: Wikipedia

By 1932, with the country's economy in a shambles, the tax code changed again. The high rates on top earners were reintroduced. Now, anyone who made over $100,000 was in a 56% bracket (versus 25% in the late 20s). And those earning over $1 million paid 63%.

Then, in 1936, with the economy still in horrible shape and the deficit soaring, the country really socked it to rich folks. Anyone making over $100,000 had to pay 62%. Anyone over $1 million, 72%. And the top rate--for incomes over $5 million--soared to 79%. (This would be the equivalent of having a tax bracket for those who made ~$20 million and up today). These tax hikes were later blamed for throwing the economy back into recession.

In 1941, income tax rates went even higher. The top bracket hit 81%.

And then, in 1945, with the country loaded to the gills with war debts, the top bracket hit an all-time high: 94%. This was assessed on anyone making more than $200,000. (Next time you hear bitching about how unfair it would be to raise our top bracket a few percentage points from 35%, remember that).

The following year, 1946, rates were trimmed a bit. The top rate was reduced to 91%.

And taxes stayed pretty much just that way for the next 15 years, until the early 1960s. Importantly, this was one of the most successful eras in US economic history. The middle class boomed, the economy boomed, and the stock market boomed. And all with the top marginal income tax rate over 90%. This suggests that the Republican mantra about high marginal tax rates killing the economy is, well, a bunch of crap.

Then, in the early 1960s, rates began to drop. Slowly, at first...

Then in bigger increments...

By 1965, the top bracket was down to 70%.

And there rates stayed, right through the early 1980s. The economy of the 1970s, of course, was horrendous--a condition that was later often blamed on high marginal tax rates. Based on the history of the 1950s, however, which had higher marginal tax rates, the cause of the 1970s misery was more likely stagflation.

In any event, in the early 1980s, Ronald Reagan came along. And he started cutting taxes. In 1982, the top marginal rate dropped to 50%.

Five years later, Reagan slashed taxes again, cutting the new top rate to 38.5%. (Note that this rate is still higher than today's.)

And then, in 1988, Reagan finished the job, whacking the top rate to 28%.

But suddenly we had a huge deficit to worry about. So George Bush 1 raised rates a bit. The top marginal rate bumped up to 31%.

Of course, George Bush had broken a campaign promise by raising rates ("Read my lips: No new taxes"), so he was dismissed. And Bill Clinton came in and jacked the top bracket back up to 39.6%. And, lo and behold, the economy boomed! And the deficit shrank! And eventually, we even had a surplus.

But taxes were too high for George Bush 2, so he cut them. Just marginally, at first.

Then more significantly. In 2003, the top bracket dropped to 35%. The deficit reappeared--and then soared. And, interestingly, we saw a repeat of the 1920s: An unsustainable economic boom that ultimately collapsed, followed by a massive recession and huge deficits. And soaring inequality, which still plagues us today.

In 2010, with the economy still struggling, Barack Obama extended the Bush tax cuts for another two years. So here we are today.

So, what does the future hold? Good question! Obviously, no one likes tax increases, but the similarities between the 1920s-1930s and the 2000s-2010s seem hard to ignore. Today, after an era of very low taxes, we have enormous inequality and a huge deficit. Last time that happened, the top tax rate soared (and, it should be noted, the economy boomed--even with the top rate high). And we certainly wouldn't be surprised to see history repeat itself again...

No, Entrepreneurs Like Steve Jobs Do Not 'Create Jobs' By Inventing Products Like The iPhone

No, Entrepreneurs Like Steve Jobs Do Not 'Create Jobs' By Inventing Products Like The iPhone

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A billionaire named Nick Hanauer recently wrote an editorial for Bloomberg in which he destroyed the argument that the jobs in America are created by rich entrepreneurs and investors.

In our current "class war" climate, this argument has been repeated so often that it's now regarded as fact. And it is frequently and passionately invoked to defend the idea that we should make further tax cuts for rich people — so rich people can have an incentive to create more jobs.

As I explained yesterday, the argument that rich people create the jobs is flawed for many reasons, starting with:

  1. Taxes on rich people are already historically low relative to other (very prosperous) periods, and
  2. Many billionaires and entrepreneurs like Hanauer have already gone on record to ridicule the idea that raising capital gains and income taxes a few points would suddenly reduce the incentive to start companies.

(The entrepreneurs would take home slightly less money from their companies, but they'd start them anyway. So cutting taxes for rich "job creators" would just make the job creators richer.)

But Hanauer's more profound point, which explains one of the things that is ailing our economy, is that rich people actually don't create the jobs.

What creates the jobs is a healthy economic ecosystem. Specifically, a healthy ecosystem that starts with the company's customers.

An entrepreneur can have the most brilliant idea in the world and plenty of funding to develop and sell it, but if customers can't afford to buy the company's products, the entrepreneur and his or her investors won't create a single permanent job.

Saying "the entrepreneur and investors create the jobs," in other words, is like saying a seed creates a tree.

A seed does not create a tree. The seed starts the tree, and contains the blueprint (idea) for the tree. But the tree is created by a combination of this blueprint plus soil, sunshine, nutrients, water, and a climate that has perfect temperature and atmosphere with enough of the above resources to go around.

Plant a seed in an inhospitable environment, and it won't create anything. It will die.

And the same is true for entrepreneurs and investors. Without their future customers and employees, and a legal and societal environment that can nurture their growth, they're done for.

And who are the customers who have the power to create and destroy jobs and fix the economy?

For the most part, the middle class — a.k.a., "the 99%." (Yes, there are some companies that cater exclusively to the 1%, but not many.)

60 minutes child homelessness truck

Image: 60 Minutes

Finally, a rich American destroys the fiction that rich people create the jobs. Click to read >

One of the fundamental problems in our economy right now is that the percentage of the national income taken home by the 1% at the expense of the 99% has radically shifted in the past 30 years. And this (and other factors) has left the 99% strapped and unable to provide the buying power necessary to create as many jobs as we need.

Anyway, as expected, Hanauer's argument struck a nerve, especially among folks who take pride and comfort in the fact that, as rich people, they're the ones who create the jobs.

(The original post has 300+ comments and counting, and my email box has exploded with praise and vitriol.)

The logic in the smarter arguments about why rich people DO create the jobs sounds persuasive, but it's wrong. This logic, too, has also been repeated so often that it is regarded as fact. So it's worth exploring.

The smarter arguments about why rich people DO create the jobs boil down to this:

  • Just look at the number of jobs created in Silicon Valley, where there is a unique combination of a highly developed venture capital system, an entrepreneurial culture, and brilliant entrepreneurs.
  • Brilliant entrepreneurs like Steve Jobs create products that create demand. No one knew they wanted an iPhone before Steve made one. Therefore, Steve created all the jobs that are required to make and sell and service the iPhone.

Again, these arguments are seductive, but they're wrong.

In both cases, what actually created the jobs were the combination of the companies and the customers of the products and services that the companies created and the ecosystem in which those companies operate. Without the customers, the iPad and hundreds of other Silicon Valley products would have remained little more than cool prototypes. And the jobs of those who made them, which were initially funded with investment capital, would quickly have disappeared. And the invested capital would have disappeared, too.

NO, ENTREPRENEURS AND INVESTORS DON'T CREATE JOBS — EXCEPT TEMPORARILY

How do we know that entrepreneurs and investors don't create the jobs?

Let's look at a couple of examples.

Income Inequality, 1981-2008

Image: Economic Policy Institute

These amazing charts show how most Americans have gotten shafted over the past 30 years. Click to see >

Silicon Valley

Silicon Valley entrepreneurs start a lot of cool companies, and Silicon Valley investors provide the risk capital necessary for these companies to develop.

These contributions are very important to the health of the economy, and they should not be played down.

And this combination of entrepreneurs plus capital can certainly create a handful of temporary jobs — jobs that last until the invested capital runs out. But without healthy customers to buy the products and services created by these entrepreneurs and investors, whatever jobs are temporarily created will quickly go "poof."

If you need proof of this, just look at the late 1990s.

In the late 1990s, and especially in 1999, hundreds of thousands of investors poured tens of billions of dollars into Internet-related investments. The entrepreneurs and companies that received these investments used it to create tens of thousands of jobs — very temporarily.

If entrepreneurs and investors really could singlehandedly "create jobs," these jobs would still exist. But by 2001, when the Internet bubble had burst, and the investment capital dried up, most of the jobs created by those 1999-era entrepreneurs and investors disappeared. Because it turned out there was no real demand for their products.

chart of the day, scariest jobs chat ever, november 2011

Entrepreneurs and investors can't solve this problem. Click for details >

But what about the companies that survived the Internet bust — Amazon, Google, Yahoo?

Didn't Jeff Bezos, Larry Page, and Jerry Yang each create tens of thousands of jobs?

No.

Jeff, Larry, and Jerry started cool companies, and they deserve a ton of credit for that. And investors provided the initial capital necessary to get the companies going. And Jeff, Larry, and Jerry hired smart people to help them build the companies. And Jeff, Larry, and Jerry built products that people wanted, which is obviously critical. And Jeff and Larry (if not Jerry) have managed their companies well for the past 10-15 years. But to say that Jeff, Larry, and Jerry and their initial investors "created" the ~100,000 jobs that Amazon, Google, and Yahoo now have is ridiculous.

What has created the ~100,000 jobs is the combination of the companies, the companies products and services, and the market's ability to pay for those products and services.

How can we be certain of this?

Because as Yahoo is painfully learning, once the market demand for your products and services wanes, the jobs you have "created" disappear.

NO, STEVE JOBS DIDN'T "CREATE JOBS," EITHER

But how about Steve Jobs? Didn't he single-handedly create tens of thousands of jobs when he invented the iPhone and iPad? After all, no one even knew they wanted an iPhone or iPad before Steve and Apple invented them.

No, Steve Jobs didn't create those jobs.

Steve and Apple did invent a couple of awesome products that about a hundred million people have bought, and he and his team deserve tons of credit for that.

But they didn't "create the jobs."

Why not?

Tax rates v/s revenues chart

THE TRUTH ABOUT TAXES: They're much lower on rich people now than in other prosperous periods. Click to see >

First because, if the 100+ million people who bought iPhones and iPads had not been able to afford iPhones or iPads, Apple wouldn't have sold any of them.

It doesn't matter how much "demand" is created by a product that is so awesome that everyone wants it. If no one has the money to buy it, they won't buy it. (Unless they can borrow the money to buy it, which is another story, and is another part of the problem with the U.S. economy.)

Furthermore, the money used to buy iPhones and iPads was not created out of thin air. When the money used to buy iPhones and iPads was spent on iPhones and iPads, it was not spent on something else. In other words, if Steve Jobs and Apple had NOT invented the iPhone and iPad, the money used to buy them would likely have been used to buy something else — and the companies that made the something else would have "created" the jobs.

Apple's building of a better mousetrap, in other words, did not suddenly "create jobs." It moved the jobs. It moved the jobs from the companies that were making the older mousetraps to the one that was making the better mousetrap (and, in this case, it mostly moved them to Asia, which is another issue). In fact, to the extent that Apple created a more efficient manufacturing process for its better mousetraps, Apple and Steve Jobs may actually have destroyed jobs, not created them.

If you still don't believe it, think of it this way:

Imagine if Steve Jobs and Apple had only been able to sell their miraculous new iPhones and iPads in Bangladesh, where the average per-capita income is about $1,700 a year.

How many jobs do you think Steve Jobs and Apple would have "created" then?

Not many.

THE BOTTOM LINE

Entrepreneurs and investors do not create the jobs in our economy. The economy itself creates the jobs. and it does this most effectively when it is healthy, meaning that all of the key components, including the middle class, have enough disposable income that they can buy what our companies produce.

Henry Ford is legendary for his decision to make sure he paid his rank-and-file production workers enough that they would be able to afford the company's cars. This decision was not just based on kindness and generosity. Ford knew that his employees would become his customers--and that without his customers, he wouldn't have a company.

Entrepreneurs and investors are very important to our economy. They keep the economy vibrant and nimble, and they help the "gale of creative destruction" that creates innovation and progress and wealth and allows the economy to remain competitive. And they deserve credit for that.

But we are all in this together.

And what "creates" most of the jobs in our economy is the healthy economic ecosystem, not one privileged part of it. Without healthy potential customers, in other words, entrepreneurs and investors can't do jack.

No, The 'Millionaire's Tax' Will Not Make Entrepreneurs Like Me Work Any Less

No, The 'Millionaire's Tax' Will Not Make Entrepreneurs Like Me Work Any Less

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The Republicans are gearing up to convince the country that this will discourage society’s most productive entrepreneurs from investing and creating jobs.

As someone who has done nothing but start and run companies over the past decade – during which time I have helped create from scratch over 1000 jobs and hundreds of millions of dollars of value – I feel obliged to comment.

At no time have personal tax rates EVER entered into my thought process in creating companies or deciding how hard to work. Nor have I heard any fellow entrepreneurs suggest that they would let a few percent increase in taxes impact their thinking at all.

Anyone who starts a company does so because he dreams about making millions of dollars (if not more) and producing products that are valuable to people. You think about the size of the market, the availability of VC funding, human talent, and the competitive landscape – you never think about a few percentage-point increase in tax rates. Entrepreneurs pay lower tax rates on capital gains as it is, so the tax rate for "job creators" is particularly low compared to the average American.

Could tax rates get to the point where it would discourage entrepreneurs? Absolutely – but we are nowhere close to that point. I find that federal tax rates are not that high and only compete with other countries which have higher rates. In fact, I know a lot of foreigners who want to come to the U.S. to start companies (because of the market size, VC money and human talent) and very few Americans who go abroad to escape our high taxes.

People create companies because they enjoy it, they love the challenge, and because they think they may be able to make a lot of money. All of us would love to have lower tax rates. But given the U.S.'s massive budget deficit, raising more money from people who have been very successful is a necessary option – and it will not discourage real entrepreneurs from creating jobs.

Obama has introduced the concept of the "Buffett tax," a few percent increase in tax rate on millionaires.

50 Economic Numbers From 2011 That Are Almost Too Crazy To Believe

50 Economic Numbers From 2011 That Are Almost Too Crazy To Believe

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Even though most Americans have become very frustrated with this economy, the reality is that the vast majority of them still have no idea just how bad our economic decline has been or how much trouble we are going to be in if we don't make dramatic changes immediately. If we do not educate the American people about how deathly ill the U.S. economy has become, then they will just keep falling for the same old lies that our politicians keep telling them. Just "tweaking" things here and there is not going to fix this economy. We truly do need a fundamental change in direction. America is consuming far more wealth than it is producing and our debt is absolutely exploding. If we stay on this current path, an economic collapse is inevitable. Hopefully the crazy economic numbers from 2011 that I have included in this article will be shocking enough to wake some people up.

At this time of the year, a lot of families get together, and in most homes the conversation usually gets around to politics at some point. Hopefully many of you will use the list below as a tool to help you share the reality of the U.S. economic crisis with your family and friends. If we all work together, hopefully we can get millions of people to wake up and realize that "business as usual" will result in a national economic apocalypse.

The following are 50 economic numbers from 2011 that are almost too crazy to believe....

#1 A staggering 48 percent of all Americans are either considered to be "low income" or are living in poverty.

#2 Approximately 57 percent of all children in the United States are living in homes that are either considered to be "low income" or impoverished.

#3 If the number of Americans that "wanted jobs" was the same today as it was back in 2007, the "official" unemployment rate put out by the U.S. government would be up to 11 percent.

#4 The average amount of time that a worker stays unemployed in the United States is now over 40 weeks.

#5 One recent survey found that 77 percent of all U.S. small businesses do not plan to hire any more workers.

#6 There are fewer payroll jobs in the United States today than there were back in 2000 even though we have added 30 million extra people to the population since then.

#7 Since December 2007, median household income in the United States has declined by a total of 6.8% once you account for inflation.

#8 According to the Bureau of Labor Statistics, 16.6 million Americans were self-employed back in December 2006. Today, that number has shrunk to 14.5 million.

#9 A Gallup poll from earlier this year found that approximately one out of every five Americans that do have a job consider themselves to be underemployed.

#10 According to author Paul Osterman, about 20 percent of all U.S. adults are currently working jobs that pay poverty-level wages.

#11 Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.

#12 Back in 1969, 95 percent of all men between the ages of 25 and 54 had a job. In July, only 81.2 percent of men in that age group had a job.

#13 One recent survey found that one out of every three Americans would not be able to make a mortgage or rent payment next month if they suddenly lost their current job.

#14 The Federal Reserve recently announced that the total net worth of U.S. households declined by 4.1 percent in the 3rd quarter of 2011 alone.

#15 According to a recent study conducted by the BlackRock Investment Institute, the ratio of household debt to personal income in the United States is now 154 percent.

#16 As the economy has slowed down, so has the number of marriages. According to a Pew Research Center analysis, only 51 percent of all Americans that are at least 18 years old are currently married. Back in 1960, 72 percent of all U.S. adults were married.

#17 The U.S. Postal Service has lost more than 5 billion dollars over the past year.

#18 In Stockton, California home prices have declined 64 percent from where they were at when the housing market peaked.

#19 Nevada has had the highest foreclosure rate in the nation for 59 months in a row.

#20 If you can believe it, the median price of a home in Detroit is now just $6000.

#21 According to the U.S. Census Bureau, 18 percent of all homes in the state of Florida are sitting vacant. That figure is 63 percent larger than it was just ten years ago.

#22 New home construction in the United States is on pace to set a brand new all-time record low in 2011.

#23 As I have written about previously, 19 percent of all American men between the ages of 25 and 34 are now living with their parents.

#24 Electricity bills in the United States have risen faster than the overall rate of inflation for five years in a row.

#25 According to the Bureau of Economic Analysis, health care costs accounted for just 9.5% of all personal consumption back in 1980. Today they account for approximately 16.3%.

#26 One study found that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.

#27 If you can believe it, one out of every seven Americans has at least 10 credit cards.

#28 The United States spends about 4 dollars on goods and services from China for every one dollar that China spends on goods and services from the United States.

#29 It is being projected that the U.S. trade deficit for 2011 will be 558.2 billion dollars.

#30 The retirement crisis in the United States just continues to get worse. According to the Employee Benefit Research Institute, 46 percent of all American workers have less than $10,000 saved for retirement, and 29 percent of all American workers have less than $1,000 saved for retirement.

#31 Today, one out of every six elderly Americans lives below the federal poverty line.

#32 According to a study that was just released, CEO pay at America's biggest companies rose by 36.5% in just one recent 12 month period.

#33 Today, the "too big to fail" banks are larger than ever. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.

#34 The six heirs of Wal-Mart founder Sam Walton have a net worth that is roughly equal to the bottom 30 percent of all Americans combined.

#35 According to an analysis of Census Bureau data done by the Pew Research Center, the median net worth for households led by someone 65 years of age or older is 47 times greater than the median net worth for households led by someone under the age of 35.

#36 If you can believe it, 37 percent of all U.S. households that are led by someone under the age of 35 have a net worth of zero or less than zero.

#37 A higher percentage of Americans is living in extreme poverty (6.7%) than has ever been measured before.

#38 Child homelessness in the United States is now 33 percent higher than it was back in 2007.

#39 Since 2007, the number of children living in poverty in the state of California has increased by 30 percent.

#40 Sadly, child poverty is absolutely exploding all over America. According to the National Center for Children in Poverty, 36.4% of all children that live in Philadelphia are living in poverty, 40.1% of all children that live in Atlanta are living in poverty, 52.6% of all children that live in Cleveland are living in poverty and 53.6% of all children that live in Detroit are living in poverty.

#41 Today, one out of every seven Americans is on food stamps and one out of every four American children is on food stamps.

#42 In 1980, government transfer payments accounted for just 11.7% of all income. Today, government transfer payments account for more than 18 percent of all income.

#43 A staggering 48.5% of all Americans live in a household that receives some form of government benefits. Back in 1983, that number was below 30 percent.

#44 Right now, spending by the federal government accounts for about 24 percent of GDP. Back in 2001, it accounted for just 18 percent.

#45 For fiscal year 2011, the U.S. federal government had a budget deficit of nearly 1.3 trillion dollars. That was the third year in a row that our budget deficit has topped one trillion dollars.

#46 If Bill Gates gave every single penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for about 15 days.

#47 Amazingly, the U.S. government has now accumulated a total debt of 15 trillion dollars. When Barack Obama first took office the national debt was just 10.6 trillion dollars.

#48 If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.

#49 The U.S. national debt has been increasing by an average of more than 4 billion dollars per day since the beginning of the Obama administration.

#50 During the Obama administration, the U.S. government has accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

Of course the heart of our economic problems is the Federal Reserve. The Federal Reserve is a perpetual debt machine, it has almost completely destroyed the value of the U.S. dollar and it has an absolutely nightmarish track record of incompetence. If the Federal Reserve system had never been created, the U.S. economy would be in far better shape. The federal government needs to shut down the Federal Reserve and start issuing currency that is not debt-based. That would be a very significant step toward restoring prosperity to America.

During 2011 we made a lot of progress in educating the American people about our economic problems, but we still have a long way to go.

Hopefully next year more Americans than ever will wake up, because 2012 is going to represent a huge turning point for this country.

US hunger, homelessness soar amid cuts in social spending: Half of Americans either poor or low-income

US hunger, homelessness soar amid cuts in social spending

Half of Americans either poor or low-income

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Amid continuous attacks on social services in the United States, hunger and homelessness are growing at epidemic rates, according to a report released Thursday by the United States Conference of Mayors.

The group’s annual survey of hunger and homelessness in its 29 member-cities states that requests for emergency food assistance grew by 15.5 percent in the past year. The number of homeless families grew by 16 percent. The survey covers the period between September 1, 2010 and August 31, 2011.

The mayors’ report is but the latest in a string of recent studies documenting the growth of poverty and social inequality in the US. Two days earlier, the National Center on Family Homelessness reported a 38 percent increase in child homelessness between 2007 and 2010, with the result that one in 45 American children are homeless. (See: “US child homelessness soars”).

The Associated Press, citing Census figures released last month, reported Thursday that half of the American population is either poor or low-income. With long-term unemployment at record levels, food pantries and homeless shelters are being overwhelmed by the growing ranks of the poor.

These grim statistics, which provide only a pale reflection of cascading human suffering and social distress, make a mockery of the claims of the Obama administration and the media that the US in an economic “recovery.” In recent days, Obama has hailed the November jobs report, which registered a 0.4 percent decline in the official unemployment rate to 8.6 percent, as evidence that his policies are working. He ignores the fact that the drop in the jobless rate was due to the exodus of 315,000 discouraged job-seekers from the labor force.

Nor has Obama mentioned, in his stage-managed attempts to present himself as an advocate of “middle-class” workers, any of the recent reports documenting the social disaster fuelled by his pro-corporate policies.

The mayors’ report cites cuts in federal commodities and funding as a factor in the diminishing ability of emergency kitchens and food pantries to keep up with surging demand. It notes that 27 percent of the people needing emergency food assistance did not receive it.

The amount of food distributed has failed to keep pace. While demand for food aid shot up by 15 percent, the amount of food given out by cities increased by only 10 percent.

The inadequacy of resources has had a tangible effect: 86 percent of cities surveyed said that food pantries and emergency kitchens have had to reduce the amount of food given out to visitors. Eighty two percent said they had been forced to turn people away from food kitchens, and 68 percent said they had to tighten rules on how often families could visit food pantries.

None of the 29 cities surveyed said they expected the demand for emergency food assistance to fall in the next year, while all but two expected the demand to increase.

Meanwhile, three quarters of the cities said they expected the amount of money available for aid to fall next year, and 41 percent said the decrease would be “substantial.”

About half of those seeking emergency food assistance came as families. A quarter were employed. Eleven percent were homeless.

Sixty percent of the cities reported an increase in family homelessness. Among individuals, homelessness increased by 6 percent.

The mayors’ survey found that an average of 18 percent of homeless people who requested assistance did not receive it. It also found that shelters in two thirds of the surveyed cities were forced to turn away homeless families with children, while 70 percent had to turn away individuals.

Sixty four percent of surveyed cities said they expected the number of homeless families to increase next year, while the same percentage of cities said they expected the amount of recourses available to help the homeless to decrease.

Individual cities paint an even bleaker picture of social distress. In Detroit, the number of requests for emergency food assistance grew by 30 percent in the past year, while in Salt Lake City, Utah the figure grew by 35 percent.

The mayors’ report comes a month after the Census Bureau released its 2010 Supplemental Poverty Measure, which, employing different criteria than the official report, increased the number of Americans estimated to be in poverty from 46.2 million to 49 million and the poverty rate from 15.1 to 16 percent.

Buried within the Supplemental Poverty Measure report is perhaps its most shocking finding: the percentage of the population classified as “low-income,” that is, making between 100 and 200 percent of the poverty rate, has nearly doubled. The official statistic puts the portion of families making between 100 and 200 percent of the poverty rate at 18.8 percent of the total population, while the new statistic puts it at 31.8 percent.

According to the supplemental Census report, there are 49.1 million people in poverty and an additional 97.3 million who are considered low-income. The two figures combined total 146.4 million out of a population of 300 million.

Alongside mass unemployment, falling wages play a critical role in the staggering growth of poverty in the US. Just over the past 12 months, wages have fallen by 1.7 percent in real terms.

This is the result of a coordinated and national corporate assault on workers’ wages that was inaugurated with the Obama administration’s forced bankruptcy of General Motors and Chrysler in 2009. Obama insisted that government loans to the auto companies be contingent on a vast expansion of tier-two wages ($14 an hour) for new-hires, and an overall reduction of labor costs to those at non-union foreign transplant auto factories.

Together with the collapse in home values, mass unemployment and wage-cutting have thrown even families with working adults into poverty. According to a study by the Working Poor Families Project released this month, the portion of employed families that classify as low-income grew from 27 percent in 2002 to 31.2 percent in 2010.

“Many of these families used to be solidly middle class but have seen their incomes drop below the low-income threshold because of a pay cut, a reduction in hours, or because a spouse lost their job,” said Mark Mather, a co-author of the analysis.

In the face of this mounting social catastrophe, no section of the political establishment, Democratic or Republican, is proposing any measures to alleviate the crisis and create jobs. Rather, the entire framework of the official discussion revolves around savage austerity measures to make the working class pay for the multi-trillion-dollar bailout of the banks. These measures include hundreds of billions of dollars in cuts to food stamps, home heating assistance, education and core social programs such as Medicare, Medicaid and Social Security.