Monday, May 21, 2012

About that TED Guy

A video from the TED convention has been making the rounds. It features a man named Nick Hanauer making a case for raising taxes on the rich and on corporations and investing the money in ways that would help the middle class. The TED organizers decided that the talk was too political and did not release it but it made its way into the Internet. The Left loves it. It is similar to the Elizabeth Warren speech, both in its justification for more taxes and in its mistakes.

Both speeches deal with a stereotyped version of the real world. They talk as though the rich and corporations were not currently being taxed or were being taxed at an incredibly low rate. In reality, by some measures such as the proportion of the tax burden born by the wealthy, we have one of the world's highest tax rates. Our corporate tax rate is by far the highest in the world although it is riddled with exceptions. Even taking those into account, we are one of the highest. Hanauer and Warren fail to recognize this or to say what they think the tax rate should be, just that a higher rate would be preferable since it could be redistributed.

Hanauer starts with a strange concept - that employers do not create jobs, the middle class does.

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 a "circle of life" like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

It is true that no one gets rich by offering a product that no one will buy, it is also true that consumers cannot buy a product that does not exist. Consumers cannot set anything in motion. First someone has to offer goods or services that people want. That is what starts the "virtuous cycle".

Hanauer also says:

Anyone who's ever run a business knows that hiring more people is a capitalist's course of last resort, something we do only when increasing customer demand requires it. In this sense, calling ourselves job creators isn't just inaccurate, it's disingenuous.

It is Hanauer who is being disingenuous. There are a multitude of reasons for hiring people. Businesses hire people when they think that it will increase profits. Sometimes this is in response to increased demand. Sometimes it is because the business wants to enter a new market. They also hire in response to increased regulations. If regulations become too burdensome then the business might outsource jobs. Other times they might insource jobs that are more economical to do domestically.

Hanauer acts as if there is a direct relationship between demand and workforce. The relationship is more nuanced. Sometimes the cost of adding more employees is prohibitive. If an office only has room for 100 employees then the cost of adding the 101st employee includes acquiring new office space. If it takes fifteen workers and a factory line to produce a product then adding one or two workers will not improve production. The point here is that Hanauer is oversimplifying.

Hanauer also rewrites history:

[O]ur current policies are … upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer.

Since 1980, the share of income for the richest Americans has more than tripled while effective tax rates have declined by close to 50%.

If it were true that lower tax rates and more wealth for the wealthy would lead to more job creation, then today we would be drowning in jobs. And yet unemployment and under-employment is at record highs.

From that statement you would never know that the 1980s and 1990s were the longest economic expansion in history and during much of that employment was at an all-time high and the unemployment rate was below the "full employment" rate of 5%. Hanauer is indicting a 30-year period on the basis of a four-year downturn and sluggish recovery. Instead of tarring the entire period, he should be looking at what was done differently 30 years ago which led to such a strong recovery.

Another reason this idea is so wrong-headed is that there can never be enough super-rich 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 median 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, we go out to eat with friends and family only occasionally.

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 cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.
This only makes sense if you accept his premise that consumer spending is the only force in the economy so, by possessing money he is keeping it out of the hands of consumers who would be happily spending it.
This is just a wild guess but I doubt if his wealth is sitting around in a huge vault that he swims around in like Scrooge McDuck. I will bet that he has most of his money invested in businesses which hire people.

Here is where he really goes off the rails:

The extraordinary differential between a 15% tax rate on capital gains, dividends, and carried interest for capitalists, and the 35% top marginal rate on work for ordinary Americans is a privilege that is hard to justify without just a touch of deification.
That 35% top rate only applies to amounts above $388,350/year. For the last four years the Democrats have been insisting that anyone who makes more than $200,000/year ($250,000 for families) is rich but Hanauer calls them "ordinary American". Also, a lot of people who make less than that earn some amount of capital gains.

Here is his summary:

In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class, is the single smartest thing we can do for the middle class, the poor and the rich.
This sounds good but it is terrible public policy. "Investments that grow the middle class" means spending on targeted constituencies. We just tried that with Obama's stimulus. Guess what? It didn't work. A review of spending by county shows that the money did not go to places where unemployment was highest, it went to places that had well-connected congressmen. This is known as "crony capitalism" and leads to all sorts of abuses. For an example, see the John Murtha Airport where a powerful congressman sent $150 million to a tiny airport. If we adopted Hanauer's proposals then this would be the future of our economy.

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