Thursday, 16 February 2012

Demand-side Economics

In his article on December 12 on Nick Hanauer's views on what is wrong with the economy, Henry Blodget wrote "In the war of rhetoric ...for our economic mess, one argument has been repeated so often that many people now regard it as fact: Rich people create jobs". This argument has been used as the reason why we should tax the top level earners in our societies less, so that they use their extra funds to create more work. Then that will filter down and we will all be better off.

Henry then goes on to unpick why rich people DON'T create jobs; and that the middle classes do.

Firstly, in general - throughout the world - top bracket taxes lower today than they have been in the past, yet Western societies are once more developing a deep divide between the rich and the poor.

Secondly, many wealthy entrepreneurs have already stated that a modest tax hike "would not have the slightest impact on their desire to create companies and jobs" (Blodget, 12 December 2011).

Thirdly, Nick Hanauer, founder of aQuantive (a Microsoft $6.4 billion purchase), is that job creation comes from companies' customers.

"What?" I hear you say.

Henry reports that Nick's argument runs as follows. Companies' CUSTOMERS buy products, which creates a production need, so the companies can make, sell and service their creations. If the CUSTOMERS have no money, demand collapses, and company employment dries up. The owners can keep creating as their ships are sinking, but without demand, there will eventually be no supply.

No matter what the entrepreneur does; if the customers aren't buying, there will still be no jobs. it doesn't matter if the entrepreneur pays more tax or not.

As Henry (Blodget, 12 December 2011) says, "ultimately, whether a new company continues growing and creates permanent jobs is a function of the demand 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".

So who are these magic customers who aren't buying at the moment? Pretty much you and me. Our middle classes who have less disposable income than they had a few years ago. We all take home less than we once did, because, as Henry (Blodget, 12 December 2011) puts it "The middle class has been pummeled, in part, by tax policies that reward 'the [top earning] 1%' at the expense of everyone else".

Henry goes on to say "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? ...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... 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 ...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."

Read Henry's original article online at: Blodget, Henry (12 December 2011). Finally, A Rich American Destroys The Fiction That Rich People Create The Jobs. USA: Business Insider. Retrieved 12 December 2011 from http://www.businessinsider.com/rich-people-do-not-create-jobs-2011-12

Sam

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