Tuesday, February 7, 2012

The Big Truth - Investors Create Jobs

A friend on facebook recommended an article and video featuring Nick Hanauer, a highly successful investor, THE BIG LIE: “Rich People Create Jobs. Hanauer assert that it is not the rich who create jobs, but the "ecosystem," which requires thriving middle class willing to spend money so that investors can get rich. He also says that Amazon.com destroyed more jobs than it created. He is an idiot. Here's why.

The real issue isn't jobs, per se, but new jobs. A few minutes worth of thought or reading a standard economics text would reveal that new jobs can only come from investment. Even a primitive economy that consumed all that it produced would have no wealth available to invest. Imagine a simple agrarian economy with farmers and a blacksmith. The blacksmith makes plows for the farmers, which he sells for food. If he wants to make more plows he has to expand his business by using some of the food to pay those same farmers to build a bigger shed. Perhaps he has an idea for a better plow. He has to spend some of his labor on trying out designs that might not work out. He can only do so if he has enough surplus food that he can temporarily forgo making plows. That means he is investing in new technology. Eventually, if the plow helps the farmers be more productive he can charge a higher price, hire a helper, and the farmers can reap more crops. The local economy grows, but only if consumption is temporarily reduced to fund investment.

In a monetary economy, the investment climate matters. The marginal tax rate change will have an effect on marginal behavior. Nick doesn't understand, he thinks only in terms of a single average investor for which there is a single high rate that will cause him to stop investing. This is a common fallacy in economic argument.

Further, he underestimates the effect of foreign investment and its sensitivity to tax rates. The United States has benefited from foreign investment throughout its entire history. Our freedom and rule of law made this land the place to invest. Raising taxes on profits reduces the foreign investment that is so helpful to us now.

Finally, there is no basis for some of Hanauer's assertion. He said that the share of national income goes to the rich is increasing. This was certainly true up until 2007. However, what would you do about it? I would have a tax system that causes the richest to pay slightly more than their share of income in taxes and everyone else to pay slightly less. It might look like this:

Wait, that is a picture of our current tax system, courtesy of the non-partisan CBO.

Hanauer also rails against middle class suffering due to the spiraling costs of health care and education, coincidentally the two areas of heaviest government involvement. Health care is heavily regulated and subsidized and higher education is heavily subsidized, resulting in a bubble.

As to whether Amazon.com destroyed or created jobs, I can't say for sure, but I am certain that Hanauer isn't taking into account the jobs created by Amazon because:
  • They provide a new platform for "storefronts" on Amazon.
  • They create greater demand for product manufacturers that sell through Amazon.
  • They leave greater disposable income that can be used to buy other stuff in the hands of consumers.


  1. Thanks for your analysis. This was very helpful.

  2. ignore the luddites, ignore the luddites....

    That being said, the marginal macroeconomic effect of a raising the marginal wage and perhaps investiment rates is generally overstated on the ride, in my opinion. Proposals being floated by actual Democrats generally don't get far away from statistical noise in terms of output effects

  3. Additionally, Amazon's Kindle e-book publishing allows aspiring authors to potentially turn a profit. I consider this a good thing!

  4. Nice work. Link forthcoming.