Sorry Henry Blodget, The Rich DO Create Nearly Every Job
About all the wholly ineffective regulation that followed the 1980s S&L debacle, it was once written that it amounted to an "Act of anger." Politicians and regulators are always and everywhere fighting yesterday's maladies, and as evidenced by the troubles in the still heavily regulated banking sector in 2008, the alleged "fixes" in the ‘90s were nothing of the sort.
The above sprung to mind when the SEC unleashed the obnoxious force of government on Henry Blodget in 2002. Blodget most notably rose to fame for making what was ultimately a very correct call about Amazon.com in the late ‘90s, but when Internet stocks collapsed in 2000 and 2001, what amounted to overdone anger led to Blodget being forced out of the securities industry after paying a large fine. Near as this writer could tell he didn't do anything wrong, but thanks to an angry political and regulatory class that was out for blood for capitalism working - very well - to starve bad technology ideas, Blodget was wrongly made the poster boy for all that was supposedly wrong with Wall Street.
Happily, Blodget didn't disappear. Instead, he chose to reinvent himself perhaps not so ironically in the Internet space that initially made him famous. As the editor of the very popular website Business Insider, Blodget has created what is very much a go-to site for those interested in what's going on in the world of business and the markets.
Recently Blodget penned a piece for readers in which he argued that contrary to popular opinion, the rich do not create jobs. A provocative statement to say the least, and wildly untrue. The rich do create jobs, by definition.
Indeed, as Joseph Schumpeter long ago observed, and his observation was a tautology, there are no entrepreneurs without capital. Taking Schumpeter's basic insight even further, it's stating the obvious to assert that there are no companies, and no jobs, without investment first. For anyone irrespective of ideology to deny the latter brings new meaning to willful blindness.
So once the obvious is accepted, that companies need investment in order to open for business and hire people, we then can ask where investment comes from. It comes from all of us who save and invest, but the rich, by virtue of being rich, have the most to invest. Investment is what creates jobs, rich people can claim the vast majority of investable wealth in this country, and because they can it's another tautology to say that their savings and investment create the vast majority of jobs.
Blodget dismisses the commentary that says the rich would create even more jobs if they were taxed less. About that, he writes that "taxes on entrepreneurs and investors are already historically low, even after this year's modest increases." Blodget is correct that taxes are low relative to the rates that prevailed from the 1930s to mid-1980s, but in making the latter point, he misses the point.
No doubt it's true that restlessly ambitious entrepreneurs of the Ted Turner, Steve Jobs, Jeff Bezos, and Mark Zuckerberg variety likely would not have been deterred by most any tax rate on income in starting CNN, Apple, Amazon, and Facebook. That much is true, but per the above, it misses the point. There are once again no companies and jobs without investment first, so when governments tax income and capital gains on investment at all, they're logically reducing the amount of capital available for entrepreneurs to access.
Blodget's error is in residing in the ‘seen.' What he misses is the ‘unseen.' As George Gilder has long pointed out, economic growth is about the ‘leap,' or better yet, experimentation with new ideas. The latter requires investment, so rather than celebrate the ‘seen,' we must consider the ‘unseen' that Blodget does not; as in how many future Microsofts, Intels and Googles never were and never will be started at all thanks to governments taxing and borrowing away always limited capital so that they can consume it.
The above is important in light of what the rich do with their money. Blodget writes of customer demand for goods, and says the demand creates jobs, but as evidenced by how much wealth is in the hands of the tragically demonized 1 percent, it's their demand that plays a major role in the health of job-creating companies created by the savings of the rich. More on this in a bit.
More to the point, the wealth that the rich don't consume must go somewhere. Jeff Bezos has notably invested some of his disposable income not taxed away by the federal government into the Uber car service. Considering the ‘unseen' yet again, we must ask how many life-enhancing services never saw the light of day thanks once again to government presuming for itself so much our capital through its taxing and borrowing powers.
Blodget goes on to write that "America's middle class has been pummeled, in part, by tax policies that reward ‘the 1 percent' at the expense of everyone else." That's interesting when we consider that the 1 percent account for 40 percent of federal revenues. It would be more realistic to say that it's the 1 percent who are being pummeled, though that's an article for another day.
What should be pointed out, however, is that a federal government that has no resources of its own is able to employ millions of Americans around the world thanks to an annual budget that has reached $3.5 trillion. What this tells us in light of how the rich account for the vast majority of government revenues is that the rich not only create most private sector jobs, but they also create most government jobs too.
It's unknown, but it's entirely possible that Blodget thinks the federal government should have a role when it comes to investing the wealth created in the private sector. That seems to be what he's looking for given his desire to redistribute the wealth created by the wealthy. It says here that Blodget's sanguine view of government as the wealth distributor is offensive, but he can (and does) point to rich entrepreneurs who would like for the federal government to tax them more.
Ok, but if readers buy into Blodget's line of thinking, they might ask themselves a question once posed by the late Robert Bartley in his masterful book, The Seven Fat Years. Bartley asked readers to "Rank in order the most likely recipient of capital from an industrial planning bureaucracy:
(A) Steve Jobs's garage.
(C) A company in the district of the most powerful congressman."
The answer to Bartley's question was and is rather self-evident. Government, like Blodget, resides in the ‘seen' once again. Anyone possessing any skill at allocating capital obviously would not work for the relatively low wages offered by government, so in his desire to help the middle class by virtue of making the federal government a VC, Blodget reveals an unwitting desire to hurt the very middle class that he aims to help.
Notable about Steve Jobs is that he got the funds to start Apple in his garage from a very rich venture capitalist by the name of Arthur Rock. Hewlett-Packard was also started in a garage, and just the same, it would be foolhardy to presume that H-P might have been an investment recipient of the federal government that Blodget appears so eager to empower. Henry Ford envisioned making the once obscure bauble of the rich that was the automobile something accessible to the middle class, but only the seriously deluded would suggest that he could have secured the funds to do so from the feds back in the late 19th century.
Ford's story is instructive, however. Ford didn't just wake up one day and start mass-producing cars; instead he regularly re-invested the profits from his nascent company back into the business on the way to perfecting the manufacture of automobiles such that they were an increasingly common middle class good by 1914. It's important to point out here that Ford was able to reach the point of mass-producing the Model T thanks to a federal government that wasn't so aggressive about taxing and borrowing when this automotive visionary was on the rise. If the tax rates that prevail today were around when Ford began, simple logic says that federal taxation of his profits would have slowed the arrival of a relatively inexpensive car that so many eventually enjoyed.
The history of Ford Motor Company also tells us a lot about job creation. Henry Ford was a rich man, and very much a job creator. About his job-creating skills, an urban myth persists to this day which says that Ford paid his employees well so that they would buy his cars. The problem is that the latter is not true. Not only did Ford not employ enough workers to drive the sales of his car-making behemoth, the simple truth is that early on Ford suffered employee turnover of 317% per year. The turnover very much ate into profits such that Ford compensated his employees well in order to keep them around.
The above is important, because Blodget oddly asserts that "America's companies are currently being managed to share the least possible amount of their income with the employees who help create it." It's a nice thought, but wholly divorced from reality. The economics of turnover haven't changed much in modern times, and that's why any visitor to the campuses of Nike, Microsoft and Google (to name but three) is blown away by all the perks of working at any of them. Employers have no choice but to share the wealth, and that's the case because if they don't pay what the market will bear, their profits will shrink even more due to turnover.
Companies couldn't exploit their employees even if they wanted to, but if Blodget is still worried about this, he should be calling for lower taxes on income, capital gains, and corporations. Once again, there are no companies and no jobs without investment first, and the more money we leave in the private economy, the more money there will be chasing workers. Taxes logically reduce the amount of capital available, and as such are very anti-worker.
To the above, Blodget presumes to have an answer. Referencing a rich entrepreneur by the name of Nick Hanauer, Blodget asserts that:
"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 his $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 goes straight into the bank."
There's a lot of emotion in the above statement, but the reasoning behind the emotion leaves much to be desired. For one, lest we forget, all that we have today, from cars, to healthcare innovations, to the computers that you readers are on right now, is the result of savings. If all we did was consume, entrepreneurs would have no capital to innovate with on the way to life-enhancing creations and jobs. It can't be stressed enough that jobs are a result of savings, so thank goodness for the rich with this in mind. Since they have income that they don't consume, their excess goes into banks and brokerage accounts so that businesses can access capital to grow and hire.
Taking this further, Blodget acknowledges that Hanauer is not stuffing the income he doesn't consume under a mattress. Instead, Hanauer like all rich people puts his money in the bank in order to earn interest on it. Banks don't pay interest on money only to warehouse it, rather they lend it out. No act of saving ever subtracts from demand despite what Blodget would have his readers believe. Blodget naively seeks redistribution of wealth earned by the rich with consumption in mind, but savings once again don't subtract from it; they merely shift it to others, including middle class individuals who borrow it to buy a house, a car, clothes for their kids, or best of all, access the savings of the rich to start a business.
Assuming we as a nation were ever to grant Blodget his redistributionist nirvana so that the non-rich could consume the wealth of the rich, we'd hardly be better off economically, and the poor and middle classes would be the worst off of us all. Thanks to the rich saving and investing that which they don't consume, there's once again investable funds available so that companies can be funded, and jobs created. Lost on Blodget is that his Hanauer example unwittingly wrecks his argument about the rich and job creation. Behind every job is an act of saving, at which point it must be acknowledged that the willingness of the rich to save means they create jobs essentially without even trying to.
What's interesting about Blodget's odd stab at economic commentary is that he never mentions where the funding for Business Insider came from. I won't presume to say with certainty where it originated, but it's my best guess that his popular internet news site wasn't crowdfunded. Something tells me that he has rich backers whose disposable income made it possible for him to employ those who toil for him.
After all that, it's important to go back to the basics. Companies and the jobs they create are always and everywhere able to open their doors thanks to investment. The 1 percent, by virtue of being the 1 percent, have the most investable funds without which there would be no jobs. Sorry Henry Blodget, but the rich create nearly every job. This is basic economics.