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Despite the rhetoric from the right, the real job creators are not millionaires with tax breaks, but the combination of demand and competition.  Romney's plan encourages neither.  

Unless you’ve spent the last year unable to pay for television or internet, you’ve probably heard a whole lot about job creators, and in particular how important it is to get them as much money as possible so they’ll get out there and hire some folks. While nobody likes high unemployment, this remains a curious argument; not only because higher income taxes have historically accompanied more job growth than lower income taxes, but because the portion of American jobs paid for out of personal income is a tiny segment of the labor pool.

For example, consider Google. Few people would argue that Google created 30,000 high paying American jobs because Larry Page enjoys a low capital gains tax. Nor was it even Google’s (impressive) earnings that lead them to become one of America’s largest employers. Rather, Google created 30,000 high paying jobs because there was (and still is) considerable demand for its services and fierce competition in the marketplace. The only way Google could meet that demand and hold off the competition was to employ a large number of highly skilled – and therefore highly paid – employees. Had it not been Google one of the handful of other companies vying for control of the search ad space in 1997 would have eventually become the leader. And moreover, because in 1997 there were more highly skilled computer scientists in America (northern California, specifically) than anywhere else in the world, America had an unfair advantage over its international brethren, and in quick order came to dominate the industry. Which is all to say that demand, competition, and a favorable market lead to all those jobs.

The flip side of the coin is that if competition is weak so too will be job creation. After Netscape collapsed Microsoft trimmed its staff on Internet Explorer considerably, and remained quite lean until it found itself facing fierce competition from Firefox and Chrome (with competition restored the IE team is presently quite large). We see this principle again and again. Where there’s competition and demand, there are jobs, but when either competition or demand falters, the market creates less jobs. In other words, the real job creators are not millionaires with a low taxes, but demand and competition.

Creating Demand

How do we create demand for American products? The short answer is very, very carefully. For the long answer, start with what creates demand.

You will always find lots of demand when three things happen at once: a product exists that solves some problem, the infrastructure exists for that product to be useful, and consumers have enough money to buy the product. You must have all three factor to drive demand for the product. Fuel cells, for example, solve a problem (high fuel prices, pollution, etc…), but are not in demand because the infrastructure does not exist to use them. Similarly, the world is full of people who need malaria medication, but there’s much less demand for medication than potential customers because the majority of people who need it often don’t have the money to buy it (as an aside, this fact is instructive as to why we might not want our health care to be decided by free market principles).

We might try to stimulate demand by using a tax policy that puts money in the hands of consumers (e.g. via tax breaks) – a popular argument for both presidential candidates. However, the devil is in the details. What kind of demand you want to increase – e.g. what industry – is an important consideration before giving a tax incentive. The proposed Romney plan puts more money in the hands of the very wealthy. A family earning 3 Million dollars per year is not going to buy any more coffee, clothing, or the like after receiving a $250K tax break – they already have all that they want of these products. A tax break for the wealthy will increase the demand for financial services, and possibly create new financial sector jobs (although probably not many jobs as the total number of customers that need to be served is not increasing, just the size of the portfolio). By contrast, a tax cut to the middle class will result in increased consumer spending in industries ranging from retail to automotive to child care to everything in between. The resulting increase in consumption will result in more jobs in services, retail outlets, auto manufacturers, and the like. Which is all to say we could choose the kinds of jobs we want and give out tax incentives to the likely consumers, increasing demand, and creating new jobs. Sounds good, but there’s that pesky elephant in the room: globalization. Which is to say, if we increase demand (at the expense of the deficit) to create jobs via tax policy, there’s no guarantee that it will be American jobs that we create.

So how do we create demand for American products? Unfortunately, under existing trade laws you can’t guarantee whatever we spend (in income tax breaks) gets exclusively applied to American companies. The easy solution is to incentivize products and services that are not easily served by foreign companies, such as construction projects. But this amounts to setting the bar for our future very low – if we want America to maintain the same lofty position in the 21st century that we have enjoyed in the 20th, we need to lead 21st century technology in the same way that we lead in aviation, biotech, electronics, and a host of others in the 20th century. Such products are by definition exportable, and therefore global leadership is up for grabs.

Creating Demand for American Products

The answer to globalization can be seen by taking another look at Google. In 1997 America had an unfair advantage for technology companies relative to the rest of the world in that a disproportionate number of the world’s best engineers were living in California’s Silicon Valley. Easier access to talented employees ensured that American technology companies were able to grow much faster than their international counterparts, and often with better employees. As a result, when the demand for search products appeared in the market, it was almost certain that it would be an American company that would become the market leader. Google emerged on top, but had it not, Alta-Vista, Ask, Yahoo!, and a host of others were positioned to make a similar leap. By way of contrast, for many countries it would take years before enough engineers educated in Machine Learning and Distributed Computing – the advanced engineering disciplines that make search engines possible – would emerge from their universities to allow them to compete with Google. By that time search had been firmly established as an American dominated business.

What Google’s history (and the history of virtually every other industry dominated by American companies) teaches us is that before demand for a product emerges (either organically or through incentives) we should be ensuring that America is in a position to have an unfair advantage to capitalize on that demand.  To ensure this advantage will require long term planning (admittedly, not something we are great at).  I believe the following five step plan will position us to succeed in the 21st century.
1.Pick the industries we want to lead in

Going against the trend of the past 30 years we will need government to plan ahead 15 and decide what industry we think is going to lead in the future. Biotech, new sources of energy, automation and robotics, and personalized medicine are safe bets.
1.Invest in infrastructure to give American businesses an unfair advantage in those industries

If we want to be exporting biofuels around the world, we need pipelines, tankers, gas stations, fueling centers, truckers and a host of other things in place before the first viable businesses come online. To get these industries off the ground we’ll need to invest, using tax incentives, guaranteed loans, and direct infrastructure projects. This has the upside of short term economic stimulation and can help us out the recession, but comes with a high cost in terms of furthering the deficit. This cost will be paid back in spades when America becomes the number 1 exporter of biofuels (or robotics, etc…).
1.Make sure we have a monopoly on the best and the brightest in these industries

Heavily invest in engineering and business education – in particular graduate education – in fields related to the selected industries by extending low interest student loans, scholarships, and grants. Similarly, make it easy for anyone with a graduate degree in engineering or business from a top international university, specializing in one of target industries, to get a work visa. We want to fill the United States with top engineers in the industry so that entrepreneurs or innovators have no trouble finding excellent talent. At the same time, invest in infrastructure – such as projects that reduce commute time – to make American cities the best places to work.
1.Make the industry competitive

Incentivize venture investments in these industries, and raise the bar on patents to very high levels to avoid anti-competitive lawsuits. We want as many American companies competing in the industry as possible in product development, not the courtroom. By curtailing all but the most essential/innovative patents, we force companies to compete on innovation.
1.Put money in the hands of the consumer

Reduce tariffs and tax rates intelligently so the buyers of our new industry have enough money to be consumers. This likely means targeted tax breaks for American citizens and companies, but it need not be limited to Americans. It may seem counter intuitive to be giving (for example) the Chinese a break on tax rates (via tariffs) so that we can better compete with the Chinese, but ensuring that they are buying our products early on will get the industry off the ground. Those tax benefits won’t look so beneficial when they are importing these products 10:1 over exports of the same.

Back to the Present

Which leads us back to the question of what kind of tax policy we should have to create jobs. With respect to Mr. Romney, more money in the hands of the very rich will only incentivize financial sector jobs, and even then very few. This money is better applied to the deficit. On the other hand, because tax cuts to the middle class will result in increased consumption and jobs, if the goal is to kick-start the economy, maintaining the middle class tax cuts seems reasonable, if done carefully. However, both candidates should realize that long term job growth requires long term planning, with a commitment to education, easing restrictions on H1B Visas (visa’s given to highly qualified individuals), and supportive infrastructure projects. The latter will not bear fruits for many years, but it will (and is necessary to) ensure American jobs and economic growth for decades.

Originally posted to Overly Optimized on Mon Sep 10, 2012 at 12:22 PM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  a nice summary of econ 101. (3+ / 0-)

    i have been making this argument for a long time, in an effort (small though it is) to counter the nonsense constantly spewed by conservatives. i've sometimes found myself giving a mini-instructional in basic economics, to illustrate why what the conservatives tell people is mostly just a great big lie, not supported by either logic or facts.

    what oftentimes surprises me is who i end up doing this for, people with degrees in business, that had to have taken at least a couple of econ classes. you would (reasonably, i think)  assume they would know better. apparently, i was among the few non-majors who actually stayed awake for the lectures. aside from me having a really boring social life, i'm not sure what else that says about me.

    the republicans have been spewing this nonsense for 30 odd years (i have no idea what they've been doing during the even years), in a planned, concerted effort to brainwash the uninformed bulk of the public. to their credit, they've been quite successful. it's going to take an equally concerted effort, on the part of liberals/progressive, to counter the republican/conservative propoganda machine.

  •  No Republican admits that Demand is a thing (1+ / 0-)
    Recommended by:
    misslegalbeagle

    anymore. Their entire worldview depends on denying the existence of the demand curve and focusing only on the supply curve. I take issue with the introductory sentence.

  •  Getting money to the poor is best (1+ / 0-)
    Recommended by:
    LostBuckeye

    They are the bottom of the financial pyramid, and when they reliably spend it has farther to go, through more levels, creating profits and taxes on every level.

    Giving to the middle classes doesn't do as much. It's the poor who spend every dime, spreading the money around far and wide, to all kinds of middle class businesses.

    Women create the entire labor force.

    by splashy on Tue Sep 11, 2012 at 02:26:09 AM PDT

    •  When discussing tax policy (1+ / 0-)
      Recommended by:
      LostBuckeye

      we're not talking about giving money to anyone. It's a matter of how much each person should pay for the benefits of our American civilization.

      "I like paying taxes. With them, I buy civilization" - Oliver Wendell Holmes, Associate Justice of the Supreme Court
      Tax breaks for the middle class result in far more benefit to America than tax breaks for the rich as so ably described in this post. Tax breaks for the poor have little effect, simply because the poor seldom pay taxes at all at the federal level.

      So the policy should be: Tax breaks for the middle classes, effective social programs to lift up the poor and ease the burdens of poverty. And what do you know, that's (basically) the Democratic idea.

      The problem with republican tax policy is that it is both irrational and ineffective.

    •  RE: Money to the Poor (1+ / 0-)
      Recommended by:
      dagnome

      I don't disagree, but tax policy wont help here.  its true that the Poor -- by virtue of being the most in need -- will spend all their money, but even with a 100% tax cut they'd still not be able to buy insurance, quality education, or live close enough to work to be able to spend any time with their families.  To prop up the poor the best thing to do is invest in health care, early childhood education, grade school and high school tutoring, pathways to college.  All of which we should do, but its distinct from the policies we should adopt to create jobs.  

      •  and regrettably, all these are items targeted (0+ / 0-)

        for extinction by any future GOP administration.

        And the GOP/Tea Party members currently in the HOuse and Senate are also working feverishly to make these cuts happen NOW, to further undercut the Obama presidency.

        It's pretty sad when public policy in Washington is being driven by the GOP/T's racist hatred of the occupant of the White House.

        For a better America, vote the GOP out of office whenever and wherever possible and as soon (and as often) as possible!

        by dagnome on Tue Sep 11, 2012 at 03:19:53 PM PDT

        [ Parent ]

  •  A quote from a successful venture CapitalIst... (3+ / 0-)
    Recommended by:
    Rightish Lefty, LostBuckeye, Icicle68

    "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 put 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."

    Nick Hanauer, Successful Venture Capitalist

    Aldus Shrugged : The Antidote to Ayn Rand. Buy ALDUS SHRUGGED on amazon, and ALL royalties will be donated directly to barackobama.com HELP ME TO HELP THE BIG O!!! And follow the fun: @floydbluealdus1

    by Floyd Blue on Tue Sep 11, 2012 at 05:37:39 AM PDT

  •  The Real Job Creators are the Spendors (1+ / 0-)
    Recommended by:
    Rightish Lefty

    This John Galt view of capitalism comes from the old concept of classical economics called Say's Law - it basically states that if you offer products people will buy them and that a rational business person will never hoard money.  Yeah. As we know things don't go that way.  Folks like Mitt Romney specialize in keeping cash out of the economy.  

    It's the people who spend who generate job growth - demand drives production.  The more people "want" they more business will produce.  An "Atlas Shrugged" situation could never happen.  If Galt tried to shut down his businesses to hold the world hostage, other capitalists would simply rise to the occasion and fill the void left my him and his cabal.  This happened when Gould tried to corner the market on gold.  You break up a monopoly, and other businesses inflood to fill the gap.  

    The question at stake here is not just - who is spending, but where is the money going?  Are are spendors in the USA creating jobs in the USA...or elsewhere?  Romeny's version of capitalism is extracative.  It's utterly mercenary - it puts capital in investments with the lowest tax burden and places jobs in countries with the least cost.  

    Every consumer is a "job creator" - but in order to maintain the health of our national economy we need a government that acts on the behalf of those spendors to insure that the money they spend is re-invested back into our economy.  So that we can all keep spending.  

    No one can terrorize a whole nation, unless we are all his accomplices. - Edward R. Murrow

    by CrazyHorse on Tue Sep 11, 2012 at 06:25:23 AM PDT

  •  I just finished a Masters program (0+ / 0-)

    and did a year long entrepreneurship course as part of it. What you say makes sense.

    My program is in Management Information Systems and the question of "what can be outsourced to other countries will" is still a very troubling take-away I had.

    Most of the MBA's I knew didn't care whether the "heap"  was in US or India or China, as long as they were in line to be "top of the heap". As someone working in MIS, I did.

    You mention the success of google because of all the computer scientists.I worry about the long time future of the US remaining a hub of this kind of innovation over the long haul
    1) So many companies outsource  much programming and almost all their technology manufacturing to other countries. We are losing our pool of talent -Its getting thinner.
    2) The Bush-era restrictions on immigration - This discourages talented and brilliant foreign citizens from attempting to permanently immigrate to the US.

    I also wanted to mention one thing which is very difficult to produce in another country: Health care. Thus the idea of increasing demand for health care with the Affordable care act is a big economy stimulant, I think, huh?

    "We have always known that heedless self-interest was bad morals; we know now that it is bad economics" - F.D.R.

    by biscobosco on Tue Sep 11, 2012 at 08:55:58 AM PDT

  •  Job craters. Crate em up, ship em out, rawhide. (0+ / 0-)

    Then expect to be worshiped as Creator.  They are craters and they make holes not holy.

    Hey Ryan, where you goin' with that trans-vaginal probe in your hand

    by 88kathy on Tue Sep 11, 2012 at 10:40:08 AM PDT

  •  I worked in a very small business (0+ / 0-)

    For a while, and I remember when we hired a new employee--bringing our numbers to 8--we had to hire so we could fill the orders we had in a timely manner. That was it. Not because we had money, but because we had so much demand that we HAD TO hire a new employee.

    No business hires because they have money, that would be insane. They hire because they need the employee(s) to produce the goods/services.  Simple, I actually learned it in a high school economics course. I think some Scotsman with what sounds like a phony name had a phrase that fits...

    No one in this world has ever lost money by underestimating the intelligence of the great masses of the plain people. H. L. Mencken

    by jim0121 on Tue Sep 11, 2012 at 12:09:21 PM PDT

    •  Would be nice if Republicans felt this way... (0+ / 0-)

      ... but, sadly, they seem to all have been bitten by the "forget-basic-economic-facts" bug...

      Love your H.L. Mencken quote - very appropriate these days, sadly

      For a better America, vote the GOP out of office whenever and wherever possible and as soon (and as often) as possible!

      by dagnome on Tue Sep 11, 2012 at 03:22:46 PM PDT

      [ Parent ]

  •  Very well done (0+ / 0-)

    It seems to me that the path to prosperity lies in having the best infrastructure, and in that category, I include our education system. I think this is a big part of what you point out.

    I am not worried that other nations might be able to out-compete us when it comes to producing cheap clothing or children's toys. If we produce the best scientists and engineers, we will prevail in the international competition.

    And let us not forget that one of the best components of infrastructure is good government. This means a government that serves the best interests of the majority -- the 99% if you will. This means a progressive Democratic government.

    Occupy is the symptom. Fundamental reform is the cure.

    by Tim DeLaney on Tue Sep 11, 2012 at 04:48:27 PM PDT

  •  I wonder if "job creator" (0+ / 0-)

    could be substituted by the phrase "the ruling class" as an effective argument.
    for example:

    ..now is not the time to raise taxes on the job creators
    vs
    ...now is not the time to raise taxes on the ruling class
    Replace "job creators" with "ruling class" and change the conversation.

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