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.
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.