Why cutting rich people’s taxes doesn’t create jobs

You’ll never get a job from a rich person with no customers.


Stop me if you’ve heard this before: A Republican president is proposing to massively cut the taxes paid by rich people. But it’s all good, because they’re “job creators”. So the tax cuts will give them money to create good jobs up and down the line, and result in so much economic growth that the government won’t even lose revenue.

One way to argue against this idea is with history: Cutting taxes always cuts revenue and leads to deficits. Both Ronald Reagan’s and George W. Bush’s tax cuts led to what were then record deficit. In between, Clinton’s tax increases created a huge surplus. This may seem too obvious to bear repeating, but apparently it needs to be said: If you cut taxes you collect less tax. If you raise taxes you collect more.

And the job creation thing only works sometimes: Reagan’s job record is pretty good (though not as good as Clinton’s), but George W. Bush’s is terrible: The economy created only 2.1 million jobs during Bush’s eight years (and was shedding jobs at a record pace as he left office). But during the eight tax-increasing Clinton years, 21.5 million jobs — ten times as many — were created.

What’s more, the purpose of cutting taxes on the wealthy is supposed to be so that they’ll have more cash to create jobs with. But if that worked, we’d have been swimming in jobs for years, because the very rich currently have as large a share of the national income and national wealth as they have since just before the Depression. If the job creators were ever going to create good jobs, it seems like they’d be doing it now, and would have been doing it since the turn of the millennium.

In fact, if you look at that graph, there seems to be an inverse relationship at work: The good old days of American jobs — when a man like my father could get a factory job, support an at-home wife, buy a house, and send two kids to college — were the 1950s and 1960s, when the top 1% was receiving a record low percentage of the national income.

But if you’ve been paying attention to American politics, you know that history — especially the kind of history you need to illustrate with graphs — doesn’t convince everybody. So in spite of hard experience, talking heads on TV are still telling us that making the rich richer will make everybody richer, because the rich create jobs for the rest of us.

You can rage about that. You can complain about how gullible and stupid the American public is, that they’re still falling for this nonsense. Or you can try to understand why: What is it that makes this particular false theory seem so much like common sense that the clear evidence against it doesn’t even register?

The answer to that is that the job-creator myth is supported by a convincing appeal to personal experience: “Do you have a job? Who pays you? Is he richer than you or not?” As the saying goes: I never got a job from a poor person.

So what’s wrong with that? You get a job because a rich person hires you, so if we want the economy to produce a lot of new jobs, we should make sure there are a lot of rich people with a lot of money to hire everybody else.

Why doesn’t that work? I mean, those of us who believe in history and graphs and stuff know it doesn’t, but why not?

The answer is that it takes three characters to create a job, not just one. For the economy to add a job, you need:

  • a worker to do the job
  • a customer to buy what the worker produces
  • an entrepreneur to bring the other two together.

If any one of the three is missing, there’s no job.

At any given moment, in any particular part of the job market, the logjam might be in any of the three factors. It’s possible that entrepreneurs don’t have enough investable cash, and that a tax cut will fix the problem. But it’s also possible that workers don’t have the right skills, so the government ought to be investing in education and training. Or that customers aren’t buying, so the government either needs to subsidize them or to buy things itself on the public account.

What’s wrong with conservative economics is that it always assumes that the lack is of entrepreneurs: If more people were in a position to start or expand a business, they would.

In fact, they won’t, unless they are confident the other two roles will be easy to fill. Imagine, for example, that you run a restaurant, and that a tax cut suddenly gives you a windfall of money you could use to expand. Will you? Not if you’re having trouble filling the tables you have.

That’s what happened during the Great Recession: Rich individuals and big corporations were sitting on huge piles of cash, but they weren’t using it to hire people. Why would they? Nobody is going to spend money to expand their businesses or start new ones if existing businesses are failing for lack of customers. If you cut rich people’s taxes in that situation, they’ll add their new pile of cash to their old pile until the economic outlook gets better.

What the economy was missing in 2008 was the customer. In an atmosphere of widespread fear, we all wanted to hang onto our cash and until we felt more secure. In such a situation, how much money entrepreneurs have to invest doesn’t matter; they won’t invest it until they see unsatisfied customers looking for a product they can spend their money on.

In general, that’s the problem when the distribution of wealth gets too skewed towards the rich: the economy chronically runs short of customers. No matter how extravagantly the rich live, there are limits to what they can consume and how many people can be employed satisfying them. You can’t base a mass-employment economy on yachts and caviar.

Right now, cutting taxes on the rich is exactly the wrong thing to do until the distribution of wealth and income returns to more normal levels. Instead, the government ought to be creating jobs by creating customers — even being the customer if it has to. It ought to be raising taxes on the rich in order to buy things we all need: roads and bridges, health care, clean air and water, education, and a 21st-century energy system that doesn’t wreck the prospects for future prosperity. In an economy already too dominated by the top tenth of a percent, that’s the way to create jobs.

So sure, I’ve never gotten a job from a poor person. But I’ve also never gotten a job from a rich person with no customers.

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Comments

  • joeirvin  On May 1, 2017 at 9:45 am

    And there’s the story, perhaps apocryphal, of Henry Ford’s response to peers claiming he was paying his workers too much: He wanted them to have enough money to buy his cars.

  • kitfr  On May 1, 2017 at 9:50 am

    While it is heavily implied, I think you need to add government as a fourth party to this triptych.

  • James Donald Bishop  On May 1, 2017 at 10:37 am

    I’m not an economist, and can’t put numbers on this, but I see two factors that are depressing the economy:
    1. Student loans. New graduates bought cars, rented apartments and bought furniture and contributed to the economy. Now their money goes to repaying student loans.
    2. Credit cards. People are paying 20 – 25 percent interest, instead of buying stuff.
    The common characteristic is money going to banks instead of services and manufacturers.

    • Dennis D Degenhardt  On May 8, 2017 at 12:51 am

      Another factor is the high cost of medical care, the number one reason for filing bankruptcy even for people with insurance. This is due to deductibles, co-pays and premium costs with so many living payday-to-payday.

      • JJ  On May 8, 2017 at 8:54 pm

        Student loans, credit, and medical care are all things that would be infinitely easier to address in a sane manner if elected officials had more attention on the “regular people” in the states and districts that they were elected to represent, rather than on raising campaign funds. If you’re concerned about any of those problems, working to change the way that we fund political campaigns is one way to address them.

        Here’s a TED talk that gives a good description of the problem (it was recorded a few years ago, but unfortunately the problem is the same):
        http://lesterland.lessig.org/

        Here’s a group of former elected officials working on the problem:
        https://www.issueone.org/

  • Dennis Maher  On May 1, 2017 at 10:45 am

    Absolutely. I don’t know if I know this because I studied economics, or because it is just plain common sense.

    • donbi33  On May 1, 2017 at 10:52 am

      [image: Inline image 1]

      On Mon, May 1, 2017 at 8:45 AM, The Weekly Sift wrote:

      > Dennis Maher commented: “Absolutely. I don’t know if I know this because I > studied economics, or because it is just plain common sense.” >

  • bobdrad  On May 1, 2017 at 3:24 pm

    I think the conservative argument for cutting taxes has other aspects that make people believe it, which you don’t really touch on: There is always an assumption that “we can cut expenses to offset the decrease in revenue, and that now that conservatives are in power those expense cuts are just around the corner”!

    So it’s not that people are unaware of the decrease in revenue from tax cuts. Rather, they believe that our government is full of waste that can easily be cut (if only we had the will, and honest politicians like the ones we just elected!), and that the new jobs created will bring in new revenue to offset what was lost. I think that’s a harder argument to dispel than the simplistic view you suggest they hold.

    • James Donald Bishop  On May 1, 2017 at 5:22 pm

      Good analysis. Do you suppose they will notice when they are the expenses that are being cut?

    • ryanpaige  On May 1, 2017 at 5:33 pm

      It is an issue that too many people believe there is enough waste and foreign aid in government spending to balance the budget, though the fact that people think we could balance the budget with less revenue isn’t necessarily an argument for cutting taxes. If a person thinks the budget can be balanced with less revenue, then surely they believe that it could be balanced even faster at current revenue levels.

      • 1mime  On May 1, 2017 at 11:15 pm

        Yes, but let’s think about “who” is appropriating taxpayer funds. “Government” gets pilloried because it’s this huge, nebulous institution, however, government functions at the will of Congress. I am not a proponent of value in a balanced budget in a large government budget. It’s not only impractical, it’s really impossible and undesirable. Key is to keep debt management relative to revenue to service debt and operate government. Mr. Muder is correct that you can’t have it both ways: cutting taxes yields less revenue. Of course advocates of small federal government really are talking about having defense being the sole responsibility of government taxation and states having the responsibility to operate all else. How these people divorce the integrated nature of infrastructure, research, and other essential services performed under the federal government umbrella presently into state-run separate entities is beyond me.

        It’s unfortunate that public service isn’t required (outside defense). A greater appreciation of the value and role of government in a sophisticated, civilized industrial world just doesn’t get the credit it deserves. It is, however, an easy target for those who largely benefit from its operation while bemoaning its existence.

  • scotusjd  On May 1, 2017 at 8:02 pm

    It seems to me that just leaving more money with the same old rich people won’t create additional new entrepreneurs with jobs to fill.

  • janedotx7  On May 2, 2017 at 5:57 pm

    So it sounds like the retort to, “I never got a job from a poor person” should be “You never sold anything to a poor person either.”

  • jh  On May 3, 2017 at 1:38 pm

    republicans forget that the US is a consumer driven economy. Without the consumers, we have no economy. The poor and the working poor and the middle class are the most important demographics in a consumer driven economy. They are the real “heroes” that keep the engine running.

    (And my contention is that the middle class creates the job creators. They are the group that has the luxury of wasting time on a project that could result in a business, enough wealth to throw at that project, and the need. The poor/working poor lack the relative wealthy they need to fund their dream projects. By need, I mean the things we want that we cannot afford to off source to other people. it is the woman who will make a washing machine because she has to do the laundry. A man who never has to do laundry wouldn’t really be motivated or see the need for a device that helps with washing dishes. Bill Gates, Warren Buffet, Steve Jobs are my usual go to examples. These were middle class kids. To date I have yet to see the Trump kids or any of the billionaire set create industries, revolutionize markets, or produce value on that scale.)

    But this republican “job creator” idea feels very religious to me. Doesn’t it feel like a Jesus or messianic figure that goes “If you build it, they will come” sort of bullshit? And of course, like most religions, there is an arch nemesis/Satan character, the evil liberal socialist. The saints are the wealthy and the CEOs. The rabble are the average American. The blacks, liberals and the poor are the minions of evil.

    • bobdrad  On May 3, 2017 at 3:39 pm

      I can’t speak for “republicans” in general and what they do and don’t know. However, the Republicans in office are beholden to their lobbyists, who draft legislation on behalf of the corporations. In this age of globalization, corporations care less about American consumers. They can alway sell goods overseas to emerging economies. If the majority of Americans become unemployed or unable to buy their goods, this is only a problem for corporations to the extent that they have to pay taxes to support these people. That’s why more and more of them are moving headquarters offshore, so they don’t have that annoying problem any more. “Job Creators” is just a story told to Americans to distract them from the reality of global markets and to enable corporations to pass the legislation they want. It has proven to be a compelling story, because it is so comforting. That’s all that is necessary.

      • JJ  On May 4, 2017 at 9:03 pm

        “the Republicans in office are beholden to their lobbyists, who draft legislation on behalf of the corporations”

        BINGO!

        Unfortunately, it isn’t a problem just with Republicans, although they embrace it more strongly. The way that we fund political campaigns distorts the whole process of government. Since political campaigns are expensive, people in congress spend 30%-60% of their time raising money, which first off means that they AREN’T spending that 30%-60% of their time trying to address the nation’s problems. Secondly, they are much too focused on the corporate lobbyists who help funnel corporate cash to their campaigns, rather than the “regular people” in the states and districts that they were elected to represent. .

        What the government does no longer correlates with what the average voter wants. It correlates with what moneyed interests want.

        In order to get rid of the corrupting influence of money in politics, we need to change the way that we fund political campaigns. We need to change the system – so that good candidates who want to work for the interests of the people that they are elected to represent can work in a system that supports that.

        Here’s a TED talk that gives a good description of the problem:
        http://lesterland.lessig.org/

        Here’s a group of former elected officials addressing the problem:
        https://www.issueone.org/

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