So here is the next question I was posed with for my blog:
"The
rich: benevolent job creators or slimy money grubbers?"
The problem is unless you are fanatic disciple of Karl Marx
or Ronald Reagan it is hard to answer that question.
Though the question is clearly tongue and cheek it does
touch on a political mindset in this country, even if it is exaggerated. As the
conservative and liberal protests over the past few years have shown, there is
a great deal of anger and suspicion when it comes to economic, and particularly
tax policies, in the United State. But
this debate is nothing new.
Here is a fun quote:
“There are two ideas of government. There are those who
believe that if you just legislate to make the well-to-do prosperous, that
their prosperity will leak through on those below. The Democratic idea has been
that if you legislate to make the masses prosperous their prosperity will find
its way up and through every class that rests upon it.
Can you guess who said it and when? It was William Jennings
Bryan Democratic Congressman in1896. Fun fact he later became the Secretary of
State under Woodrow Wilson.
Lets have some fun with the quote (I changed the bolded
parts):
“There are two ideas of government. There are those who
believe that if you just pass laws
to make the rich richer, that their prosperity will trickle down to
everyone else. The Democratic idea has been that if you pass laws to make the middle class
prosperous their prosperity will prosper the whole nation.”
There, with just a few changes to modernize the language I
just became a speechwriter for the Democratic Presidential campaign.
So the argument is an old an ongoing one. One side says the
poor needlessly suffer because the rich have no other concern other than to
accumulate wealth. The other side accuses the poor looking for a free ride. To
support these accusations both sides hunt down anecdotal examples, which is not
difficult, because there is no shortage of greedy or lazy people on this earth.
These stories get recycled in the media and by word of mouth until visions of
welfare queens and tax cheating fat cats dance in our heads.
These stereotypes get so ingrained in our thinking that our
political arguments are commonly couched in the context of discussing the
behavior and actions of the “rich” and the “poor.” But such descriptions have
one severe flaw. We do not live in 19th century English romance novel. The rich
are not all Gentlemen landowners and the poor are not all landless laborers.
The rich and the poor of this nation come from wide variety social backgrounds,
cultures, religions, ethnicities and occupations. In the absence of any metrics
to categorize them other than their net worth, it is silly to say that the
rich, or the poor for that matter, behave as a uniform social group.
What is important to realize is that basic behavior of both
the poor and the rich is identical to one another, and it is summed up quite
well by every economist’s favorite Scotsman.
“It is not from the benevolence of the butcher, the
brewer, or the baker that we expect our dinner, but from their regard to their
own interest.”
- Adam Smith, Wealth
of Nations
When all the ideological bunting is stripped away, both
low-income wage earners and wealthy business owners and everyone in between are
acting with the same motivation. Nobody, rich or poor, goes to working thinking
"I am so happy that I can earn money and contribute to the gross national
product."
Even motivations aside, politicians try to paint an economic
picture of one group or another as being the foundation of our economy it is
simply pandering for votes (in the case of the lower income groups who have
more numbers) or money (in the case of the wealthy who donate more to
campaigns). Saying that the middle class, the wealthy, or any other group is
more important to economic growth it is like saying that sugar is more
important than lemons when making lemonade. A modern national economy is a
complex thing with a lot of moving parts and to use the biblical expression
“the eye cannot say unto the hand, I have no need of thee.”
But it is worth looking into who are the people doing the
hiring and creating jobs. Lets move from fluffy behavioral study to some hard
numbers see what they show us.
In 2007 (The most recent year the government has published
complete figures regarding business in America) there were 27,757,676
businesses operating in the United States and 120,604,265 people living in the
United States working for a private employer (aka The Man)*. Of the 27,757,676
businesses in the United States 21,708,021 did not employ anyone but the
owners. (It is also noteworthy that the vast majority of these businesses are
side business, or failed startups, and do not produce a livable wages for their
owners and make very little money. The average businesses with no employees
only grossed $4,568.78 for the whole year of 2007).
So that means that all the people who worked for a private
company in the US worked for one of 6,049,655 different businesses. Of theses
businesses 99.697% (6,031,344) are classified as “Small businesses” by the government.
Meaning they employ less than 500 people each. These small businesses employed
59,866,924 people with an average salary of $36,828.97 per employee.
The remaining 0.3026% of all businesses that employ people
employed everyone else, or 60,737,341 people (or 50.36% of all US workers
employed in the private sector.) and provided an average salary of $46,461.37
per employee.
So what stands out here? First a relatively small number
(18,311) of businesses supplies a hugely disproportionately about half of the
jobs in this country. Also large businesses pay their employees higher
salaries, or at the very least provide more high salary positions.
This data seems to support the theory of job creation is
primary done by the rich, as it is a fair assumption that the people who own and
run those 18,311 businesses that provide over half the private sector jobs in
the country would be very wealthy.
But not so fast, businesses are not money factories that
just generate wages. All businesses have to offer some form of product or
service. Businesses do not operate in a vacuum, they need customers. If
customers are not buying goods and services, then businesses do not make money,
and businesses that do not make money do not hire people.
So who are the customers? Again we turn to the numbers. (All
these numbers are from 2010 as that is the most recent year the government has
published finalized figures regarding consumer spending. Please note that all
data was rounded to the nearest 1000 by the Department of Labor so there will
be some anomalies in the data but the general numbers are close enough to prove
the point.)
In 2010 there were 129,107,000 households in the US and they
spent a total of $5,843,867,781,000 that year. Out of these households, 6.3% made
more than $150,000 in one year. These are the Rich and they account for about
17.1% of consumer spending.
So overall 82.9% of are nations consumer spending is done by
people who make less than $150,000 annually. The lion’s share was made up by
the middle class (people with annual household annual incomes under $70,000 but
over $20,000) and the upper middle class (people with annual household incomes
between $70,000 and $150,000) who made up 72.9% of all consumer spending. The
poor (households who make less than $20,000 a year) have the lowest number
overall at 9.7% of consumer spending
So here we hit up against a major flaw in the idea that the
rich are the nations job creators. For an economy to thrive you need a two
halves working together. You need people who provide goods and services
(producers) and you need people who pay for those goods and services
(consumers). As long as things are in balance every one is happy. But if the
balance gets thrown off prices can shoot up or down rapidly and that causes all
sorts of problems and ultimately people start losing their jobs, which often
exasperates the problem further.
But there is one more factor to consider, investment. It is
true that not all wealthy people are involved in the 18,311 businesses that
most of the country works for. But they are the primary investors in this
country. A frequent argument for taxes breaks for the rich is that their help
expand and start new business by providing start up and growth capital.
According to the IRS in 2008 (again the most recent numbers I could find), US
taxpayers who made less than $200,000 annually made $49,402,739,000 in income
from investments. People who made more than $200,000 annually made
$426,387,691,000. So the rich almost invest ten times as much as everyone else.
So they are a huge contributing force for business growth. However, there are a
few hiccups here. First of all, the income made from stocks is not necessarily
the same a investing. A lot of CEOs are paid with stock options as opposed to a
salary. So their acquiring of stock is less of an investment and more of a
payment. Also, companies can use investment to fund start up costs and
expansion. They cannot rely on investment for long-term growth, the type of
growth need to support increased hiring with stable employment. If you do not
believe me ask anyone who worked for Pets.com or ENRON.
So to answer the question of whether or not the rich are the
nations jobs creators the answer is yes, no and sort of. The vast majority of
people in the US are employed by large companies, which in turn are owned and
operated by wealthy people, so the answer is yes. But these large companies
could not operate without a customer base, which is both numerically and monetarily dominated by the middle
class and the upper middle class, so the answer is no. But the rich provide the
vast majority of investment capital which business rely one to start up and
grow. However, a business cannot remain solvent (i.e. be able to continue to
employ people) by relying on primarily on investment and will need to rely on
consumers sooner or later, so the answer is sort of.
*In case your wondering 22,376,000 Government Employees that
break down in the following way:
17,412,047
Work for the Department of Defense (including Civilian Employees)
10,906,292 Work for the Local Governments (Cites and
Counties)
3,775,705 Work for the State Governments
2,730,050 Work for the Federal Government (Non-Department of
Defense jobs)
