Who are the nation's job ceators?

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)