Brad DeLong relays a piece in the National Journal that reproduces a TED talk from Nick Hanauer. Hanauer is an entrepreneur and venture capitalist from Seattle who offers some pointed thoughts on job creation, taxes, and inequality.
Hanauer’s speech is brief, so do read it to judge for yourself. He seems to imply we incorrectly deify entrepreneurs as job creators. I say imply because Hanauer doesn’t actually use the word entrepreneur—instead he uses the terms “businesses” and “capitalists,” and it’s unclear to me if he’s primarily targeting his remarks at rich investors or at entrepreneurs, or both. Regardless, he is not in favor of the current tax system. I think his argument boils down to our tax system containing too many tax breaks for wealthy investors generally, and casting too great a gulf between capital gains and income tax rates. And that these tax breaks for the wealthy are justified by waving the flag of “job creation” inappropriately, because in truth the middle class provides the majority of consumption in our economy, not the wealthy, and businesses are dependent on this consumption and create jobs only to match middle class consumption demands.
As Hanauer states (bold is my emphasis):
I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated.
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 a "circle of life" like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.
So when businesspeople take credit for creating jobs, it's a little like squirrels taking credit for creating evolution. In fact, it's the other way around.
Anyone who's ever run a business knows that hiring more people is a capitalist’s course of last resort, something we do only when increasing customer demand requires it. In this sense, calling ourselves job creators isn't just inaccurate, it's disingenuous.
Hanauer’s main point surely is correct—that you need consumers to pay for services and products in order for businesses to justify the hiring of more people. And business only hire when they are confident of meeting consumer demand, not just automatically or out of the goodness of their hearts. But it’s also true that you need entrepreneurs to come forth with new innovations for consumers to consume. You can’t have one without the other.
Where I think Hanauer errs is stating that only consumers can get the cycle started. Does demand create supply, or does supply create demand, or somewhere in the middle? (by the way, to my knowledge this is an undecided debate in economics). When I think about the relationship between consumers and entrepreneurs, I find myself asking: is it easier to purchase something, or create something new and fantastic that people want to buy? Henry Ford and Steve Jobs are famous for telling their customers what they wanted without their knowing it first. Neither one of them used focus groups or market research firms.
I won’t offer much commentary on the larger point about tax policy and the increase in income inequality in the U.S. This topic was serviced by an interesting discussion at the Economics Bloggers Forum (watch the Panel 3 video here).
What I will say in regards to entrepreneurship and tax policy is that it’s a tough cookie to crack. My rough take on it though is there is a point at which marginal income tax rates do significantly discourage entrepreneurial activity. It is true that the U.S. prospered in the 1950s and early 1960s when the top marginal rate was as high as 90%, and both Bill Gates and Steve Jobs got their starts in the 1970s when the top marginal rate was 70%. But when marginal rates were this high we don’t know how many other potentially successful entrepreneurs were deterred from launching or growing their ventures. My hunch, and I admit that is all that is, is that the number was not insignificant.
Along the same vein, I believe tax policy can significantly influence whether those who finance entrepreneurs are willing to do so. The difference in after-tax returns when the capital gains rate is 15% or 0% can be a determining factor whether investors in early-stage companies—notably angel investors—take the plunge, especially if as now, they are risk averse. I’d rather use tax policy get these investors off the sidelines by making permanent the Obama proposal to exempt equity investments in startups held for at least five years (as opposed to having the government directly take equity stakes in or even guarantee the loans of new ventures).