19 May 2012

The Rich Aren’t Necessary

So says Nick Hanauer:

It is astounding how significantly one idea can shape a society and its policies.  Consider this one.
If taxes on the rich go up, job creation will go down. 
This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today's economic landscape.

And:

Another reason this idea is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don't buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally.
I can't buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can't buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.

And:

We've had it backward for the last 30 years. Rich businesspeople like me don't create jobs. Rather they are a consequence of an eco-systemic  feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit. That's why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

This was supposed to be a TED talk but, fortunately, the people who run those things aren’t complete idiots and are capable of prolonged rational abstract thought.  However, it’s obvious from the excerpts that Hanauer completely out of his league when it comes to economics.

[Aside:  before I begin explaining why Hanauer is talking out of his rectum, let me first state that I have no interest in defending the rich per se.  Some rich people are terrible, like the banksters of the Fed and Wall Street that defrauded the citizens of the united states out of hundreds of billions of dollars, and some rich people are awesome, like the all the VCs and Angel investors that help to fund the start-ups of hundreds of new businesses.  Like all groups of people, there are some complete turds, some good role models, and a decent amount of mediocrity.]

Hanauer is completely out of his league because he focuses solely on consumption as the key to wealth.  I’ve addressed this in passing before, but now seems like an appropriate time to pick up on the point again:  consumption is not wealth-creating, it is wealth-consuming.  In fact, that is the definition of the term.  Short-term consumption does an especially good job of illustrating this point.  If one day I bake a cake and the next day I eat it, what do I have on net?  Nothing.  Yes, I created a cake, but I also consumed it as well, and therefore I have nothing to show for my efforts, save for some temporal feelings of being full and tasting something sweet.  And feelings, being dynamic and unquantifiable, are not exactly the stuff of wealth.  For proof, go to a bank and try to take out a loan by using future emotions as collateral.

Real wealth, in contrast, is not consumption but rather accumulation.  It is worth pointing out that accumulating wealth does not preclude its usage (think of real estate, for example). In this case, things are produced and/or cultivated, but they are not immediately consumed.  This is generally referred to as capital accumulation or capital formation.

Now, Hanauer’s analysis fails because it fails to account for the role of capital in production.  You can’t produce anything unless you have materials for production, people and/or machines for production, and a place to actually produce things.  And you can’t consume stuff unless you produce it first.  These elementary observations are apparently too complex for Hanauer to consider, which is why he claims that the wealthy don’t create jobs.

In a tautological sense, this is true simply because the wealthy don’t often consume more than the poor (although it does beg the question of who buys luxury cars and yachts, but that’s somewhat beside the point).  In a technical sense, this can be true as well, as not all wealthy people are directly responsible for the creation of jobs.  However, since production—and its attendant jobs—are generally contingent on either having capital or having access to capital, it should be obvious that the rich are necessary for job creation if for no other reason than the simple fact that they have capital that can be used for job creation.

In a technical sense, it is not necessary for capital to be held by the wealthy, seeing as how anyone can technically have capital. However, it is the rich that, by definition have the capital.  And since capital is necessary for production and thus, according Hanauer’s erroneous assertion, wealth, it stands to reason that there must somewhere be the accumulation of capital.  And those who accumulate capital are the wealthy.
Thus, the wealthy are necessary for job creation, if for no other reason than by virtue of the fact that they have capital.  Thus, taxing the rich, particularly taxes on their capital, means that that there will be fewer jobs because there will be less capital with which to enable production.

The second problematic assertion that Hanauer makes is that the government is better or more efficient at managing capital than the wealthy.  This is predicated on two assumptions.  First, Hanauer assumes that the wealthy simply sit on their capital.  Second, Hanauer assumes that the government is generally more efficient than motivated investors at allocating capital.

The former assumption is easily dispensed with as Hanauer himself notes (chase the link to find it) that the wealthy have become wealthier.  While a good portion of this is more than likely due to defrauding taxpayers, as was seen in the housing banking crisis of 2008, it is hard to deny that wealthy people generally make a point of increasing their wealth by a mechanism known as investing.  Investing is basically people letting other people use their capital in exchange for money.  Thus, the wealthy are allowing their capital to be used productively instead of merely sitting on it.

The latter assumption is a little more difficult to address, but it is worth noting that the government has created a ton of messes when it gets involved with capital allocation.  Pretty much every bubble in the central banking era is proof of this.  Anyhow, the assertion that the government is generally superior at allocating capital is provably false (see the footnote to this post for further evidence).

Thus, when all is considered, Hanauer’s argument is nothing more than Keynesian nonsense, as evidenced by its single-minded focus on consumption as the driver of wealth.  It predicated on fallacious assumptions, it ignores basic economic principles, and is nothing more than shallow demagoguery.  Incidentally, much like Krugman’s economic “analysis,” this is yet another example of the narrowness and short-sightedness of Keynesian analysis.  There is no depth to it, for it focuses on one variable, as if one aspect of the market holds the key to explaining it all.  Basically, Keynesians are like children with the way they think, since they cannot apparently consider multiples variable simultaneously, or even guard against common fallacies and short-sightedness.

Finally, note that this analysis, like most other examples of Keynesian analysis, calls for increased government intervention and control.  Isn’t it about time we acknowledge that Keynesianism is nothing more than an attempt to justify socialism using capitalistic rhetoric?

2 comments:

  1. It isn't clear that it even rises to the level of "Keynesian nonsense." Even Keynes and Marx understood the problem of capital, even if not without an ulterior motive.

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  2. @Steve- I meant Keynesian in the sense that this was nonsense that is typical of self-identified Keynesians.

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