Who Creates Jobs? Taxes, Spending, and Class War

Republicans oppose spending for unemployment compensation and for plugging holes in states’ Medicaid and education funding, but they fight to extend the Bush tax cuts for the top 2% of income-earners—those making over $200,000.  This, according to the Wall Street Journal, is not “class war,” but President Obama’s proposal for increasing taxes on that top 2% is.

The Journal opposes the President’s proposal because it “means raising [taxes] on the Americans most likely to take the risks that spur economic growth.”  The Journal pointedly asks: “Mr. Obama and Nancy Pelosi think they can play their usual class war card to justify raising taxes on the rich, but that’s risky political business with unemployment at 9.5%.  Who do they think will create new jobs—people making less than $200,000 a year?”

Rich people create jobs by investing in companies (little ones they own themselves or big ones they own stock in), and it’s these companies who actually hire workers and pay them a wage.  This is true.  But it’s like saying that the light coming from the ceiling of my office is caused by the light switch on the wall.  Without turning the switch on, there will be no light, but the ultimate creator of that light tracks back to a power station and a national electric grid that hooks into the wiring behind the walls of my building.  In an economy, consumer demand is the power station, the grid, and most of the wiring.  If there is not enough consumer demand, businesses have no reason to hire new workers—just as there is no reason to switch the light on if nobody is using the room.

The reason companies aren’t hiring more now isn’t that they don’t have the money.  It’s the lack of consumer demand.  Businesses are currently sitting on huge piles of cash.  According to Bloomberg Businessweek, the 3,000 largest publicly traded U.S. companies “have $2.9 trillion in cash and short-term investments” they don’t know what to do with.  Workers and consumers (and most state governments), on the other hand, are struggling to pay last month’s bills and to provide for basic necessities.  The latter is the primary cause of the former.  That is, not enough money in the hands of workers and consumers means a lack of profitable investment opportunities for business and rich folk.

That’s why extending unemployment compensation, among many other things, will create more jobs than any tax cut.   Using the Congressional Budget Office’s estimates of the job-generating capacity of different policy options, here’s the proposed cost and predicted job growth for the three policies currently in dispute:

POLICY	Amount passed or proposed	Number of jobs likely created in 2010-2011
Increased aid to the unemployed	$34 billion	300,000 to 600,000
Increased aid to states	$26 billion	80,000 to 180,000
Tax cuts for top 2%	$70 billion	70,000 to 210,000

Thus, given that the tax cut desired by the Journal is twice as big, extending unemployment compensation creates from 6 to 8 times the number of jobs as the tax cut would.  Aid to states creates about 3 times as many jobs.

You can turn this around and say that a $70 billion tax increase on the top 2% could lead to the loss of as many as 210,000 jobs, and that would be true (given the CBO estimates).  But if the government used that $70 billion in new revenues for increased aid to the unemployed, it would create more than 1.2 million jobs–or a net gain of about a million.  Why wouldn’t we as a nation want to do that?

On the other hand, you might note that the Obama 2010 “stimulus” package, totaling $60 billion, is predicted to produce a maximum of 780,000 jobs.  That’s helpful for some of the 14.6 million who are currently unemployed (as officially calculated), but it’s not enough.  Democrats are doing the right things to stimulate the economy, but not nearly at the magnitude necessary to get it growing strongly enough to reduce unemployment anytime soon.

As I pointed out in March, the Obama White House was dismissive of a much stronger 2^nd stimulus plan proposed by a coalition of unions, the National Urban League, and the Center for Community Change.  That one would have spent $400 billion (on the same kind of things the administration is spending it on) and would have created 4 million jobs.  The White House dismissed it on political, not economic, grounds.  Something of that magnitude would never pass Congress, they said.

The problem with strictly political calculations is that it’s often politically stupid to propose and pass something that is not substantively adequate to the size of the problem.  After bitter fights with Republicans, the President added more accomplishments to his resume this summer by passing one more temporary extension of unemployment benefits and a state bail-out package that will leave states still woefully under water.  After his impressive string of legislative “victories,” however, he now owns the current state of the economy, which the majority of Americans see as “on the wrong track.”

The President should take advantage of recent bad economic data on GDP growth and unemployment to admit his mistake.  That by itself is always refreshing in a president.  And if he’s going to be accused of “class war” for merely restoring Clinton-era tax rates on the top 2%, why not do enough taxing and spending to deserve that charge?

As the Institute for Policy Studies and others have shown, the top 5% are good for at least $500 billion in various tax increases that could be put to productive uses in a wide variety of ways.   As the CBO estimates show, taxing the rich kills some jobs, but not nearly as many jobs as are created by bailing out the unemployed, state governments, construction workers, autoworkers, transit workers, homeowners, and many others.  With that kind of increase in consumer demand, the businesses currently sitting on trillions of dollars would start hiring to produce all the things they could profitably sell.  In other words, ironically, a more robust class war would be very good for business.

Jack Metzgar