Sunday, December 11, 2011

Henry Blodget's Odd View of How the Economy Works

This is really scary. Henry Blodget publishes one of the most highest trafficked web sites on the internet about business, yet he just doesn't have a clue.

In an attempt to justify higher taxes on the rich, Blodget is out with an opinion piece where he tells us that entrepreneurs don't create jobs. He cites as backup of for this view a confused op-ed by billionaire Nick Hanauer.

Hanauer writes:
I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. in 2007 for $6.4 billion. I was also the first non-family investor in Amazon.com Inc.



Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

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 the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.
Blodget buys this theory hook, line and sinker:
A billionaire named Nick Hanauer recently wrote an editorial for Bloomberg in which he destroyed the argument that the jobs in America are created by rich entrepreneurs and investors.
In one sense, Hanauer and Blodget are correct, even if somehow there were no entrepreneurs in the world, it doesn't mean, we wouldn't work. We would still have to hunt and gather food and build shelter, but it would be on a primitive level. What the entrepreneur does is increase the productivity of our labor. He may see, for example, that by building a boat, that more fish can be caught and thus he may invest to have a boat and hire workers to work for him as opposed to being individual fisherman. Once he has increased the number of fish produced, he can pay off  his workers in fish and he can hire other workers to build him a huge house and pay them with fish.

Thus, in this economy, more people get to eat more fish and the entrepreneur has a spanking brand new mansion.

Thus, in this sense when Blodget and Hanauer say that entrepreneurs did not create jobs, they are correct. Blodget writes:
Steve and Apple did invent a couple of awesome products that about a hundred million people have bought, and he and his team deserve tons of credit for that.

But they didn't create those jobs...When the money used to buy iPhones and iPads was spent on iPhones and iPads, it was not spent on something else. In other words, if Steve Jobs and Apple had NOT invented the iPhone and iPad, the money used to buy them would likely have been used to buy something else--and the companies that made the something else would "created" the jobs
In the same way, our entrepreneur didn't "create" jobs when he built a boat, he caused a change in jobs. But what Blodget and Hanauer are missing when they call for higher taxes on the rich is that the ideas of entrepreneurs result in a huge increase in the standard of living by providing consumers, in a more productive way, products they want.

Further, none of this increased productivity would have occurred if it weren't for investment coming into the picture to create the capital goods needed to produce the consumer goods. Yes, Blodget and Hanauer are correct, businessman who create consumer products that have no consumer demand are going to fall on their face (It is a profit and loss system), but they are wrong when they think it is this consumer demand that drives the system. Consumers always have demands. I may want a Lamborghini and caviar every night, but there have been no entrepreneurs to date, who have figured out how to produce Lamgorghinis and caviar in such quantities so that I can afford to buy them in the quantities I desire.

But because Blodget and Hanauer fail to focus on the increase in productivity caused by entrepreneurs and the capital needed to increase productivity, they call for higher taxes on "the rich", because, to them, it is consumer demand that drives the system, somehow not realizing that the consumer demand is always there and that the key is someone must be entrepreneurially creative enough to figure out how to be more productive so more products are produced and that the investment money is needed to buy the capital goods that will be needed to produce consumer goods.

Blodget and Hanauer just don't get it. Here's Hanauer:

When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.

And that’s what has been happening in the U.S. for the last 30 years.

Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.

One reason this policy 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 average 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, I go out to eat with friends and family only occasionally.
Notice, the complete focus on consumption, without any focus on the need for capital investment to produce consumption goods. The superrich are important, not because of what they can consume (as Hanauer thinks), but because they have the funds available to do things with their money beyond buying consumption goods. They have the funds available to invest in the machines and equipment that will produce more consumer goods, thus raising the standard of living for everyone. And, yet in the Blodget-Hanauer world, these are the people who should have higher taxes placed on them!

Taxes should be lower for everyone, but the last person you want to raise taxes on is the person who is investing money so that more products are being created like houses,apartments, and iPads. Do we really want to raise taxes on these people so they produce less, and so the money ends up in the government bureaucracy? Absurd.

10 comments:

  1. Thanks for covering this. My head nearly exploded when I saw the primo tweet.

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  2. His articles have been increasingly supportive of populist thought, and less focused on business reality. He has successfully politicized his content. I travel the internet in search of contrarian, intelligent, and, mostly, non-biased content related to our current business environment. I just deleted BusinessInsider from my list of favorites. Prediction: He will go the way of Politico(I use to read that site everyday).

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  3. This highlights why the focus on jobs is always misplaced. Jobs are but a means to gain wealth and otherwise achieve their wants and goals. Since the quantity of human needs, wants and goals is limitless, so is the amount of work - jobs - required to satisfy them.

    When instead people don't have jobs, it's either because they value their leisure time more or there are impediments (invariably government) that cause them not to work more.

    The focus always needs to be on wealth production. At any given level of wealth, most people would rather work less than more.

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  4. The current violent parasite in the whitehouse told this freak to write these things. Note how a lot of these so-called economists are writing the exact same thing these days. They are bought and paid for by the state. We are full-on Fascism.

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  5. I saw this article fed to me on LinkedIn - and I quickly sent feedback to LinkedIn that BI is a political hack site with no economic or business reasoning behind it. I implored them to not link to any BI articles ever again.

    A good venture would be to contact BI's online advertisers - they may not agree with BI's premise that their entrepreneurship and business doesn't, in fact, create jobs.

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  6. I really wish that the GOP would defend increased taxation of the high income earners on the grounds of protecting private property rights instead of the b/s argument that these people create jobs so they need to keep their money. Since when do people have to do something, whether its create a job or buy something, for the right to own the product of their labor? The middle class people that embrace the idea that the rich must use their property to create jobs or it should be taken from them, do not realize that the same argument can be made against them and their property which I guess according to the Keynesians should be entirely spent down to the last penny. Should the middle class and poor be held to the standard of consuming in order to justify lower taxation?

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  7. "An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be." ...and... "Rich businesspeople like me don’t create jobs. Middle-class consumers do."

    A job boils down to someone placing a signature on a paycheck. That's not the consumer. That's me, the entrepreneur, the employer that actually has an agreement with the employee to pay for their labor / service.

    A job is a job - with someone actually make wage payments. It's not a consumer spending cash for a good or service.

    A job is a contract - an entrepreneur makes a job offer, the candidate accepts, the labor/service is rendered, and the wage is paid.

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  8. It's actually depressing to witness the effort these people indulge in to be spectacularly wrong. They would rather run ten miles in to the muddled quagmire of the Great Dismal Keynesian Swamp than to walk a few feet that gets you to the free market.

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  9. I think the Austrian case can only be understood by the average Joe and Darcy if it is done visually, so that people can see both the entrepreneur side and the consumer side and put them in context to instantly understand the big picture.

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  10. You all think this guy is an infantile Keynesian idiot but really he is a state-sponsored terrorist. He will say anything the state wants him to say including advocating stealing (enslaving) 6 billion people's earned property using government guns and jail backed violence. I have no thoughts of stealing from other people because I am not a terrorist like Blodget..Krugman..Obama.....

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