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The Rich Do Not Create Jobs
The rich are not job creators
The idea that the rich are the job creators in the economy is one of the most common myths in American politics. It is said that raising taxes on the rich is a surefire way to induce a recession, slow growth, or prolong economic hardship. But when we look at actual history and data, we see a different story.
Let me be clear from the top: there is absolutely nothing wrong with being rich or wanting to make a ton of money. Those who have worked hard and achieved success deserve respect and admiration. But that does not mean they are "the job creators". That is what this analysis intends to show.
First we will look at the very wealthy and their place in the economy. Then we will look at data on business, employment and taxes. Finally we will analyze the results and draw some conclusions.
Change in income, 1947-1979
Change in income, 1979-2009
Top 10% of earners own 90% of all stocks and bonds, 2007
There are more rich, and they have more money
There are three main facts about the rich in America:
First, there are more rich people than ever before. In 1978, there were 450,000 millionaires and 1 billionaire in America. These numbers grew massively in the next decade. In 1980, there were 574,000 millionaires. In 1985, 833,000 millionaires. And in 1988, there were over 1.6 million millionaires, and 51 billionaires.
The Boston Consulting Group estimated there were 5.2 million millionaire households in 2010. The Deloitte Center for Financial Services calculated a much higher number: 10.5 million millionaire households in 2011, or almost 9% of all American households. (The difference is caused by differences in how wealth or income is calculated.)
Second, the rich earn more money than ever before. In 1953, executive compensation amounted to 22% of corporate profits. By 1987, it had risen to 61%. Over the last 30 years, the chiefs of American companies have continued to do extremely well. In 1980, the average American CEO earned 42 times the average worker. In 1990, that had grown to 107 times. And the ratio peaked in 2000 at a whopping 525 times.
In 2007 CEO pay was still 344 times the average worker's. In that year, average CEO pay at public companies was $15.1 million. In 2010, it stood at $12 million.
Among the top one percent of earners, average aftertax income more than tripled from under $400,000 in 1979 to over $1.3 million in 2007. Aftertax income of the top 20% doubled, from about $100,000 to $200,000. But the bottom 80% of Americans more or less stayed flat over the period.
Third, the rich own a greater percentage of the economy than ever before. The top 1% of earners have been increasing their share of total national income since the late 1970s. They now account for more than a fifth of total income in the US (see chart at right).
In addition, a "rising tide" has not lifted all boats. The income gains of the richest have far outpaced the gains of other groups. From 1979 to 2009, the top 5% of earners increased their income by 73%. Those in the middle (earning between $48,000 and $73,000) increased their income by only 11%. Perhaps most troublingly, the bottom quintile of earners--the poorest--have gotten poorer. They actually lost about 7% of their income in this period (see charts at right).
This contrasts with the previous thirty year period, from 1947 to 1979, where all levels of society increased their income by about the same amount, the richest five percent actually grew by the smallest amount (86%), and the poorest actually gained the most (116%).
New US jobs since 1939 (1939 to late 2012)
American job creation, 1940-2010
Job creation over time in America
So clearly we have a lot more rich people. If the rich are job creators, we should have lots of job creation. What do the data actually show?
The US economy added about 104 million jobs from 1939 to late 2012. The first chart at right shows the accumulation of new jobs during this period. The chart shows two important facts. First, the rate of job creation remained quite steady for almost the entire period (particularly since the 1960s), until the year 2000. Second, after the year 2000, there has been effectively no overall change. This lack of job creation is a novel occurrence for the American economy.
The rate of job creation in the late 20th century proceeded at a consistent, steady clip despite the vicissitudes of wars, recessions, Democratic administrations, Republican administrations, and changing tax and fiscal policies.
The second chart at right shows that the 2000s were the first decade in several generations without a significant increase in jobs. It was also the first overall decline in the number of jobs. This is profoundly important for a variety of issues. But for the purpose of this essay, the implication is clear: an increase in the number of wealthy people, an increase in the amount of money earned by them, and a greater concentration of income have NOT had a positive effect on job creation.
There were actually more jobs created in the 1970s--with higher taxes on the rich, fewer rich people, and less income inequality--than in the 1980s. And in the 2000s, with the highest number of rich people ever, and the rich earning the greatest share of income ever, there was actually a net loss in jobs!
If we exclude the 2000s, there was certainly a gradual increase in the number of jobs created per decade in the second half of the 20th century. However, much of this job creation must be chalked up to a growing population. The more people there are, the more jobs will be created, with or without rich people.
US Investment as a Percentage of GDP, 1980-2011
Unemployment Rate Over Time
Top Income Tax Rate Over Time
Investment, unemployment and taxes
One of the main ways the rich are assumed to "create jobs" is through investment. There are a number of problems with this belief. Investment requires risk taking. Many rich people are perfectly content to receive a steady income, sit on their wealth, and avoid risk with their money.
Among those interested in investing, many will prefer large, established corporations. These are companies with limited growth potential, unlikely to add massive numbers of jobs to the economy (especially if they choose to move operations offshore). In addition, many will invest abroad, which may create jobs, but not in the US.
Only a minority of rich people want to fund risky start ups and bet on small businesses domestically. In the US, investment as a percentage of GDP fell overall between 1980 and 2011. This is despite the meteoric rise in the number of millionaires and billionaires, and the amount of money in their possession, during this period.
Unemployment and Income Taxes
The American unemployment rate has risen and fallen since the 1940s. But overall it has remained more or less flat. If anything, it has slightly increased on average during this time. Meanwhile, the top marginal income tax rate fell dramatically from 1948 to 2012. At its peak in the 1950s, it was over 90%, and it currently stands at 35%.
So, significantly lower taxes on the richest Americans, more rich people, more total money earned by the rich, and a greater share of national income owned by the rich, has not coincided with a significant increase in jobs, nor a significant decrease in the unemployment rate, nor a significant rise in investment.
If the rich were genuinely job creators, we would not see these results.
The rich are not the job creators we thought
Why is it, when the rich have the most money ever, in both absolute and relative terms, that we do not see a massive rise in jobs? Indeed, why is there instead little or no change, or even decline?
The fact is that the rich are not the job creators. If anything, it is those who are in the process of becoming rich that are the job creators.
It's not that being rich makes you a job creator, it's that being a job creator makes you rich.
This helps to explain why states and countries that have very high income taxes on top earners can still have dynamic labor markets with a lot of job creation. Examples of this include Sweden, Denmark and the Netherlands.
Now, can a rich person create jobs? Absolutely. Many rich people create jobs by hiring people, spending on consumer goods, and starting or investing in new businesses. The point is simply that being rich in and of itself does not make one a job creator. A larger paycheck, or a bigger bank account, does not automatically equal more jobs.
Many middle class and poor people can also create jobs by starting a new business and hiring workers, purchasing goods and services, investing in a small business owned by a friend, or putting money in the stock market. The rich do not have a lock on job creation, simply because they are rich.
The worship of the rich, and the fetishization of wealth, so common in modern politics, is clearly unwarranted.
Real job creation
So if throwing money at rich people won't create jobs, what will? Policies that encourage business activity, new business formation, investments in education and training which improve the labor force, enhancements to infrastructure, low sales taxes and VAT taxes, allowing businesses to advertise and promote themselves, and efficient and well-regulated financial markets, among others.
Sometimes high taxes on the rich do accompany economic stagnation. This is not necessarily because of the taxes themselves, but usually because high taxes are often accompanied by other, more powerful, measures that constrain business and job creation.
An overregulated labor market, legal red tape, restrictions on business activity, a complicated process for registering and starting new companies, poor protection of private property from theft and fire damage, poor enforcement of contracts, requirements on businesses to provide health insurance or other benefits to workers, excessive minimum wages or maximum working hours, overregulated financial markets--these are the kinds of measures that restrict wealth creation and job creation. And the kinds of governments that adopt these policies often embrace higher taxes too.
The Rich and Job Creation in the US Economy
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- 10 Things You Didn't Know About Economics: Numbers 1-3
- Philosophy, Ideology and American Politics