An argument against Nick Hanauer’s rejected TED talk

In the end, I agree with his thesis, but for a completely different reason than he’d want me to. 

Someone named Nick Hanauer claims in a TED presentation (though not on TED’s site) that the US Gov should tax the rich more because historically as tax rates have fallen unemployment has risen, therefore there is a negative linear causation between the rich’s tax rate -> employment. He claims it is not the rich but instead the middle class who create employment through demand, in that their going to the store to buy things…creates employees (who are designing/manufacturing/advertising/distributing/selling the products). If you haven’t see it, here’s the video:

It sure sounds good. Tax the rich, yea! With their monocle glasses and top hats and little white curly mustaches.. and and…and their money! They’re not using it all.

Mr. Hanauer displays a graph, cornerstone #1 of his argument, claiming a decrease in taxes is the cause of the increase in unemployment. There is a coloration, but is it a causation? Pirates and global warming I say. His idea is wrong.

His “chart”

My thesis: Advances in technology cause increased unemployment.

Take a look at my graph, I stole his “unemployment line” and layered it over my crude graph of Moor’s Law using the same period. In actuality, Moor’s Law is more linear, so I did myself a disservice in poorly designing the graph but you get the idea.

Look Ma, an inverse relationship!

Here’s an easy real life example of how technology lowers the employment rate:

Blockbuster -vs- Netflix:

When Blockbuster went bust in 2009/10 they had 60,000 employees and earnings of $73 million. That’s a paltry $1,216 per employee. Netflix buried Blockbuster with 2011 earnings of $226 million. And they did it with only 2,348 unlimited vacation day taking employees, that’s $96,252 per employee. With more advanced technology, the DVD rental service leader was able to 1) provide a better service to the users (demand remained the same, or probably even increased), 2) triple earnings… and….. 3) reduce employment by 96%. Yep, technology did that. Demand increased, or at least stayed the same, while employment decreased. The opposite of what our TED friend says.

I’d imagine Barnes and Noble (soon to be out of business) and  Borders (already out of business) verses Amazon would be another good comparison. Combined B&N and Borders had the same number of employees (~60,000) as Amazon, but vastly less earnings: Amazon with $630 million, B&N with a $60 million loss. So each Amazon employee is producing much more GDP than a B&D/B employee, plus with the same number of B&N/B employees that could only sell books, Amazon employees are selling pretty much anything you can think of.

Therefore:

Moor’s Law as applied to employment: With new technology, same number of employees creates X times more GDP/output –OR– GDP/output remains the same while number of employees are reduced significantly. (Moor’s Law applied to consumer electronics= computers get faster for the same price -or- same speed for cheaper price).

Standard Oil & Apple…. and ExxonMobil

There is probably a good example here as well, but since I already did all that work for the Blockbuster vs Netflix bit, and I don’t get paid for this….

In 1906 Standard Oil had 60,000 employees, in 2011 Apple had 60,000 employees (did you notice every single company I mentioned had 60,000 employees?).  In 1906 Standard Oil earned $2 billion, in 2011 Apple earned $26 billion. That’s 13 times more earnings per employee. But here’s the interesting part, last year ExxonMobil (a combination of two of the about 30 post anti-trust Standard Oil spinoffs) earned $41 billion with 84,000 employees. If technology didn’t screw everything up, ExxonMobil would need 1.23 million employees to produce that same amount of profit. So, a reasonable statement is that technology substantially reduced employment in the oil industry. Not low tax rates for The Donald.

Now about those taxes…

Taxing people does not create jobs. If that was the case we’d tax everyone 100% and bam! 100% employment (we’d fix the “full employment leads to inflation” problem, no one would  have any money). There are a lot of arguments against high tax rates in the US. “High” being more taxes than necessary to provide the smallest government capable of providing a free an open market, domestic security and public services. Any more money taken from people and it’s called stealing.

If you agree that higher taxes creates jobs, you must agree with these statements:

  • The government uses 100% of every dollar they take from the rich and apply it towards job creation programs.
  • The job creation programs are effective.
  • The job creation programs create private sector, and privately funded, jobs (not tax payer funded jobs*).
  • The government can use this money to create jobs better than the private sector can.
  • The jobs the government created are necessary and in demand.

*Tax payer jobs do not count as jobs. That’s like taking water from one side of the pool to fill up the other side of the pool.

Market Demand Creates Jobs

Yes, market demand creates jobs. Plus:

  • basic research and development of pure science (funded by wealthy individuals and companies)
  • startup companies which commercialize new technologies (funded by wealthy individuals and companies)
  • companies which “create markets (iPad, anyone?), advertise, distribute, and manage products/services
  • the middle class that buys the stuff

So yes, the middle class is responsible for jobs. But so are the rich. As Chung Ju Yung says, “every position is important, even the janitor”. And, in this case, even the fat cats. We’re just a little more jealous of them.

There is probably a big demand from the middle class for flying cars, free high quality digital music, and the cure for cancer, but this demand doesn’t magically create flying cars, free music and the cure to cancer. Capital and businesses (ran by capital intensive people) are going to have to invest a lot of time and money (for hiring people) into creating and commercializing these thing before there are any jobs for middle class people to “create”.

So, in the end, I agree with Mr. Hanauer

I agree with him that lowering the tax rate increases unemployment. Here’s the process:

  1. Car company employs 60,000 people and makes X number of cars per year. Taxes are 60%.
  2. Taxes go down to 40%. Car company invests the extra profit in new plants and more R&D.
  3. Car company’s R&D department invents a new automated process which reduces production time substantially.
  4. Car company implements automated process, lays off 40,000 employees. Makes 2X cars per year.
  5. Car prices are lowered thus demand increases, employment decreases.

There, see? Lowering tax rates reduces employment. This is because with lower taxes, better technologies can be created. With lower taxes, there is more incentive to risk capital in the pursuit of creating products/services which people will pay for and which will therefore make you rich. More people competing to make better products/services and to sell more than other existing companies results in a greater number of improved and cheaper technologies. A side effect of this seems to be the reduced need for labourers, starting from the bottom, low skilled manufacturing, and creeping it’s way up (LegalZoom).

So in the end, he’s right. Therefore, the only solution is to raise taxes until innovation stops and, for good measure, we should outlaw several technologies which are particularly effective at reducing employment. Like automated manufacturing machines. You’re employed now, congratulations, now back to the assembly line!

UPDATE:

Here are some actual smart people that know something about economics breaking down his argument.

UPDATE (Dec 2012):

If you don’t believe my analysis and opinion, consider the words of Paul Krugman from the recent DealBook conference. In this speech he is essentially suggesting that we worship tech guys and dislike banking guys because, in our limited intelligence and indifference to things that don’t exist within our immediate understanding or appreciably benefit us, iPhones and social media are cool but banking is confusing and just about money, which is’t cool. We are capable of using an iPhone, it makes us feel  smart and hip. We don’t know what a collateralized debt obligation, and we can’t carry one around in our pocket to impress our friends with. So, as a result, we think tech guys are cool and disruptive, whereas banking guys are evil and bad because they get paid so much relative to average employees. But the truth is, tech guys have just as much or more money than the banking guys who we love to hate. The difference is that tech guys destroy jobs by “disrupting” the economy whereas banking guys don’t.

I’ve copied Paul Krugman’s speech below (from the above link):

“We tend to think of the tech guys as doing this wonderful thing for us, which to some extent they are, although often the executives aren’t necessarily the innovators. But, maybe we need to reconsider a little bit, are we so, totally happy with what technology is doing? I love watching concerts on my iPad, and all that, but there’s a pretty good case, that technology is ambivalent, in its effect on workers, or possibly even harmful right now. Which doesn’t to mean stop it, but we need to think more about how are we going to support a decent distribution of income. And it means also that maybe we can stop worshiping the tech executives. Respect them, fine, but this worshipful — it’s like when Steve Jobs died, what a great name, Steve Jobs, it turns out the number of jobs that Apple actually creates in America, especially in manufacturing is ludicrous. Which is not to say technology ain’t great, but it’s not a panacea for our economic problems.”

He then goes on to note that most of the value of technology comes from using it. From the 70’s to the 90’s America’s productivity was stagnant. It took off once corporations figure out how to use IT to make other stuff more productive.

What’s different now is that, “We’re using capital intensive stuff, you buy a bunch of servers and those servers replace thousands of people doing what was previously a skilled occupation which is simultaneously displacing a lot of jobs and it’s capital using, so since have limited amounts of capital, this is going to shift the distribution of income away from workers and that has happened rather stunningly fast since 2000. The distribution between capital and labor was more or less stable for 50 years. In the last dozen years or so, the labor share has plummeted. Technology is certainly one of the plausible stories there, and it’s not a good story.”

The bottom line is that Wall Street is villainized for making money and is blamed for the destruction of our economy. Meanwhile, tech companies have multi-million dollar compensation packages to retain talent, and contribute to the destruction of our economy. Or as they proudly call it, “disruption” of the economy.

The tech companies are celebrated and revered. And I get that. I love my iPhone. I love my iPad. I, like most people, don’t fully grasp what a collateralize debt obligation is.

So, Jamie Dimon appears to be some guy who makes funny comments while his company does obscure work shifting money around. Steve Jobs, on the other hand, is a god, because I can use the iPhone.

But, in focusing on the tangible, like an iPhone, we often miss the other side, and don’t ask tech executives about how they feel about the inequality they’ve created.”

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