TED Talk Propagates Economic Fallacies

While exploring a friend’s Facebook feed, I saw a link to a TED Talk with a provocative title: Rich people don’t create jobs. After watching Nick Hanauer’s torturous reasoning – he would make James Taggart look like Hank Reardon – I can say I am glad TED decided not to massively air this anthology of errors. 

According to the businessman, it is a myth to believe that “the rich” create jobs; rather it’s the consumers. One has to wonder how the hell this man was able to stay in business for so long by believing that spending drives the economy.

 If it were the case then one would indeed hope for more destruction like an alien invasion as “economist” Paul Krugman famously wished for. Or we could start breaking windows like there’s no tomorrow, since we “will see” that window makers get richer. 

But that’s not how real life works. What makes the economy grow is savings, since one needs money to acquire new machines, maintain them and hire workers. While the first steam engines were rather modest, they wouldn’t have existed without savings. 

You also need to believe in the state worshippers’ two most fearful French words: laissez-faire. Without it, humans are stuck in the Middle Ages where sacrifice and poverty are seen as virtue and wealth is seen as sin. This mentality is what weighed down countries like China and India in abject poverty for so long. 

The former’s transformation was quite dramatic when Deng Xiaoping started putting private property (and personal wealth) back into people’s mores in the 1980s. While economy inequality did increase, extreme poverty decreased exponentially. Now, while socially still repressed, the average Chinese has better hopes to better his or her economic situation. 

Incentives Matter 

However our James Taggart wannabe doubles down on his economic fallacies by linking high taxes and low unemployment (and vice versa), which defies logic. 

According to Hanauer, we should be drowning in jobs if “the rich” really created jobs. Yes, marginal tax rates were higher in the 1950s and 1960s in the U.S. while the economy was growing. But this statement lacks a crucial detail: the U.S. was the only large industrial economy still standing on the planet. Therefore its production was supplying the “free world” with all its good and services. 

Another crucial detail most people miss is regulations. Contrary to popular beliefs, there has been no significant deregulation in the past decades, be it in the Federal Register or the Federal Code of Regulations. As a result, the cost of creating a business has increased tremendously, leaving only in the game large corporations who can afford them.

 Banking is a good example of such unintended consequences. Back in 2010, Congress adopted the Dodd-Frank Act in order, so it was believed, to increase banking transparency and prevent another crisis. It also prevented the opening of new banks, as a single new one opened its doors since 2010. In addition, 28 percent of small banks had to shut down because of increased costs while larger banks occupied a larger share of deposits. In other words, the law made “too big to fail” even more of a reality. 

Finally, Hanauer rightfully blames inflation for the declining purchasing power of the middle class (and everyone for that matter). But as with his previous statements, he misses the elephant in the room: government incentives. 

It’s funny that his graphic would include the most regulated and subsidized industries like education and healthcare while ignoring those whose prices declined exponentially like computers and clothing. In the latter case, (relative) lack of incentives to consume have decreased prices and improved quality. But in the former, government strongly encourages consumption through loans (Pellet Grants) or tax breaks (for health insurance), artificially increasing demand and therefore prices. 

In short Nick Hanauer’s talk was just a rehashing of economic fallacies that have been debunked long ago. Savings and freedom, not spending and regulation, are what drive economic growth and job creation. If not, then the Canadian province of Quebec would be an industrial powerhouse with its 25.75 percent top marginal income tax rate, 10 percent sales tax (and various others) and high regulation, not near the bottom of nearly every economic ranking. 

In addition, the present zero interest rate policies would have created a thriving economy if spending were the magical potion Hanauer claims it is. But this artificial incentive to spend is inflating a stock market bubble and slows down economic growth.