Citigroup CEO's Vikram Pandit was
fired on October 16, 2012 after five years and compensation of $261 million for
his work. Sounds like pay to fail. Mr. Pandit became CEO of Citigroup in 2008
when Citigroup bought Mr. Pandit's Old Lane Partners LP hedge fund a year
earlier. Then Citigroup shut down the hedge fund at a write-down of $202
million. Moreover, while Mr. Pandit was at the helm of Citigroup, the company's
shareholders didn't do so well: the value of their holdings declined by 88
percent. Who would not like a job where not matter what happens you get paid?
If the company makes money and stockholders get their dividends you get paid. And
if the company loses money and share value declines almost ninety percent you
still get a hefty payday. However, this reality exists mainly in the rarified
world of the so-called job creators--i.e. one-percenters. We love the
one-percenters. We aspire to be like them--the mansions, the fancy cars, yachts,
and Learjet. We loved Dallas. It gave us a glimpse at opulence up close and
personal on TV screens in our living rooms. We loved JR because he was rich, and despite of the fact that
he presided over a dysfunctional family. We love CEOs,
too. And in the stratosphere of the CEO's world failure is rewarded handsomely.
You Joe Blow are not a job creator. You get fired when you screw up. And
taxpayers pick up the tab as unemployment compensation. Taxpayers pay
unemployment compensation to workers for a specified number of weeks. When that time period is satisfied some
members of Congress say that's enough--even in a recession--for we don't want to
encourage idleness and dependency. If you don't find another job during this
time period, you're screwed. You can't make your mortgage payments, buy the
groceries, make tuition payments for the kids; and without insurance you go to
the emergency room when you're sick. Some job creators talk
loosely about harvesting businesses, from "rescuing' flailing companies, at no
cost to their stockholder. They destroy American jobs and send them overseas.
We like these people. We vote for them. We forgive their trespasses. We treat a
shoplifter more harshly than we treat them. We bail them out with tax dollars
when they abuse their stockholders' trust--all because we admire them and want
to be like them. Contrast that with our regard (perhaps disregard) for workers:
does lazy or greedy come to mind? The meme on unions is they're bad! Worker
strikes and minimum wage legislations are unwelcomed. Who speaks for workers
Fox, NBC, ABC, and CBS? Hardly! But these major news organizations, including
CNBC, the WSJ, The Financial Times, and Businessweek are voices for Wall Street.
Small businesses have 20 to 99 employees; mid-sized businesses consist of 100 to 499 employees; and large businesses have at least 500 employees or more. A number of research studies argue that there is an inverse relationship between business size and job creation. For example, David Birch (1987) in "Job Creation in America: How Our Smallest Companies Put the Most People to Work," published in Free Press, New York, makes the case that small business creates more jobs. This finding was corroborated more recently by David Neumark, et. al. in "Do Small Businesses Create More Jobs? New Evidence from the National Establishment Time Series," (NBER, February 2008).
However, in other ways there are real differences between small and
large businesses. Large businesses offer more job security, insurance, and
other benefits to their workers; small businesses, especially the startups, are
ephemeral: most die in a year. But that misses the point, which is small
business is the engine of job creation. The only way small business can play
this important role in the American economy is if the destruction and creation
process of jobs is at minimum equal; or preferably net job creation is
positive. For an analogy imagine a coal-fired furnace. To make it generate heat,
you stoke it with coal. Of course, heat production destroys coal; so you need
to add more coal to the furnace again and again. The point is small business
generates over 79 percent of new jobs added to the economy, but some die in one
year. That is, behind the scenes as one business is lost another startup takes
its place; when that one dies, another steps in and takes it place. This is a
dynamic process in the economy that economists refer to as frictional
unemployment.
Big business hires many workers. Sears has 300,000 and Apple has 35,000
employees. Big business accounts for approximately 50 percent of all jobs. But
unless they expand and innovate, the number of employees they have won't change
much. On the other hand, small businesses contribute to 50 percent of GDP. The
remaining 50 percent of GDP is divided up between mid-sized and big businesses,
which together represent 50 percent of jobs. In a previous post I indicated
that higher taxes on the one-percenters will not reduce consumption needed to
boost the economic recovery. It seems, too, that differential tax treatments favoring
small business have positive effects on the economy. There have been a number of "tax breaks" the Obama
administration extended to small business. Two are particularly important: the
Health care tax credit, which was enacted with the 2010 Affordable Care Act
(ACA), for small businesses that provide health care insurance to workers. The
ACA needs to be both understood better and widely embraced. Businesses are not
taking advantage of the tax breaks because of confusing rules; and they are
missing out on billions of dollars in breaks according to the Congressional
Budget Office (CBO). The other break is startup deductions. Startups can deduct
up to $10,000 of startup costs for such things as marketing research and office
supplies. You start up a new business and you get a $10,000 break--that's money
in the bank. The deduction is a big incentive! It helps with insuring your
workers and reduces your insurance costs. I hypothesize that happy workers are
hard workers. Insured workers are happy. Therefore, insured workers are hard
workers.
If as some people assert, higher taxes discourage investment and growth,
then by that logic tax breaks encourage investment and growth. Now, since
startups and small businesses create most of the new jobs in the economy, then
it makes sense to provide startups and small businesses with deductions as
incentives for new business formation. In a slowly growing economy (registering
2 percent growth), demand is also a problem. Another stimulus could help demand
in spite of the fact Republicans say the stimulus did not work--even as some of
them like Representative Paul Ryan of Wisconsin, and Gov. Chris Christie of New
Jersey took stimulus money, while condemning it. In politics there is a
mismatch between what politicians say and what they do. The reelection results
may give President Obama more flexibility to enact more business-friendly
policies, and enact policies that could produce the 12 million jobs projected
for the next four years.
Startup business is the brainchild of an idea--whether it is Facebook or
Apple. Mark Zuckerberg and Steve
Jobs (including Ronald Wayne and Steve Wozniak) did not make taxes a barrier to
their creativity. Apple almost failed. The company was in decline from the
mid-1980s to the 1997, when Steve Jobs returned it to profitability. But its
difficulties had nothing to do with taxes, but everything to do with the
product and market conditions. In September 2012 at $17.55, Facebook stock was
selling much below its IPO price of $38. Now as a stretch, you could say that
the poor economy is responsible, and that the government is responsible for the
poor economy--not Wall Street of taxes. So, the government is responsible to the
poor performance of Facebook stocks. This kind of convoluted thinking comes at
everything from a view that government is the source of all things bad. But
that's an argument for another time. The fact is startup and small businesses
play a major job role in the U.S. economy. When friends say, "I want to run a
convenience store, start an import business, open a dance studio, teach online,
develop ring tones for cell phones, open a restaurant for exotic foods, start a
wholesale outlet for vegetable retailers, etc," I never hear questions about
taxes. And I don't see too big to fail big businesses that want the government
to leave them alone, until they need to declare bankruptcy. When my friends
enter the fray they survive or fail on their own effort--or on whether they made
the right choices of location, product(s), and prices (including costs). Their
survival rarely has anything to do with taxes (or the government), but
everything to do with the degree of effort they bring to their business
endeavor. When my friends fail--they are not offered a parachute like the
CitiGroup CEO. Yet, my friends are startups and small business--they create jobs
often for themselves by providing a service or product that did not exist
before.
Distemper is favoring job creators with tax cuts when the empirical
evidence says otherwise. In a prior posting, "The Debate on Tax Cuts: More
Politics and Economics (see: click here),
I argued that top marginal tax cuts did not correlate with economic growth in
the American experience. The Congressional Research Service reported the same
finding, but had to withdraw their economic report after Senate Republicans
raised concerns about it. According to the New York Times, the report was
withdrawn because it questioned the central tenet economic theory espoused by
conservatives. (see: click here)
We need to stand behind startups and small businesses, which are the engines
of job creation. Their viability encourages economic growth. Further, since the
evidence that cutting top marginal tax rates to support economic growth is
misguided, a preferred policy choice is to reduce the tax burden on startups
and small business, and on low- and middle-income taxpayers.