Private Sector Job Creation is the Answer to Long Term Stability

By Chris Gergen

Someone once said “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.”

Such is the case concerning the economy and how jobs are created.  In my last article I discussed the role government does and does not play in creating jobs.  The irrefutable fact remains that governments do not create jobs. Rather, through taxation and regulation they create or destroy the ecosystem indispensable for the creation of permanent jobs.

Many believe that entrepreneurs, small business owners, the wealthy and those aspiring to become wealthy are the driving force behind job creation. As with the idea of government creating jobs, this idea of entrepreneurs, small business owners, and the wealthy creating permanent jobs is also incorrect.

According to Forbes Magazine[i], Phil Knight, Oregon native, co-founder, and former Chairman of Nike, is the 47^th richest man in the world and the 19^th richest man in the United States.  Surely, if anyone could create permanent jobs it would be Phil Knight and Nike.  Few people realize that neither Phil Knight nor Nike created any permanent jobs.  Entrepreneurs like Phil Knight invest capital to design, develop, and deploy their ideas, services, and products until the capital runs out.   Jobs created by entrepreneurs such as  Phil Knight, small business owners and the wealthy are only as secure as the level of initial capitalization of the venture.  As I mentioned in my last article, any jobs in Oregon and Lane County would be good jobs, but Oregon and Lane County need to look long term at sustainable, permanent solutions to their persistent unemployment problems.

Let’s look at where these permanent jobs come from.

According to those who argue that entrepreneurs, small business owners, and the wealthy create jobs, a key role of government is simply lowering taxes on “job creators” so they have the capital to invest in creating ideas, services, and products.  However, this logic is not supported by the facts.  Low tax rates by themselves will not create permanent jobs. During the boom years of the 1990s, the dotcom rage “created” thousands of jobs in the United States.  Unfortunately, the boom of the 1990s was really a bubble that burst in March 2000 and sent the economy into a deep economic struggle, forcing the Dow Jones Industrial Average to finish lower than the previous year for the following three consecutive years[ii].

During the 1990s billions of dollars were invested by investors, entrepreneurs, small business owners, and the wealthy in creating thousands upon thousands of jobs in many different sectors.  According to the logic of those who argue for lower tax rates so job creators can create jobs, the tax rates should have been low during this period.  However, the truth is much different: the high bracket tax rate on “job creators” from 1993 to 2000 was 39.6% and in 2001, the tax rate was only lowered to 39.1%[iii].

The current rate of 35% in 2012 is below the tax rates of the boom years of the 1990s.  If the idea of lowering taxes on the wealthy in order to create jobs were valid, entrepreneurs, small business owners, and the wealthy would currently be creating jobs hand over fist because our current rates are the lowest they have been in over 20 years[iv].  If you were to look for rates lower than our current rates, you would have to go back to the three year period of 1988 through 1990 when the rate was 28%.  Before that, you would have to go back to pre-World War Two era rates of 24% and 25% in the mid-1920s and early 1930s.

During the boom years of the 1990s and into the aftermath of the dotcom collapse, the national unemployment rate hovered between 3.7% (December 1999) and 6.3% (January 2002)[v]—even with tax rates above 36%.  The sudden rise in unemployment in the early 2000s was due to a lack of capital to continue funding these companies, which in turn was caused by a lack of consumer demand.  As a result, not only did investors take a bath, but most of the thousands of jobs “created” by the boom suddenly disappeared—because they were temporary.  Ideas, services, and products that people demanded — not tax rates or the single-handed efforts of “job creators”—caused the jobs boom of the 1990s.

The reason jobs are not currently being created is because of a lack of demand. And a lack of demand doesn’t have anything to do with entrepreneurs, small business owners, and the wealthy creating jobs or taxation scaring investors away from starting businesses.  Fixing our economic woes in Oregon and Lane County begins by looking at the real problems.

The economy is bigger than the government, entrepreneurs, small business owners and the wealthy.  The economy is comprised of all of us.  In order to create demand, a few things have to happen legislatively and in the business sector.  Be sure to come back to “Lane Solutions” – because that will be the subject of our next installment.

Chris Gergen is a Springfield based financial advisor and is the author of The Quality Paradigm: Why You and Your Business Need it to Succeed.  He blogs at Be Epic.Daily. He can be reached via email at [email protected].

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