Yes Virginia, Job Creators do Matter

Do job creators matter?

The average American is likely screaming “YES!” of course we need job creators. In case you hadn’t noticed we’re kind of struggling here and the more jobs the better. But believe it or not this is actually a question that economists are debating.

One of liberals’ top idea-men, Paul Krugman, suggests the answer is no. In a new column for the New York Times, Krugman argues that conservatives’ “deap-seated believe that the 1 percent, by working harder, are doing the 99 percent a big favor, creating jobs and raising income” is a big pile of hooey.

According to Krugman, the gain from the wealthy’s contribution to society is completely captured by their own income.

. . . textbook economics says that in a competitive economy, the contribution that any individual (or for that matter any factor of production) makes to the economy at the margin is what that individual earns – period. What a worker contributes to GDP with an additional hour of work is that worker’s hourly wage, whether that hourly wage is $6 or $60,000 an hour. This in turns means that the effect on everyone else’s income if a worker chooses to work one less hour is precisely zero. If a hedge fund manager gets $60,000 an hour, and he works one hour less, he reduces GDP by $60,000 — but he also reduces his pay by $60,000, so the net effect on other peoples’ incomes is zip.”

This allows Krugman to argue that the federal government should tax higher incomes at a 70 percent marginal rate since it would have no impact on the rest of society.

Nevermind that this would do very little to solve our problem. Indeed, the latest IRS data reveals that there were 8,274 people with incomes of $10 million or more. Those folks earned a total of $240 billion in 2009. But even if you taxed them at a 100 percent marginal rate – that is, if you confiscated every dollar they earned – you’d be able to cover government expenditures for roughly 24 days. Of course you’d also completely ignore the underlying problems that are contributing to our deficits in the first place – exploding entitlement programs.

But the bigger concern is the underlying idea – that the wealth can be taxed into nonexistence without any impact on the economy.

Strictly speaking, Krugman’s underlying argument is based on sound economic theory. According to textbook economics, marginal product theory says that factors of production (including workers) are paid the equilibrium value of their marginal product.

BUT. And this is a very large but, there are very large exceptions to the general rule. Adam Ozimek at Modeled Behavior explains:

“Many of these people work at moving the productivity frontier forward, and thus increasing the marginal productivity of other workers.

. . . Consider, for instance, that if we suddenly kicked out the top 10 percent of high IQ people (or 10% most productive people, or 10% most creative people, or whatever) in the U.S.. It strikes me as fairly likely that the total output of the remaining 90% would go down. . . . Now, instead of kicking out the top 10% of workers, just make them work less as a result of high income taxes. See my concern?”

His concern is that the Steve Jobs of the world would be less incentivized to turn out great products. And as a result, the thousands who are now employed creating apps for the iPad, and the thousands of other spin-off industries, would simply not exist.

The point is, textbook economics can teach us a lot. But this is the real world where the exceptions, the nuances, and undefined variables that cannot be captured in a model are extremely, extremely important. When you remember that, you’ll see that job creators do matter. A lot. Regardless of Paul Krugman’s economics lectures.