Nick Hanauer and Backwards Economics

I have recently come across a TED Talk that was causing quite a stir for two reasons: it was a banned TED talk and it was arguing for income redistribution as a means towards a stronger economy. While I cannot comment on why it was banned, I will comment on the talk itself. You can view the talk here:

Nick Hanauer’s reasoning rests on two problems: his belief in the ancient fallacy that consumption drives greater productivity, and his failure in understanding the function that entrepreneurship plays in society as a whole.

First, he makes the argument that businesses and the jobs they supposedly create would not exist without money in the first place for consumers to purchase these goods or services. When they do have money to purchase what is provided by businesses, they facilitate an ‘ecosystemic feedback loop’; only t  hen can businesses grow, hire, and make profits. It must therefore be the imperative of policy makers to redistribute income in order to boost this consumer demand. This seems like a simple and sound argument but, under further investigation, the logic is completely backwards.

Goods have to be paid for with goods. Consumption by definition must be preceded by production. How can one possibly consume before any production has occurred? Individuals produce for the sake of consumption, not the other way around. When he argues that it is vital for consumers to have the money that make business possible, he does not ask how consumers got the money in the first place nor does he demonstrate an understanding of what money even is. Money, among a few other things, is a medium of exchange between goods. Its very existence implies that goods must have been produced in the first place (unless of course it has been illegitimately printed).

What drives an economy is savings and investment. What economies need is capital to produce goods that people value. Profits are derived in a free market from one’s ability to serve the needs of somebody else. Mr. Hanauer accumulated his wealth because he was able to make others better off. It is because he is particularly productive. To tax the most productive members of society because they are guilty of being too good at serving the needs of other people is demented in reasoning. It diverts capital away from these entrepreneurs to invest and places it in the hands of the State whose politically motivated bureaucrats bear no price for poor decision making.

Despite all these arguments against redistribution, Mr. Hanauer legitimately points out the more essential question: where then are the jobs? Using statistics, charts are put on display conveying no clear relationship between theory and reality. Unfortunately, economics is the dismal science. There is no place to hold economic-scientific experiments with a single manipulated variable—which in this case is taxation—to observe a responding variable—which in this case is jobs. This is to say that the only thing that has affected employment since 1995, where his measurements begin, has been taxes on the rich. Well, since 1995 there have been around 64000 new regulations, public debt has more than tripled from $5 trillion to $16 trillion and America’s economic freedom as a whole has fallen sharply to rank below that of Ireland!  It is this that needs to be the focus of policy.

-Ian CoKehyeng

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