Commentary: Demand, not business incentives, drives job creation

The Myrtle Beach Sun NewsJune 10, 2012 

I’ve always dreamed of owning a Lamborghini.

It would cost more than my house. Its maintenance fees would likely be more than my monthly mortgage payment.

If the legislators in Columbia who are planning on diverting tens of millions of dollars from a lawsuit settlement understood why there is no Lamborghini in my garage, perhaps they’d rethink their priorities.

South Carolina is set to receive $31 million from a $25 billion settlement between the federal and state governments and five of the nation’s largest loan providers. The money is supposed to go to struggling homeowners, but there are some in the General Assembly who want most or all of it to be used instead to provide incentives for businesses.

“Our thought process was that the Commerce Department would be able to recruit and get people out working,” Anderson GOP Rep. Brian White told The (Columbia) State newspaper. “You get people employed, that’s a house payment and a paycheck.”

That sensible-sounding reasoning is misguided.

It’s the same rationale used to justify a $1 billion package of incentives for Boeing even as the state refused to do things such as funding the public school system up to the supposedly required minimal standard. Then they let businesses off the hook after their lobbying caused a major deficit in the unemployment benefits system. South Carolina had to borrow money from the federal government to make ends meet then absolved businesses of responsibility by using unanticipated money – the economy grew a little faster than expected, which grew tax revenue – to cover that deficit.

It’s the same rationale that has foolishly led people in their minds to essentially sever the relationship between business and the fiscal health of potential customers.

Maybe that rationale has something to do with the state’s low average annual wages – with the Myrtle Beach metro area’s the lowest in the nation.

That brings me back to my Lamborghini pipe-dream.

The car might be the best thing since sliced bread.

The company can be the most efficient and well-run on the planet.

It can offer me a year’s supply of Mounds bars, my favorite candy.

But no matter what they do, I won’t be buying a Lamborghini – because I can’t afford one.

The way to create jobs isn’t to throw a ton of public dollars at private firms; it is to make sure as many people as possible have enough income to buy the products businesses are selling.

Demand drives job creation, not business incentives.

Even bad products turn a big a profit when enough customers who want to buy them, can.

Cue video of Snooki or Kim Kardashian if you doubt me.

The Seattle-based millionaire venture capitalist Nick Hanauer explained why better than anyone I’ve ever heard. (Check him out on my blog at MyrtleBeachOnline.com.)

“I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated,” he said during a TED speech. TED is a non-profit devoted to “ideas worth spreading.” Some TED talks have become legendary.

“That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small,” Hanauer said. “What does lead to more employment is a ‘circle of life’ like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me. So when businesspeople take credit for creating jobs, it’s a little like squirrels taking credit for creating evolution. In fact, it’s the other way around.”

Many potentially important consumers in South Carolina are trapped in homes no longer worth as much as their mortgages, many of them through no fault of their own. They became victims of a massive real estate bubble that burst and led to one of the deepest economic downturns in our history.

Money from the mortgage settlement and other mortgage-relief plans – many of which are opposed by the same legislators on supposed principled grounds – could help unleash those consumers.

That increased consumer activity would lead to more business activity, which would essentially force more businesses to hire even if they didn’t want to. And make no mistake, businesses try to use as few workers as possible because they are primarily concerned about profit, not job creation.

Well-targeted and well-designed business incentives are sometimes in order.

But when it comes to job creation, nothing beats a middle-class customer with a pocket full of money.

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