The Big Fat Lie That Started It All: Investors are Job Creators
(In the words of millionaire, investor, and not-at-all job creator Morris Pearl, Chair of the Patriotic Millionaires)
I’m an investor who hasn’t actually worked in years. I have millions of dollars in the stock market, investments in a variety of publicly traded companies that employ thousands of people. Do you know how many jobs I’ve actually created from all that investing? Zero. Stop calling me a job creator.
Conservatives like to claim that people like me deserve tax cuts because we’re “job creators” and that any additional money we make will mean even more jobs for everyone else. It’s a nice thought, but it’s completely, totally, 100% wrong. Sure, you can call some rich people that built businesses from the ground up job creators, but that’s a small, small minority of those of us given that label. The way most rich people get rich and stay rich, investing, has nothing to do with job creation. It’s simply not true that investing in the stock market creates jobs. The only thing that does create jobs is consumer demand for products and services, not my investment dollars.
So yes, entrepreneurs like our members George Zimmer (founder of Men’s Wearhouse) or Scott Nash (founder of MOM’s Organic Market) who build successful businesses that employ people should be celebrated, but investors and entrepreneurs are two very distinct groups, and they should be treated as such.
Let’s look at an example.
I’m an investor in Apple, to the tune of hundreds of thousands of dollars worth of Apple stock. But while I benefit from Apple doing well, I certainly don’t deserve the credit for the thousands of people employed making iPhones. They only have jobs because of the 217 million people who bought an iPhone last year. That consumer demand, not my investment, is what created those jobs.
But what about the initial venture capitalists who funded Apple at its beginning? Back in 1980, Apple sold part of their company for $101 million. Now those shares are worth around $900 billion.
This may seem like a huge deal for the company, but none of that $900 billion actually went to Apple (except for the original $101 million). It’s all in the hands of those investors. Apple hasn’t grown and created jobs because of its increased stock price, it’s the other way around. Apple’s stock price increased hugely because Apple’s business has grown so much. Apple only had that initial $101 million to work with, which it used to hire people and create products that it could sell for a profit, which it then used to hire more people and design new products.
So yes, I might be a job creator, but only in the sense that I pay for products and services like everyone else in America. We all help create jobs because that’s how the economy works, and none of us deserve a special tax break for doing so.
America Beware: A Private Equity Firm Wants to Buy Your Company
There is no bigger beneficiary of the job creator lie than private equity firms (like the one Mitt Romney used to run).
The job creator argument is even less applicable when applied to some of the people who benefit most from the reduced capital gains rates, private equity investors. While private equity firms sometimes do come in and transform a company, saving thousands of jobs and earning their investors billions, just as often they buy up a company, sell its assets, and cut costs through massive layoffs, leaving the company in a worse financial situation but with a pumped up stock price.
Sometimes they create jobs and sometimes they destroy them (on average companies bought by private equity tend to have more layoffs and lower wages than other companies), but no matter how you view their “creative destruction,” it’s just not accurate to think that their investments are critical to keeping our workforce employed.
Let’s look at one high-profile case of these “job creators” at work:
Toys ‘R’ Us: A “Success” Story
Toys ‘R’ Us used to be pointed to as one of the success stories of private equity. That was, until it declared bankruptcy and shut down all operations.
For years private equity managers from KKR, Bain, and Vornado (the three funds that took over management of the company in 2004) claimed that they saved the company and created 62,000 jobs by taking it over. Well, while they were claiming this, there were 62,000 people employed at Toys ‘R’ Us total. Before private equity got their hands on the company, though, it employed 97,000 people. It was in healthy financial shape, with annual earnings of $252 million, cash on hand of $2.1 billion, and outstanding long-term debt of $1.9 billion. Everything was looking great.
In 2004, private equity firms paid $6.6 billion for Toys ‘R’ Us (of which $170 million went to 21 executives who negotiated the deal), and promptly closed stores around the country so they could sell the buildings the stores were located in. They then used the money from those sales to pay off some of the billions they borrowed to buy the company.
The kicker is, a significant amount of that $6.6 billion they used to buy the company was raised through debt, debt that was then added to the Toys ‘R’ Us books, debt which kept the company from properly investing in online retail at a time when big box stores were facing more challenges, debt that directly contributed to the once-profitable company completely shutting down earlier this year.
In March 2018 the company announced it would close all of its stores, leaving thousands of workers without jobs. To add insult to injury, those workers are owed $75 million in severance pay that they’re unlikely to ever recover, while bankruptcy lawyers and advisors walk away with nearly $350 million.
When a private-equity “success story” is one that leads to nearly 100,000 workers losing their jobs while rich executives get richer, how can those executives have the gall to claim that they deserve a tax break for creating jobs?
(For more information about venture capital’s central role in destroying one of America’s most iconic companies, read this article in The Week.)