"Don't letanybody tell you that it's corporations and businesses that create jobs,"Hillary Clinton said last week in Boston. "You know that old theory,trickle-down economics. That has been tried, that has failed. It has failedrather spectacularly. One of the things my husband says when people say, 'Whatdid you bring to Washington?' He says, 'I brought arithmetic.' "

The remark,writes my fellow Forbes contributor, Clyde Wayne Crews Jr., Policy director at CompetitiveEnterprise Institute, "echoes President Obama's 'You didn't build that.Somebody else made that happen.'"

"The mainquestion," writes Andrew Ross Sorkin from a different perspective in the NewYork Times, "was whether Mrs. Clinton's words were more about politicalmaneuvering than reshaping her beliefs."

Several dayslater, at a campaign rally in New York, Hillary Clinton said she had misspoken."I shorthanded this point the other day, so let me be absolutely clear aboutwhat I've been saying for a couple of decades. Our economy grows whenbusinesses and entrepreneurs create good-paying jobs here in an America whereworkers and families are empowered to build from the bottom up and the middleout—not when we hand out tax breaks for corporations that outsource jobs orstash their profits overseas."

Where donew jobs come from?

Amid thepolitical maneuvering, there is, happily, some serious work being done by the Kauffman Foundation and the Institutefor Competitiveness & Prosperity to figure out where new jobs actuallydo come from. The surprising truth is that over the last twenty five years,almost all of the private sector jobs have been created by businesses less thanfive years old.

"In fact,between 1988 and 2011," write Jason Wiens and Chris Jackson of the KauffmanFoundation, "companies more than five years old destroyed more jobs than theycreated in all but eight of those years."

Existingfirms are net job destroyers

"Both onaverage and for all but seven years between 1977 and 2005, existing firms arenet job destroyers," write Wiens and Jackson, "losing 1 million jobs netcombined per year. By contrast, in their first year, new firms add an averageof 3 million jobs."

"Newbusinesses account for nearly all net new job creation and almost 20 percent ofgross job creation, whereas small businesses do not have a significant impacton job growth when age is accounted for."

"Policymakersoften think of small business as the employment engine of the economy. But whenit comes to job-creating power, it is not the size of the business that mattersas much as it is the age. New and young companies are the primary source of jobcreation in the American economy. Not only that, but these firms alsocontribute to economic dynamism by injecting competition into markets andspurring innovation."

"Many youngfirms exhibit an 'up or out' dynamic," write Wiens and Jackson, "in whichinnovative and successful firms grow rapidly and become a wellspring of job andeconomic growth, or quickly fail and exit the market, allowing capital to beput to more productive uses."

"Our publicpolicy emphasis," writes RogerMartin, Academic Director of the Martin Prosperity Institute at the RotmanSchool of Management, "should be on enabling entrepreneurial firms to driveinnovation and prosperity."

Why Fedpolicy isn't creating net new jobs

This researchsheds light on another key economic issue of the day: why doesn't the Fed'spolicies of low interest rates and "quantitative easing", which shovel hundredsof billions of dollars into the economy, create net new jobs? One part of theanswer is clear: the money is only accessible to established firms, whichhaven't been creating net new jobs. It's simply not accessible to the youngfirms which are the genuine job creators.

What do theseestablished firms use the money for? We know that the big firms don't use itfor investment as much as one might expect. In a Financial Times articleentitled "Corporate investment: A mysterious divergence" RobinHarding helped resolve a conundrum that had puzzled the world's top economists:why is net investment at a measly 4 per cent of output when pre-tax corporateprofits are now at record highs – more than 12 per cent of GDP?

In standardeconomic theory, this makes no sense. When profits go up, companies should beseizing investment opportunities to lay the groundwork for even more profits infuture. In turn, that investment should create jobs, generate more capital goodsand lead to higher wages. That's how capitalism is meant to work.

As ithappens, we have the kind of thing that you rarely see in economics—a studythat enables us to pinpoint the problem by offering "with" and "without" data.

It'sbrilliant work by economists from the Stern School of Business and HarvardBusiness School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, in anarticle entitled "Corporate Investment and Stock Market Listing: A Puzzle?"which compares the investment patterns of public companies and privately heldfirms. It turns out that the lag in investment is a phenomenon of the publiccompanies more than the privately held firms.

"They findthat, keeping company size and industry constant, private US companies investnearly twice as much as those listed on the stock market: 6.8 per cent of totalassets versus just 3.7 per cent." Large publicly-owned firms are simply notinvesting enough to grow the economy.

Guesswhere all that money goes?

So if theFed's money doesn't go into job creation or investment, where does it all go?One part of the answer is that the firms are just sitting on the money, notseeing opportunities for investment. Another part of the answer is given byWilliam Lazonick in HBR and the New York Times: an astonishing amount goes to sharebuybacks.

"From 2004 to 2013,454 companies in the S&P 500 Index expended 51 percent of their profits, or$3.4 trillion, on repurchases, on top of 35 percent of profits on dividends…More than three-quarters of compensation for the 500 highest-paid executivescame from stock options and stock awards."

"So who gainsfrom open-market repurchases? Their sole purpose is to give a company's stockprice a manipulative boost, and prime beneficiaries are the corporate executiveswho decide to do them… For corporate executives, stock-based pay is a ticket tomembership in the 0.1 percent top-income club. So why do we let executivesmanipulate the stock market?"

As The Economist has written, the Blue Chips' use of sharebuybacks is the equivalent of becoming addicted to snorting "corporatecocaine."

"We arereaping the bitter fruits of the 'shareholder value' revolution," as MatthewYglesias at Slate writes. "Executives at publicly traded companies arepaid to generate higher share prices, which is done by hitting quarterlyearnings targets. This leads to underinvestment relative to the behavior ofmanagers of privately held firms."

As Hardingconcludes, it is "time to stop thinking about corporate governance andexecutive pay as matters of equity and to regard them instead as amacroeconomic problem of the first rank."

To view fullarticle, click here: http://www.forbes.com/sites/stevedenning/2014/10/29/the-surprising-truth-about-where-new-jobs-come-from/#332deaa447d9