Posts Tagged ‘Trickle-Down Economics’

If nothing else, Biden’s big-government agenda is triggering a debate about fundamental issues, such as whether it’s a good idea to make America’s economy more like Singapore or more like Italy.

In making the case for the Italian approach of higher taxes and bigger government during his speech to Congress, President Biden exclaimed that “trickle-down economics has never worked.”

But we need to realize that Biden is using a straw-man definition. In his mind, “trickle-down economics” is giving a tax cut to rich people under the assumption that some of that cash eventually will wind up in other people’s pockets.

However, if you actually ask proponents of pro-growth tax policy what they support, they will explain that they want lower tax rates for everyone in order to reduce penalties on productive behaviors such as work, saving, investment, and entrepreneurship.

And they will be especially interested in getting rid of the tax code’s bias against saving and investment.

Why? Because every economic theory – even socialism, even Marxism – agrees that saving and investment are a key to long-run growth and rising living standards.

Which is why there’s such a strong relationship in the data between the amount of capital and workers’ wages.

Indeed, it’s almost a tautology to say that this form of “trickle-down taxation” leads to higher productivity, which leads to higher wages for workers.

As Stanford Professor John Shoven observed several decades ago:

The mechanism of raising real wages by stimulating investment is sometimes derisively referred to as “trickle-down” economics. But regardless of the label used, no one doubts that the primary mechanism for raising the return to work is providing each worker with better and more numerous tools. One can wonder about the length of time it takes for such a policy of increasing saving and investments to have a pronounced effect on wages, but I know of no one who doubts the correctness of the underlying mechanism. In fact, most economists would state the only way to increase real wages in the long run is through extra investments per worker.

In other words, everyone agrees with the “trickle-down economics” as a concept, but people disagree on other things.

So I guess it depends on how the term is defined. If it simply means tax cuts while ignoring other policies (or making those other policies worse, like we saw during the Bush years or Trump years), then you can make an argument that trickle-down economics has a mediocre track record.

But if the term is simply shorthand for a broader agenda of encouraging more saving and investment with an agenda of small government and free markets, then trickle-down economics has a great track record.

For instance, here’s a chart from the most-recent edition of Economic Freedom of the World. Nations with market-oriented economies are far more prosperous than countries with state-controlled economies.

By the way, Biden is not an honest redistributionist.

Instead of admitting that higher taxes and bigger government will lead to less economic output (and justifying that outcome by saying incomes will be more equal), Biden actually wants people to believe that bigger government somehow will lead to more prosperity.

To be fair, he’s not the only one to make this argument. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development also have claimed that there will be more prosperity if governments get more control over the economy.

I call this the “magic beans” theory of economic development.

Which is why I always ask people making this argument to cite a single example – anywhere in the world, at any point in history – of a nation that has prospered by expanding the burden of government.

In other words, I want a response to my never-answered question.

The response is always deafening silence.

To be sure, I don’t expect Joe Biden to answer the question. Or to understand economics. Heck, I don’t even expect him to care. He’s just trying to buy votes, using other people’s money.

But there are plenty of smart folks on the left, and none of them have a response to the never-answered question, either. Heck, none of them have ever given me a good reason why we should copy Europe when incomes are so much lower on that side of the Atlantic Ocean.

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Back in September, I posted a flowchart showing how the current tax system is biased against saving and investment.

Simply stated, the federal government largely leaves you unmolested if you consume your after-tax income, but there are as many as four extra layers of tax on income that is saved and invested (a point I also discuss in this video on the capital gains tax).

But it’s not sufficient to point out that the internal revenue code is biased against saving and investment. Over the years, I’ve had many debates and discussions with leftists, and their reactions range from glee (“good, we’re taxing the rich who have lots of wealth”) to boredom (“big deal” and “so what’s your point?”).

To help people understand why double taxation is misguided, it’s also necessary to explain how such policies undermine economic performance. I had a chance to briefly address this issue in a “Room for Debate” column for the New York Times. The main topic of the piece was how rich people who win lotteries should use their extra cash, and I used the opportunity to explain why the rest of us should want them to do more saving and investment.

…being good entrepreneurs and investors is the best way for rich people to help the rest of us. All economic theories, even Marxism and socialism, are based on the premise that capital formation is a key to economic growth and rising living standards. In other words, we need saving and investing to create the conditions for more jobs and rising wages. And since the world has learned that it’s not a good idea for the government to be in charge of such things, that means we rely on the private sector – including (gasp!) rich people – to set aside some of today’s income to finance tomorrow’s prosperity.

Statists call this “trickle-down economics,” which is an admittedly clever term of derision, but it doesn’t change reality. As I note in the excerpt, every single economic theory agrees that capital formation is necessary if we want more prosperity.

To provide a bit more elaboration, people generally get paid on the basis of what they produce. And workers are able to produce more when there is an increase in the quality and/or quantity of machinery, equipment, tools, and technology. These forms of capital are not the only things that matter, to be sure, but I’d be shocked to find an economist who disagreed with the premise that more saving and investment leads to higher productivity leads to higher wages.

Yet our tax code probably treats saving and investment worse than it treats tobacco. As I noted in 2009, this doesn’t make sense.

Politicians understand the economic impact of taxation when it serves their interests. They often brag about raising tobacco taxes to discourage smoking. It’s not their business to dictate private behavior, of course, but they are right about higher taxes leading to less smoking (they also lead to more cigarette smuggling, but that’s a separate issue). Those same politicians, however, conveniently forget about the economic effect of taxes when they impose high tax rates on work, saving, investment, and entrepreneurship. Or maybe they simply don’t care.

It’s pretty discouraging when you get to the point where the only possible interpretations of political behavior are stupidity or venality.

Or perhaps it’s a combination of both, as I explain in my video on class warfare.

P.S. I did explain to the readers of the New York Times that Obama’s policies are discouraging saving and investment, as illustrated by companies sitting on more than $1 trillion of cash and banks keeping more than $1 trillion of excess reserves at the Federal Reserve.

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