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| You Say 'Trickle Down' as if It's a Bad Thing President Biden in his State of the Union ad --dress encouraged Americans to imagine a future in which "the days of trickledown economics are over" and the economy is built "from the middle out and the bottom up." That expression, "middle-out" economics, has bounced around Democratic politics for at least a decade. But how would it work? No one says. Politicians may scorn the trickle-down effect, but it is responsible for Americans' economic well-being. Even some prominent 20th-century liberal economists, including Paul Samuelson and Alfred Kahn, agreed that the innovation and investment that lead to capital formation are crucial to economic growth. Kahn once wrote: "The most powerful engine of productivity advance is technological progress, generated in large measure by expenditures on research and development and embodied in improved capital goods and managerial techniques." That process confers benefits on everyone, he added, "precisely by trickling down." When employees use better equipment and have better managers, they become more productive. This makes them more valuable to their companies and stirs competition in the labor market, causing their real incomes to rise. Sen. Elizabeth Warren (D., Mass.) sees the world differently. During her 2020 presidential campaign, she said the wealth tax she wanted to impose on billionaires would have no important cost to society. In her view, the tax would be reserved for "the diamonds, the yachts and the Rembrandts." Ms. Warren ignored an important point. It's the superrich who have the greatest ability to save and invest in businesses. For his 2019 book, "The Billion Dollar Secret," entrepreneur Rafael Badziag interviewed 21 self-made billionaires. He found that they generally derived more pleasure from investing in technologies to create new and improved products—a benefit to everyone—than from spending on personal luxuries. A good example is the smartphone. Wealthy Americans were among the first buyers of and investors in the product when it was a new technology. In time, costs dropped and smartphones became ubiquitous. Lower taxes for the rich spur investment, which is good for people of all classes. Politicians and the press mislead voters and readers when they claim that tax cuts for the rich don't benefit other economic classes. We all gain from new, improved products made possible by innovative startups funded by the wealthy. Excessive taxation, doubtless a feature of a "middle-out" plan, could deplete the funds that entrepreneurs use to start and sustain useful ventures. Americans shouldn't worry so much about wealth distribution. Instead, we should be grateful for how the wealthy enable entrepreneurial ideas to come to life, allowing everyone to prosper. Mr. Rhoads is a professor emeritus of politics at the University of Virginia. |
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