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Yes, but is ‘Trickle Down’ Enough?

May 22, 2024  |  582 words  |  Economic, Politics

Today’s Wall Street Journal carries a short opinion piece by Steven E. Rhoads, a professor emeritus of politics at the University of Virginia, who wants to remind readers that ‘trickle down’ works, allowing everyone to prosper.

When President Biden used his State of the Union address to encourage the American people to imagine a future in which “the days of trickle-down economics are over,” it rubbed Professor Rhoads the wrong way and moved him to put pen to paper.

He thinks establishing a wealth tax to address what Democrats consider the failures of ‘trickle down’ to provide a decent standard of living to those on the lower rungs of the economic ladder would be a big mistake.  Since, as Rhoads notes, it is the super-rich who have the greatest ability to invest in capital improvements and new entrepreneurial ideas that are most responsible for raising our standard of living.  

Not only that, but the super-rich are naturally inclined to act in a benevolent manner.  To prove this point Professor Rhoads cites a 2019 book, “The Billion Dollar Secret,” in which entrepreneur Rafael Badziag interviewed 21 self-made billionaires and found “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.”

This apparently demonstrates that 2020 presidential candidate Senator Elizabeth Warren was all wrong when she said the wealth tax she was proposing would be reserved for ”the diamonds, the yachts, and the Rembrandts,” and would not negatively impact economic growth.

To be clear, I am not arguing against ‘trickle down.’  I agree with economist Alfred Kahn (1917-2010) who 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 capitals goods and managerial  techniques.” That process confers benefits on everyone, Kahn added, “precisely by trickling down.”

I also agree with professor emeritus Stephen E. Rhoads when he writes:  “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.”

At least I agree that is what should happen.

Instead of being concerned with the widening gap between the wealthiest Americans and everyone else, Rhoads thinks we should be expressing gratitude for the entrepreneurs and the super-rich.  Rather than tax what appears to be their exorbitant and out-sized wealth, we should go easy on them because they generate jobs and create new products we all enjoy.

Leaving the rich alone so they can perform their job-creation magic is a message I first encountered in Michael Novack’s 1982 best-seller, The Spirit of Democratic Capitalism, which among other things was a pean to just these folks, and stroked the egos of entrepreneurs everywhere.

Mr. Novak (1933-2017) went from being a dissident Catholic lay theologian in the late 1960s to the darling of the Reagan Revolution.  He rode that recognition for the rest of his life, living out his days as a resident scholar at the prestigious American Enterprise Institute, a bastion of free-market economic conservatism.

Professor Rhoads ends his short piece by worrying “excessive taxation” could deplete the funds that entrepreneurs use to start and sustain useful ventures.  Well, maybe.  Or maybe our billionaires and super-rich can still start and sustain those useful ventures, if they can manage to get by with one less vacation home, one less yacht, and a few less diamonds.

Robert J. Cavanaugh, Jr.

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