In defense of trickle down economics
This post was inspired by a particularly stupid viral tweet:
The problem (other than that the whole concept is a Democratic smear and that there’s hardly anyone who would defend it) is that trickle down economics is obviously true. In fact, it is one of the most fundamental aspects of economics. It is so true that I would say this: If you deny trickle-down economics, it is you who are the moron, not those defending it.
Answer couple simple questions: which tax breaks would have the largest positive impact on the real economy? If you were to set up the distribution of income (assuming no change in total income) to maximize economic growth, would it increase inequality or decrease? For the first question, the answer might not be “to the richest and the smartest”, but it’s likely far closer to that than to “normal people”. Indeed, far from paying too little in taxes, it is very clear billionaires in this country pay an exorbitant rate of tax. Musk’s tax bill is supposedly $11 billion. Now, no matter what you think of Musk, that is clearly an absurd amount. When someone’s tax bill is $40,000, he might be paying close to all of it. When someone’s tax bill is $1 million, he might be paying most of that. When someone’s tax bill is $11 billion, he’s not paying any of that -the general public is. A person cannot ever consume $11 billion. Rather than having mascots pay taxes (with substantial deadweight loss at that), it would be better for public sanity to lower taxes on the rich and actually get people who pay taxes in practice to pay for them in law. For the second question, it’s obvious that in most cases, the answer is that a growth-maximizing income distribution would increase inequality. To see why, consider that the economy grows through innovation. Thus the most obvious way to boost the economy is to redistribute resources (on the supply side) to those who are most likely to invest in innovative goods and services and (on the demand side) to those who are most likely to shift national consumption to innovative goods and services. Now, the demand side question is more open than the supply side one, but it is simply an empirical regularity that it is the richest people who consume the goods and services most at the bleeding edge of technology. For the supply side question there’s no doubt: redistribution from the poor to the rich increases the investment rate, redistribution from the rich to the poor lowers it.
Empirical examples of this abound. The most obvious example is the industrial revolution, which first benefited primarily the richest people in the world, then turned out to benefit the whole world. Would income redistribution from the richest people in the world to poorer people in poorer nations have raised growth, or squelched it in its crib? The economic booms in China and India led to both dramatic declines in poverty and dramatic increases in inequality. The Roman Empire had substantially more investment and innovation than the later dark ages -and far, far greater inequality. It is the American states with no income tax that tend to have the fastest population growth. As an empirical regularity, from early 20th century Germany to the United States, economic booms tend to coincide with rising inequality, while recessions tend to coincide with falling inequality. The most obvious explanation of this is that in many circumstances, economic growth isn’t really possible without increasing inequality.
Now, does this mean inequality should be infinite or redistribution from the rich to the poor is never justified? Of course not. The point is that redistribution from the rich to the poor has deadweight loss, not that it is inherently a bad thing. The Nordic states have a substantial degree of redistribution and they’re doing fine (though not as fine as White Americans in terms of consumption). Are the poor hurt by redistribution from the rich to the poor? Not very often. But the argument was never that increasing inequality would always or even usually benefit the poorest, it was that increasing inequality would grow the aggregate. Which it usually (not always) does.
And, to new readers,
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