Saturday, February 22, 2014

It's Time to Bury the "Trickle-Down" Myth

A letter titled The trickle-down myth appeared in the NJ Star-Ledger in December 2013. The letter asserts that "more jobs won’t be created until more buyers gain their fair share of American wealth and can afford to buy more," as if all wealth belongs to "America" rather than those who earn it.

He goes on to say—correctly—that businesses seek to "keep labor costs low." He also says—again correctly—that "Creating jobs is not business leaders’ top priority today; market share, stock value and net income are"—i.e., maximum productiveness. He also states, with some validity, that "corporations prefer part-timers and temps instead of full-timers, and they look to technology to do a job whenever possible."

This last is not surprising, given the steep costs associated with jobs imposed by labor laws and other government interventions, like ObamaCare's insurance mandate. To the extent that technology is market driven, it is a good thing because increased productivity helps the business grow profits while simultaneously raising the value of the  workers' labor, which leads to higher real wages and general standard of living. But to the extent that technology is employed to avoid the artificial costs of government regulations, it is not so good.

He concludes that "The idea that wealth at the top will automatically trickle down in the form of plentiful jobs is a myth, and Americans shouldn't fall for it." 

I left these comments:

"Trickle-down" certainly is a myth. Look around, and ask yourself from where the myriad products and services consumers buy come from. Where do the jobs that consumers' income depends on come from? Where does the tax money that supports the public sector come from? All of it is generated by business activity. The rise to prominence of the businessman under capitalistic freedom over the past two centuries or so has been a boon to the average person, ending the pattern of grinding, hand-to-mouth poverty of centuries past. The "trickle" is more like an avalanche of prosperity emanating from business.

A businessman organizes the factors of production toward a single goal; to create products that consumers value and are willing and able to buy. Trading value for value is the businessman's path to riches. He virtuously figures out ways to lower the cost of production, simultaneously raising the productivity (and thus wages) of his workers, lowering the cost to consumers (leaving them more money to spend elsewhere), and thus growing his business and raising his own profits and personal wealth. By making his business more efficient, the businessman paves the way for the rise of new industries and new inventions, and thus new business, investment, and job opportunities. The more successful the businessman is, the more money he makes—and the better off workers/consumers are.

It's true that "Creating jobs is not business leaders’ top priority today." It never was. Nor should it be. A business owner's own profit is properly his top priority, just as a paycheck is properly the top priority of the worker and the best deal for the money is properly the consumers' top priority. Job creation is a consequence of business success, and if we want more job creation we should want to encourage more business success through reduced regulation, rolling back burdensome labor laws that discourage full-time job creation, and lowering taxes on all income levels.

In point of fact, wealth doesn't come down from the top, either as a trickle or an avalanche, and this view of economics is insulting to every industrious, self-supporting individual. Wealth is earned by the productive activities of individuals. What those at the "top"—the most productive, the creator, the innovator, the entrepreneur, the so-called "1 percent"—provide is the opportunity for those below them to prosper, earn, and create wealth by their own effort. Ayn Rand identified this process and dubbed it The Pyramid of Ability. She explains:

    When you live in a rational society, where men are free to trade, you receive an incalculable bonus: the material value of your work is determined not only by your effort, but by the effort of the best productive minds who exist in the world around you.
    When you work in a modern factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible: for the work of the industrialist who built it, for the work of the investor who saved the money to risk on the untried and the new, for the work of the engineer who designed the machines of which you are pushing the levers, for the work of the inventor who created the product which you spend your time on making, for the work of the scientist who discovered the laws that went into the making of that product, for the work of the philosopher who taught men how to think. . .

For a full dramatization and concretization of the Pyramid of Ability in action, and what happens when the top of the pyramid is sheered off, read Atlas Shrugged.

Related Reading:

Three Cheers for "Trickle-Down!"

Gladwell & Co.’s Monstrous Injustice Against Businessmen—Ari Armstrong

"Greed" is a Two-Way Street

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