President Joe Biden’s recently unveiled budget marks a new era in U.S. economic policymaking. Decades of trickle-down tax cuts are out the window; Biden is betting that trickle-up economics will deliver the kind of sustained and equitable growth we all want. But that’s a dangerously short-sighted strategy that in the long term will create far more stagnation than a Reaganomics agenda that overstayed its welcome.

Biden is proposing a very large expansion of government spending, to 25 percent of GDP — from 20 percent before the pandemic. The plan represents a massive redistribution of wealth from companies and higher earners to middle and low-earning Americans. The White House wants to use tax increases on corporations and high earners to generate about $4 trillion in additional revenue over the next 10 years, then redistribute it to different sectors of the economy, including higher wages to caregivers and cash benefits to families with children, subsidies for more well-paid union jobs, and investment in infrastructure projects like repairing roads and bridges, with a lot of money ($186 billion) to “spark widespread adoption of electric vehicles.”

Those ideas are a big break from the last half century of government policy and how economists have viewed growth. Trickle-down economics was the signature of the Reagan era: the idea that if you cut taxes on companies and the wealthy, they would invest that money productively in the economy and we’d all benefit with more jobs and higher living standards.

We do have higher living standards than we did in the 1980s and we’re richer by many measures, but trickle-down didn’t live up to its full promise. Growth has slowed, so has innovation and productivity, and there is widening income inequality.

The Biden administration would like to try a new approach. One of the president’s economic advisers, Heather Boushey, favors a philosophy that aims to spark growth by redistributing wealth and income. She argues that because consumption accounts for 70 percent of GDP each year, it stands to reason if we take resources from rich people who save more of their money, and give it to poorer people who spend more, we’ll increase consumption and have a bigger economy. That’s the essence of Biden’s trickle-up strategy.

And there is some truth to it, at least in the short run. If you’re in a deep recession where people are afraid to spend, there’s a benefit to boosting consumption. But as a long-term growth strategy it’s deeply flawed. First, it’s inflationary and less sustainable because you have more demand chasing the same amount of goods. The only sustainable way to boost consumption is through innovation: creating new products or finding more productive ways to make things.

Second, it means there’s less money for investment because we’re spending instead of saving. Economists in the Boushey camp think the U.S. economy has too much money locked away in savings. But that argument originated in the early 2000s when American financial markets were awash in capital from abroad. Foreign countries sent us enough of their savings that we could get away with saving less ourselves. That’s less true today — a reminder that international capital markets can be fickle and it’s risky to shape long-term policy around them.

In the long to medium-run a nation needs a stable source of saving to finance the kind of innovation that drives growth. Trickle-uppers in the Biden administration believe that innovation will come as companies respond to rising consumer demand for more goods. But that misunderstands the nature and history of innovation. Innovation designed for mass consumption tends to be the least productive.

Take the steam engine, which was one of the most important discoveries that made everything in our modern world possible. It took more than 100 years before it was widely used and began to show up in productivity estimates. Often the biggest and best innovations initially have nothing to do with consumer goods; how we use the next big thing is rarely predictable. Making new products and technology is usually expensive at first. In the early days of significant inventions, they’re only accessible to richer people, as with air travel and cars. But as time goes on, we discover their broader uses and we find new ways to make new technology for less money, making it more widely available.

It’s not clear that slower growth and falling levels of investment in the U.S. is really a failure of trickle-down economics. Perhaps there are just fewer productive investments around. That’s probably why firms are engaging in more share buybacks. The decline could also reflect an economy where big companies acquire smaller firms who innovate rather than innovating themselves. Or that innovation has shifted toward intellectual property instead of physical capital.

Or maybe it’s just that investment goes in waves and things will change without massive intervention, as has happened in the past. Just like the steam engine, a breakthrough today may spur new investment tomorrow. In any case, reducing the gains from investment by taxing corporations and capital income more heavily will only make investment and the upsides of risk-taking less attractive going forward.

Biden’s budget has some good things in it, such as expanding broadband and investing in education. But a better approach would be for him to also keep the best of Reaganomics: empowering the private sector to lead the recovery, nixing deductions and loopholes in the tax code and keeping tax rates low.

While relying entirely on trickle-down economics didn’t fully deliver on growth, relying too much on trickle-up will be worse because it can’t deliver sustainable long-term growth. We may want a more equal economy for moral reasons or because it’s better for society, but Biden’s approach won’t deliver more growth, too. Trickle-up works better for redistributing the pie rather than growing it. We need to find the balance.

Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

(21) comments

gary4books

"trickle-up?" I guess one has to be educated to be so very wrong. It is not all about money and economics. A booming economy comes from education and efficiency and productivity. Just as the Interstate Highway system gave a boom in the 60's and the computer revolution increased productivity for a boom in the turn of the Century, the Biden investment in infrastructure (and the real definition of infrastructure is from Wikipedia: "Infrastructure is the set of fundamental facilities and systems that support the sustainable functionality of households and firms. Serving a country, city, or other area, including the services and facilities necessary for its economy to function.").

The Biden Economy is not moving money as much as it is investing our money to be productive and more efficient. help for older people to stay in their home will be more efficient and save money. So will other investments in health and education. We will not be trickled on, just better and stronger.

Hayduke2

Gary👍👍👍

gjthuro

Better and stronger ...wow, everything that has been done since the Biden gang took over is helping to weaken this country; open borders allowing 100K illegals in every month with his ( and Obamas ) catch and release game that the citizen taxpayers have to pick up the cost for , terminating Keystone and eliminating drilling on the Peoples' land has cost thousands of good paying jobs and will result in the oil that would have travelled in the pipeline to continue to come this way , but by truck, train and ship as it does today burning up millions of gallons offuel in the process, $38 million "gift to Hamas so they could buy rockets from Iran to bombard what once was our strongest ally in the Mid East, and $6 trillion in new debt in 5 months...yeah this stuff will surely make us stronger

jth7100

Four decades of trickle down economics (fraud) failed miserably and predictably. Unless you are quite wealthy to start with, then it benefitted you.

veritas

It's interesting to watch Democrats, who are lightening quick to eschew the label of socialist, readily and proudly align themselves with the concept of wealth redistribution, inarguably the most significant foundational tenet of socialism. "A rose by any other name" and all that...

phydeaux994

What is it called when all the wealth is distributed to the top 10% of Americans? I haven’t seen any wealth being distributed to the other 90% veritas. “Socialism” is just another word to scare the unEducated and the deplorable’s. The latest is “Critical Race Theory” that popped up about a month ago. Nobody ever heard about it before then.

threecents

Unless you are still living in the 1950s, you should know by now that we have a system with aspects of capitalism and socialism and that a pure system either way does not work.

gary4books

[rolleyes] V

Greg F

Ver…your sort call anything that even past republicans supported communist or socialist. To you, Ike and his interstate highway ideas would be communist ideals. Gaslighting is what that is when you try to skew perceptions by constantly stretching your words so they misrepresent reality.

Hayduke2

Another nonsense post by the “untruth”

FrederickFan

Without a strong, economically successful middle class (trickle up), America turns into Nicaragua or the Philippines (a few crumbs trickle down). No need for all the wasted column space. It's as simple as that.

Ms. Schrager is peddling the same old propaganda and lies we always get from wealthy Republicans everytime they want another tax cut.

veritas

Nothing trickles up. In order to redistribute money, it must first be confiscated. Comparing the U.S. economy with Nicaragua and the Philippines is an unserious absurdity.

threecents

Perhaps you are not familiar with the concept of a taxation system that provides safety nets. I agree that concept is problematic. For example, Jeff Bezos - one of the world's richest people and highest earners - has gone at least two years recently without paying any income taxes. Somehow that upsets me a lot more than the government providing safety nets for people who need them. Remember when Trump promised to get rid of the loopholes he uses to avoid paying income taxes? He said only he could do it. Of course getting rid of tax loopholes is a common refrain for presidential candidates and others in government, but people actually believed Trump.

Greg F

Oh, baloney ver…republicans have stolen wealth for decades to redistribute upward to the already wealthy. It’s time to take it back from where it never should have gone, and for the rich to pay their share as it had in the past. GOP is a criminal entity regime designed to dumb down its constituents so badly they can not figure out they are being fleeced. They spit out that god will protect them so be little sheep and don’t mind the rich man behind the curtain.

Hayduke2

V- does it “trickle down?” Past performance indicates it doesn’t.

threecents

Trickle up. Put money in the hands of people who will spend it, supporting businesses. Everybody wins.

Blueline

That's called Supply Side economics.

olefool

It will probably be more successful than Reagan's trickle down theory. Time to transfer the wealth back to the middle classes where it originated.

public-redux

No, supply side economics does not involve increasing tax rates and government transfers to lower and middle class folk.

threecents

Pub-Red[thumbup] Exactly.

FrederickFan

[thumbup]

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