In an op-ed in the Wall Street Journal Steven E. Rhoads returns to an argument that I do not think will ever be over. He argues in favor of what is called “trickle-down economics”:
President Biden in his State of the Union address encouraged Americans to imagine a future in which “the days of trickle-down 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.
I dearly want investment in facilities, better equipment, and better managers but it will take some convincing, which Mr. Rhoads does not even attempt to do, to persuade me that increased investment in facilities, equipment, or personnel is what has actually gone on during the past 40 years. As evidence I will submit the DJIA and GDP. In 1980 the DJIA closed just under 1,000. A few days ago it closed over 40,000 for the first time. That’s a 40 fold increase. In 1980 U. S. GDP was just under $3 trillion. Now it’s just over $25 trillion. That’s a slightly more than 8 fold increase. Over that same period CEO pay has increased 10 fold (relative to rank and file workers). Nominal private fixed investment has gone up about 10 fold as well:
Why the discrepancy? I would submit that it can all be explained by considering that the meaning of “investment” has changed over the years. It used to mean building new facilities, buying equipment, and hiring more and better employees. Now it means “speculating on financial instruments”.
Any “trickle-down” from that is limited to the relatively small amount that dribbles into the real economy.
Update
In the original post I included a graph of residential fixed private investment rather than non-residential fixed private investment. It was an error which I have corrected.