Friday, February 04, 2011

Risk-Takers and (the Lack of) Social Progress

-- Posted by Neil H. Buchanan

In my post last Friday, I offered some thoughts on the relative efficacy of tax cuts aimed at the non-rich versus the rich. The broad point of the post was to discuss in some detail how it is possible that rich people can have so much money without being an important source of the spending that could end recessions.

On the comments board for that post, there was a brief discussion among some readers regarding a parallel argument about tax policy. Even though tax cuts for the rich would not be spent in a way that would help to end a recession, is it not possible that such tax cuts would help any economy (in recession or otherwise), by putting money in the hands of people who would use it to fund innovations and breakthroughs that will ultimately benefit everyone?

I have long been skeptical of such arguments. They are, after all, little more than trickle-down economics sprinkled with some appealing modernist rhetoric. Crude trickle-down economics simply says that rich people will spend their money as they wish, with that money ending up in the hands of those whom the rich employ (butlers, stable-boys, caterers, and so on), who will thus be better off than if they had not been hired by a rich person. (A version of this argument was the recent statement by one of the right-wing radio talkers that he had never been hired by a poor person.)

By contrast, the more appealing version of trickle-down economics says that high-end tax cuts result not in more butlers being hired, but rather in an expansion of entrepreneurial activity. And what could be more forward-looking and confidence-inspiring than an entrepreneur -- especially if the alternative is to put money in the hands of the dreaded government and its stultifying bureaucrats? (Who cares if the internet was created by government-funded projects, staffed by smart guys who were not seeking profit?)

Ah, the entrepreneur! Is there a word in the modern vocabulary that has a more positive connotation combined with such vague denotation? If you do not support entrepreneurs, you must hate America.

Other commenters on last Friday's post made two points in response to the "put the money in the hands of the entrepreneurs" suggestion. First, entrepreneurs need customers; so money in the hands of the non-rich will still stoke entrepreneurial activity. Second, people engaged in high-risk/high-payoff activities are seeking something so big that marginal tax rates almost surely are irrelevant to their calculations. "Hmmm, I might be able to invent cold fusion, thus revolutionizing the way all of modern society is powered. But I just found out that I'd pay an average tax rate of 45% instead of 35% on my resulting billions. Nah. Let's just forget it."

As it turns out, this past Sunday's New York Times Business Section offered some related thoughts on this issue from the conservative economist Tyler Cowen. (Cowen is one of the two rightie essayists who rotates with two left-centerie essayists on Sundays.) In "Innovation Is Doing Little for Incomes," Cowen looks at the enormous effect that technological innovations had on living standards from the Industrial Revolution through the 1970's, compared to the seemingly non-existent effects that more modern innovations have had.

The sentence that jumped out at me from Cowen's essay was this one: "Today, no huge improvement for the automobile or airplane is in sight, and the major struggle is to limit their pollution, not to vastly improve their capabilities." During my recent travels, as I sat through 13-hour flights between California and the East Coast of Australia, I had been miserably pondering this very phenomenon. Why, I wondered, have we apparently hit a plateau in aircraft technology that makes it impossible to imagine shorter flying times? Is 600-mph a barrier that we will never surpass?

I am just old enough to remember the excitement and controversy surrounding the Supersonic Transport, the breakthrough jet that cut the flying time between New York and London down by several hours. The SST was ultimately grounded because of severe noise problems, along with high fuel consumption during the Energy Crises of the 70's. My casual reading of the news regarding aircraft technology tells me that no new SST is anywhere in the production pipeline. Boeing continues to suffer public-relations embarrassments from production delays in its super-jumbo jet, suggesting that even the innovations on the drawing boards these days are not proceeding smoothly.

In any event, Cowen uses that example to make a broader point. Whereas innovation used to change society in ways that could arguably support the heroic vision of business embodied in the word "entrepreneur," it no longer does. The example of the moment is, of course, Mark Zuckerberg's Facebook. While I never understood the appeal of Facebook, I can readily concede that it is wildly popular. It might even be making people better off in some sense that could be captured in the word "utility." What is has not done, Cowen points out, is make anyone but Mr. Z wealthy. Ford, Packard, Olds, and all the other lions of the auto industry spawned the Great American Middle Class. Zuckerberg made it possible to know whether the hottie down the hall is in a committed relationship.

This, of course, does not mean that we should simply give up on the idea of innovation as a driver of social progress. We have, however, for the last three-plus decades been shoveling more and more money to the people whom we hope against hope will respond with a burst of entrepreneurial zeal; and we have increasingly refused to transfer any of the resulting bounty back to the public treasury. It is difficult to make even a minimal prima facie case that taxing high incomes (and accumulated wealth) at rates even double those currently being debated in the U.S. has ever harmed innovation. And the innovations during the low-tax era simply have not trickled down on the rest of us. I love America. I wish it would stop worshiping false heroes.