Growth, re-investment and taxation

Let’s get down to brass tacks. I believe that economic growth in the modern economic is primarily the interaction between government, companies and speculators.

Bill Janeway suggests this triumvirate and, while it misses the environmental bubble we live in, it captures the core of what creates economic growth. The current economic cycle is the result of government providing the structure, the workforce and the R&D which companies monetize by convincing investors who speculate on which company will do best. The quote from Janeway is ‘The government was the internet pioneers’ collaborative, constructive and supportive partner’.

So why does this matter for growth, re-investment and taxation.

Professor Damodaran, who taught me corporate finance and valuation, sees growth (any type of growth) as a result of investment or re-investment. In financial valuation, most analysts set growth of a specific company as a factor of its market or overall GDP so that it is exogenous. Damodaran shows that growth should be considered endogenous based on the proposed rate of re-investment (i.e. the amount re-invested by a company in the previous period will set the growth rate in the next period).

This idea of growth being a factor of re-investment can be overlooked when considering economic growth (as opposed to company specific growth). Keynesian economists do support government investment when the economy is slowing but push for low spending when the economy is strong.

But why? Economic over-heating? Crowding out of private investment? All of these things can be managed with a clear re-investment plan. The private sector and financiers can be informed of where government money will be spent. Re-investment will avoid areas of current profit-making. It’s market coordination, not control.

The new money to be re-invested comes from increased marginal rates at the top level and fewer corporate tax deductions. Money is not taken from the social welfare net that protects the vulnerable in our society.

Set out the re-investment priorities. Play to Australia’s strengths of good governance, educated workforce and a large land mass. Provide strong social and environmental protections. Spend the money on building what is coming (not what we already have) and set our future growth rate higher.

This is not different from Tyler Cowen’s Stubborn Attachments. And aligned with the new congresswoman from the Bronx. And she is proposing to make the re-investment environmentally focused so it covers that element.