taxes and capital investment

I was listening to an interview on Bloomberg radio while I was driving to PA the other day. The interviewee was academic specialist on the effect of taxation on capital investment. She scoffed at the idea that the higher corporate tax rates proposed by Biden will crimp companies’ desire to invest in the US.

Companies don’t react to taxes, she said. Rather, they try to envision what the local market for their products/services will be in, say, ten years, and invest accordingly. In the case of the US, they see a country with slowing population growth and, as a result, an aging average consumer gradually pulling purse strings tighter. For their capital allocation decisions, this is far and away the biggest negative.

Put in different words, wittingly or not (“not” being more probable) the previous administration has made the US look considerably worse as a destination for new capital by severely restricting the flow of immigrant workers to the US and by starting an ill thought out and economically wacky tariff war that limits the ability of manufacturers in the US to import materials or export products. The latter almost immediately shrank the flow of capital investment from abroad; the latter launched the shift of intellectual capital creation to more welcoming locations (think: Canada) outside the US.

Continuing efforts to undermine/overthrow the newly-elected government can’t have prettied up this picture, either.

I also recently finished an eccentric book recommended to me by my children, Why Information Grows, by Cesar Hidalgo, an information economist. It uses information theory to try to describe how information/economic growth happens. It starts with (Shannon) entropy, the idea that information/knowledge/skill/knowhow is inherently unstable and, left to its own devices, will deteriorate. It can be preserved in products, however, and enhanced in a systematic way through communities formed by like-minded individuals. These communities can be universities, or corporations or larger units like cities or countries. Sort of a takeoff on the idea of European monks preserving learning through the “Dark Ages”–that is, a nice story that maybe isn’t so complete.

What interests me about the book is that it highlights ways in which information can be degraded or lost–lack of support for education, and the race- and gender-hate politics aimed at hobbling or shattering research communities. Japan, where male descendants of the samurai and the 1980s-style manufacturing they represent are prized above all–and where there’s been no economic progress to speak of in 30+ years–immediately comes to mind. Closer to home, and to contemporary relevance, in the US the Trump-led Republican party is clearly an entropy champion, with its claim that Trump is still president despite having clearly lost the November election, and its January coup attempt perhaps making it the entropy champ.

The stock market is acting as if Trumpism is already in the rear view mirror and fading quickly. Biden’s success in controlling the pandemic has focused Wall Street on two ideas: finding beneficiaries of reopening and, on the negative side, avoiding stocks whose best attribute has been their ability to serve the quarantine market. What I’ve called the “capital flight” market, that is, seeking multinationals without extensive plant and equipment in the US, is long gone. The prevailing view seems to be that Trumpism has been reduced to a political fund-raising scam preying on sunset-industry workers.

As a stock market participant, I hope this view is correct. As a citizen, I think the remedy is a change for the better in the worst-in-the-OECD domestic support to retrain workers for next generation jobs.

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