The red economy and the green economy

There are two avenues to economic growth – either the exploitation of more resources (increasing output by increasing input), or the more efficient exploitation of existing resources (increasing the output to input ratio). In general, any period of economic growth will involve both of these – during the industrial revolution for example, more inventive and efficient methods of exploiting the energy from fossil fuels led to increased demand for those fuels. But in return, the increased use of fossil fuels has led to the development of more efficient industrial processes, ultimately giving us technological wonders such as the computer I’m using to publish these words, a form of communication more efficient than anything dreamed of by the industrial pioneers of the 18th century.

Unfortunately, there is a strain of public discourse that fails to distinguish between the two. Ronald Reagan once famously said:

There are no great limits to growth because there are no limits of human intelligence, imagination, and wonder.

While on the other side, the environmentalist movement points to dwindling resources and the limited capacity of the ecosystem to absorb pollution and other forms of biological disruption. Who is right?

As in most such cases, there is truth in both arguments – and to reconcile them we need to distinguish between the two avenues to growth identified above. Reagan was talking about the second, “green” growth process, the one in which human ingenuity dreams up more efficient processes and new business models, opening the door to improved technologies and ever-decreasing waste, an exponential curve that continues indefinitely without ever touching a hard limit. The environmentalists meanwhile are warning that there are limits to the complementary “red” economy, the one which relies on ever-increasing rates of exploitation, a ballistic curve that must hit zero at some finite (if yet unpredictable) future date.

The wrinkle comes when we remember that the two processes have always gone hand in hand – new technology requires new resources, and vice versa. But governments can rebalance the economy to place more weight on “green” efficiency than “red” extraction, by changing the burden of taxation. We have already made a start through carbon taxes, but pollution is not the only limit we face.

Land is the most visible finite resource we have. The exploitation of land for economic activity was mankind’s first foray into resource extraction, and it continues apace. Northern Ireland in particular has almost no unspoiled land left, a testimony to its long history. But not all land is equally exploited – a farm is not in the same class as a factory, or a suburban estate. Site value taxes recognise this by indirectly using the planning system as a measure of resource extraction. Land zoned as commercial is more valuable than that zoned as farmland, as it can be exploited more heavily – and therefore it is taxed more highly. Land zoned as forest or wilderness would be essentially tax-free. By doing so, the incentive for land owners to have their land rezoned for further urban sprawl (or in the case of the Amazon, farmland sprawl) can be reduced or removed entirely.

One might think that human resources are another scarce commodity, but from an economic point of view they are quite the opposite. Every person unemployed – or employed in a McJob – is a potential efficiency squandered. Man-hours cannot be saved in land banks or left untapped in the ground for later generations – they get spent at a rate of one hour per hour no matter what, so letting them trickle away makes no sense from either an economic or a compassionate viewpoint. Unlike oil drilling or greenfield construction, pillars of the red economy, employment is inherently green. And yet we tax it, even knowing that taxes inhibit economic activity.

If we want to increase employment and rebalance the economy from red to green, revenue-neutral taxation incentives are therefore available: reduce corporate and base payroll taxes, while increasing pollution, extraction and site value taxes to compensate (the upper income tax band can stay, for the purposes of redistribution). The major benefits would be increased employment and investment, with reduced urban sprawl and fewer emissions.

Win-win-win-win.

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One thought on “The red economy and the green economy

  1. Another win would be vastly less tax evasion and tax avoidance (not that there is anything wrong with the latter). For example, in all the discussions in the UK about tax avoidance from Starbucks et al, few notice or make the distinction that these companies have successfully minimized their corporate tax liabilities, but the likes of Starbucks will be paying huge amounts of business rates (a very crude land tax).

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