Distributive Conflict, Growth, and the ‘Entrepreneurial State’

In this paper, we introduce a twofold role for the public sector in the Goodwin (1967) growth cycle model. The government collects income taxes in order to: (a) invest in infrastructure capital, which directly affects the production possibilities of the economy; (b) finance publicly funded research, which augments the growth rate of labor productivity. We first focus on a special case in which labor productivity growth depends entirely on public research, and show that: (i) provided that the output-elasticity of infrastructure is greater than the elasticity of labor productivity growth to public R&D, there exists a tax rate tau* that maximizes the long-run labor share, but not a growth-maximizing tax rate; (ii) the long-run labor share is always increasing in the share of public spending in infrastructure, and (iii) the presence of public R&D is not enough to stabilize the distributive conflict. We then study a more general model with induced technical change where, as is well known in the literature, the distributive conflict is resolved in the long run. With induced technical change: (iv) the labor share-maximizing tax rate is the same as in the special case; (v) the long-run share of labor is always increasing in the share of public spending in infrastructure, and (vi) maximizing growth requires to levy a tax rate in excess of tau*.