The private sector is risk adverse when tax policy encourages risk aversion. Look at the capital gains tax for example, the existence of that tax means that you have a n% lower risk tolerance since you would have to exceed the cost of the capital gains tax plus make a profit.
If taking a moonshot costs $1000 and if it’s successful, you make $10000, but after capital gains you net $5000, that means it cost $1000 to make $5000, however if the percentage chance of success is just 5%, private markets would be less likely to invest compared to a $1000 investment that has a 90% chance of making $2000.
Which means you get a lot of the “safer” investments and very few of the high risk investments because the risk/reward ratio is destroyed by high confiscatory taxes.
But, if capital gains taxes were zero, you would have a necessarily higher percentage because the reward side of the ratio is much better.
This somewhat explains why a French VC is much more risk adverse than a Silicon Valley VC. My point is risk aversion is a function of the risk/reward ratio.
Since government isn’t really directly accountable to anyone, they can pour money into highly risky “investments,” because they really aren’t beholden to anyone. The US, for example wasted billions on so-called green energy investments in companaies that no sane private investor would have supported: Solyndra as an example. In Houston, taxpayers are being forced to pay for Astrodome renovations to turn the aging structure into a parking facility; government promised that the facility would be “profitable,” yet, if that were that case, they would have had no trouble raising private capital for such a “profitable” endeavor.
My other point is that governments have a long, illustrious history of treading in areas that are actually terrible investments, but since they can literally print money (and provide payoffs to various constituencies,) they are under less pressure to actually do their diligence (or ignore diligence that counter argues their project viability.) As long as the right groups “get theirs,” a government effort continues unencumbered by pesky ideas such as return on investment.
Don't capital gain taxes zero out wrt. to risk, since you also get tax deductions for money lost?
There's waste in both private and public institutions. They work in different ways, and when you make a public institution work it can be extremely efficient in terms of value per dollar.
My point was that maybe public funds could play a bigger role... Imagine a drug being developed by many private subcontractors the same way the space program worked.
I'm sure private competition would be good at optimizing cost of drug trials.. just an example..
I don't have a recipe... Just the feeling that the big picture risk is probably better absorbed by public investments.
If taking a moonshot costs $1000 and if it’s successful, you make $10000, but after capital gains you net $5000, that means it cost $1000 to make $5000, however if the percentage chance of success is just 5%, private markets would be less likely to invest compared to a $1000 investment that has a 90% chance of making $2000.
Which means you get a lot of the “safer” investments and very few of the high risk investments because the risk/reward ratio is destroyed by high confiscatory taxes.
But, if capital gains taxes were zero, you would have a necessarily higher percentage because the reward side of the ratio is much better.
This somewhat explains why a French VC is much more risk adverse than a Silicon Valley VC. My point is risk aversion is a function of the risk/reward ratio.
Since government isn’t really directly accountable to anyone, they can pour money into highly risky “investments,” because they really aren’t beholden to anyone. The US, for example wasted billions on so-called green energy investments in companaies that no sane private investor would have supported: Solyndra as an example. In Houston, taxpayers are being forced to pay for Astrodome renovations to turn the aging structure into a parking facility; government promised that the facility would be “profitable,” yet, if that were that case, they would have had no trouble raising private capital for such a “profitable” endeavor.
My other point is that governments have a long, illustrious history of treading in areas that are actually terrible investments, but since they can literally print money (and provide payoffs to various constituencies,) they are under less pressure to actually do their diligence (or ignore diligence that counter argues their project viability.) As long as the right groups “get theirs,” a government effort continues unencumbered by pesky ideas such as return on investment.