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Discussion: (2 comments)

  1. There are several available fiscal tools that the FED and governments could apply in addition to interest rates and money supply if NGDP (or unemployment rates) were targeted. Investment incentives such as bonus depreciation, accelerated depreciation and investment tax credits are proven economic stimulants. The domestic producers credit is also good for small manufacturers which tend to be capital intensive and may not benefit proportionately to large companies from export incentives.

    R&D and hiring credits help also. Technology and capital make workers more productive – this is a robust path towards higher wages. Companies with profitable opportunities invest capital which increases demand for labor which drives up market wages – a driver of inflation. Higher productivity offsets higher wages relieving inflation and increasing global competitiveness.

    A major problem with all of these incentives is that they are uncertain from year to year. Capital intensive small businesses need to plan over a longer term than one and two year tax programs have offered. If, for example, bonus depreciation were to be structured at 20-30% permanently and raised to ten times the unemployment rate for the current year (8% unemployment = 80% BD) with a maximum drop of 20% per year, many companies would establish longer term capital investment plans.

    Bonus/accelerated depreciation is particularly virtuous as it scores neutral over ten years of public budgeting without dynamic effects counted. With economic impacts set against the cost of a few years of public debt it is very positive.

    If the FED and govt bodies were able to work together to authorize these incentives with less reliance on the conventional political brokering we might see them applied more smoothly and less porkedly (Solyndra).

    Perhaps a model where congress allows the fed to propose a package of business stimulants that can be voted up or down by congress with minimal amendment.

  2. Todd Mason

    A link to the Citi study might be nice. I suspect it would say, as the NFIB did in its current survey, that it’s the economy, stupid.

    ” Overall, this is a poisonous climate for investment and expansion. Twenty-three (23) percent of owners still cite weak sales as their top business problem; this is historically high but down from the record 34 percent reading last reached in March 2010. The net percent of owners expecting higher real sales fell 8 points to a negative five percent of all owners (seasonally adjusted), 17 points below the 2012 high of net 12 percent reached in February. Not seasonally adjusted, 19 percent expect improvement over the next three months (down 6 points) and 43 percent expect declines (up 9 points). The percent of owners planning capital outlays in the next three to six months fell 3 points to 19 percent. Six percent of owners characterized the current period as a good time to expand facilities (down 1). This compares to 14 percent of owners who felt positive about expansion in September 2007.”

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