Had a Thought About Accelerated Depreciation

[adios]

Accelerated depreciation has been part of the fiscal stimulus provided by the Bush administration. Here's an excerpt from an explanation of accelerated depreciation in the U.S. Jobs and Growth Tax Relief Reconciliation Act of 2003:

Increase in First-Year Bonus Depreciation

Last year’s tax legislation introduced a new first-year bonus depreciation deduction equal to 30 percent of the cost of new (but not used) assets with a normal depreciation life of 20 years or less. Under the Act, this additional first-year bonus depreciation deduction is increased from 30 percent to 50 percent for investments acquired and placed in service after May 5, 2003 and
before January 1, 2005.

My thought was that this accelerated depreciation may be an important reason why job creation has been so lackluster given GDP growth. In my mind there's no doubt that this accelerated depreciation spurs business investment which it clearly is meant to do. But if the investment is in productivity enhancing, labor saving capital it would have to inhibit companies from hiring more labor. I think the accelerated depreciation was well intentiioned with the idea being that increased business investment leads to economic growth which in turn leads to more employment. I submit that part of this has actually come to pass i.e. that the increased business investment has led to economic growth. For example the manufacturing sector has rebounded nicely per recent ISM surveys. However, since the investment was in labor saving, productivity enhancing technological capital the resulting employment gains that were anticipated haven't followed. I realize that business investment generally speaking is in productivity enhancing capital if you will but I'm fairly certain that we're seeing business encouraged if not rewarded for replacing labor with technology on a scale that we've not seen for quite some time. I could definitely be way wrong about my analysis so I'm interested in comments on this.

[rasfreeman]

I agree with most of what you said. I'm a little more up on the macro stuff than the accounting, so maybe you can help me clarify something. The idea behind the one-time increase in accelerated depreciation is for tax reasons? (because you can depreciate a larger % of your capex that year so that your net income is lower...) Is that correct?

I think Greenspan's take on employment picking up is twofold: 1) we're just now beginning to see the rewards for the huge investements in productivity-enhancing IT equipment. Firms are just getting the hang of how to use the IT infrastructure, and I think productivity will continue to steeply increase in the next 5-10 years. 2) there was a lot of slack in the economy. Inventories were high etc. (I strongly agree with the first point, and don't really know much about the second point.)

You wrote:
"but I'm fairly certain that we're seeing business encouraged if not rewarded for replacing labor with technology on a scale that we've not seen for quite some time."

We should always encourage business to install labor-saving technology. This will increase productivity, which in turn increases real wages. The trick is to keep the economy growing at a rate that is greater than the rate of productivity growth--that is what will create new jobs.

I tend to think that the economy is in good health and that hiring will pick up soon. My biggest worry is that, given the extra pressures of an election year, that there may be a backlash against things outsourcing and other types of activities that make the US economy so strong in the first place.

I would enjoy hearing your thoughts.

[Ray Zee]

the idea behind ad. is to spur the growth through large purchases. like equipement. and expensive vehicles. that does create or keep job growth up. whether it also limits jobs is something i never thought about and really dont care about as from a micro view anyone who really wants a job can find one. and i believe slow economic growth is much better than fast, as the probelms inherent in growth can be dealt with better if it is slow and steady.

[adios]

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I agree with most of what you said. I'm a little more up on the macro stuff than the accounting, so maybe you can help me clarify something. The idea behind the one-time increase in accelerated depreciation is for tax reasons? (because you can depreciate a larger % of your capex that year so that your net income is lower...) Is that correct?

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Yes.

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We should always encourage business to install labor-saving technology. This will increase productivity, which in turn increases real wages. The trick is to keep the economy growing at a rate that is greater than the rate of productivity growth--that is what will create new jobs.

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I couldn't agree with you more. After thinking about this some I think it's allowing companies to delay hiring longer than it normally would.

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I tend to think that the economy is in good health and that hiring will pick up soon. My biggest worry is that, given the extra pressures of an election year, that there may be a backlash against things outsourcing and other types of activities that make the US economy so strong in the first place.

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I'm thinking that the recovery is still somewhat fragile but we're on the right path. I agree that many of the "evils" that the pols are pointing to would result in a slower rate of growth or no growth.

[adios]

[ QUOTE ]
the idea behind ad. is to spur the growth through large purchases. like equipement. and expensive vehicles. that does create or keep job growth up. whether it also limits jobs is something i never thought about and really dont care about as from a micro view anyone who really wants a job can find one.

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Yes I agree with you. I think there are plenty of jobs available but the demand for unskilled labor isn't that strong. FWIW IMO those that have been displaced can't find employment making the wages they were making before they were displaced. I may be wrong about this and I don't have much evidence to back it up but I have a suspicion that many who have been displaced have some sort of cash income where they can, shall we say, reduce their tax burden from working as a minimum wage employee getting a W-2.

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and i believe slow economic growth is much better than fast, as the probelms inherent in growth can be dealt with better if it is slow and steady.

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Good point.