The White House's latest plan to add jobs and grow the economy will add jobs and grow the economy, according to a new report from Macroeconomic Advisers. But it won't dramatically improve the recovery.
The proposal to build more roads and rail, establish an "infrastructure bank", make permanent the research and experimentation tax credit, and expand tax breaks for small businesses will boost real GDP growth by an average of 0.3 percentage points over 2011 and 2012 and lower the unemployment rate by 0.2 points.
The report expects infrastructure spending to grow by only $16 billion in 2011 if the current plan is passed (highly unlikely, that). The R&E tax credit is a smart, but limited, way to goad companies into spending more on long-term development.
But the real stimulus here is the small business tax incentive, which allows businesses to fully write-off any durable purchase -- say, a machine -- until 2012. In the short term, that will save companies (and cost the government) about $200 billion in the next two years. But in over ten years, it will barely add to the deficit. Sounds like magic!
It isn't. As the Tax Policy Center explains, accelerating business' savings means lower taxes now at the cost of higher taxes later. There are other reasons why Macroeconomic Advisers doubt the stimulus will be terribly effective. First, small business that are really struggling won't have enough profit against which to charge this depreciation. Second, since capital stock is currently underutilized, there's no reason for some companies to spend money on more equipment. For companies that have capital to spend, this short-run policy might pull demand forward into 2011 and slow investment in 2012 and beyond.