Important Boost to U.S. Economic Recovery Could Be Taken Away

I’ve been critical of quantitative easing (i.e. money printing), because most of the money was funneled to help shore up the balance sheets of the banks, without finding its way to the person who needs it most: the average American, who can spur the economic recovery.

There are exceptions, which include some infrastructure spending that could have long-lasting economic benefits. Another creative measure, called the “bonus depreciation,” is set to disappear early in 2012. This tax break was enacted in 2009, as part of a tax incentive package to spark the economic recovery back to life.

The measure allowed businesses to write off 100% of certain capital expenditures, in the year of purchase, instead of spreading out that write-off over a five-year period. Think of it as a type of cash-for-clunkers for businesses. It saves them a lot of money upfront on their taxes, which gives them the incentive to go out and purchase capital goods and/or services, because this incentive reduces the actual cost of the item significantly.

This tax break has had three positive impacts on economic recovery. It incentivized companies to spend on capital goods, which kept capital goods manufacturers and service providers busy and employees employed, and could have resulted in job creation from the increased demand. Secondly, it boosted the country’s productivity, since the companies that purchased the capital goods and/or services became more efficient. Thirdly, a more efficient firm improves sales, as it offers products/services at more competitive prices, either around the world or in their own backyard (which keeps their employees employed, possibly expands job creation and spurs economic recovery). (See: December U.S. Job Numbers Disappoint.)

It is a real shame to me that, to date, Congress has dropped this incentive from their tax holiday bill. Associations are fighting hard to have the incentive reinserted into the bill, and so extended through 2012, with no luck thus far. The associations argue, and rightly so in my opinion, that it impacts businesses directly and, in turn, job creation, and so the economic recovery.

Here is a measure that actually supports the average businessperson, and so the average American, in sustaining and bettering their businesses and their jobs. This country needs all the help it can get in its attempt to ratchet up its economic recovery and, even if this measure helps just on the margin, we should take it. With unemployment remaining stubbornly high, any measure that results in some job creation is a measure worth keeping.

It’s not like the economic recovery has turned the corner so the incentive can be dropped. There is no doubt that 2012 will continue to be a struggle for the economy. Getting rid of the accelerated depreciation measure at this point in the economic recovery pushes us in the wrong direction; we want to move toward economic recovery, not contraction.

Where the Market Stands; Where it’s Headed:

Only three weeks into January and the Dow Jones Industrial Average is up three percent for 2012. If you’re a firm believer in the January Effect (the old adage that says if the stock market goes up in January, it is up for the remainder of the year), things are looking good for you!

I don’t put much credence in the January Effect theory. I believe that we are in a bear market rally that could be making its last run to the top before it finally fades and we get down to the real business of the bear: bringing stock prices down again. (See: Official Numbers in…2012 Not Looking Good.)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.