Economic Recovery Measures

Are Accelerated Write-Off Provisions Effective?

Two of the biggest items among the tax extenders that Congress may consider before the end of the year are two provisions that allow accelerated write-offs of investments: section 179 expensing and bonus depreciation. Section 179 expensing provides an immediate write-off for small businesses for a certain amount of investment; both the amount and the level at which the favorable tax treatment phase out decreased significantly when the extenders expired at the end of last year. Bonus depreciation allows all businesses to write off half of certain investments immediately. Both provisions are among the costliest in the tax extenders package, costing a combined $315 billion over ten years if extended permanently.

These two policies, and in particular bonus depreciation, are generally justified as stimulative measures, and since they effect only the timing of write-offs, their temporary nature is central to their effectiveness in that regard. However, the Congressional Research Service's Gary Guenther in a recently updated report finds limited short-term economic benefit.

Though there appear to be no studies that address the economic effects of the enhanced Section 179 allowances enacted in the previous eight years, several studies have examined the economic effects of the 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. The findings indicated that accelerated depreciation is a relatively ineffective tool for stimulating the economy during periods of weak or negative growth. [emphasis added]

Guenther sees many reasons why the effect of accelerated write-offs may be limited, including both their design and the economic context.

Fed and Treasury 'rowing in opposite directions'

The Federal Reserve's efforts to help the economy recover through quantitative easing (QE), twisting, and tapering have made front page news without fail. Although it has gotten less attention, the Treasury Department has also been changing the way it finances the national debt to take advantage of lower interest rates, inadvertently counteracting some of the intended effect of the Fed's policies on the economy. That's exactly what a new Brookings working paper by Robin Greenwood, Samuel Hanson, Joshua Rudolph, and Lawrence Summers argues: during the past 5 years, the Fed and the Treasury have been "rowing in opposite directions."

In 2008, the Fed reduced interest rates to near zero in an attempt to help the economy grow. But nominal interest rates cannot go below zero, so conventional monetary tools stopped working. To further stimulate the economy, the Fed took extraordinary measures and began purchasing long-term government bonds and government guaranteed debt (like Mortgage Backed Securities, or MBS). These measures reduced the amount of long-term debt available for public investors and lowered long-term rates.

But while the Fed was engaging in these unconventional transactions, the Treasury was selling more long-term debt to lengthen the average maturity of the national debt, thereby locking in today's low rates and mitigating the risks of higher interest rates in the future, essentially providing a partial counterbalance to the Fed’s policies.

Senate to Consider Bipartisan Housing Finance Reform Bill

The push among lawmakers to reform housing finance has picked up lately, as proposals have been emerging in recent weeks. The most prominent one in the Senate has been proposed by Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID).

CBO's Latest Estimate of TARP: $27 Billion

Caught up in the release of CBO's baseline and its analysis of the President's budget last week was another CBO update of their estimate of the Troubled Asset Relief Program (TARP). The subsidy estimate for the entire program is in line with analyses of previous years, showing a total net cost of $27 billion. The estimates have been much less than the $356 billion peak cost estimate CBO had in April 2009 and the $700 billion of total funds approved.

Explaining the "Double-Dipping" Provision

As the Senate looks for offsets for an unemployment insurance extension, there is one provision that has gotten some attention: ending "double-dipping" for those receiving both UI and federal disability benefits.

UI Offsets a Good Start, But Fall Short

Today, the Congressional Budget Office released their score of the proposal from Majority Leader Harry Reid (D-NV) to renew extended unemployment benefits in concert with other reductions in spending.

Offsetting A Long-Term UI Extension

The unemployment insurance saga continues. Today, Senate Majority Leader Harry Reid (D-NV) proposed an alternative unemployment benefit extension which would run through mid-November, in place of the three-month extension previously considered.

Unfinished Business for the New Year

The passage of the Bipartisan Budget Act was a positive move away from governing by crisis, and a demonstration that policymakers can meet self-imposed legislative deadlines. Yet substantial unfinished business remains, and much of it has significant fiscal implications. Below are some issues Congress should address early this year:

Stopgap Unemployment Benefit Extension Should Be Offset

At the end of 2013, Congress allowed extended unemployment benefits to expire, and as a result the maximum number of weeks for collecting benefits has declined from 73 to 26. While the White House and Congressional democrats have pushed for a one-year extension costing $25 billion, Sens.

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