Here’s the situation: Fundamentally, investment is what drives productivity and growth. Unfortunately, more than six years after the Great Recession started, business investment is still weak. The chart below shows nonresidential investment in structures and equipment as a share of GDP. It’s pretty easy to see that such capital expenditures have basically plateaued below 8.5% of GDP, compared to more than 9.7% at the time when the economy went into the tank.
From a policy perspective, given this weakness in investment, we should be doing everything we can to increase the incentives for capital spending. The best course is probably wholesale reform of the corporate tax system, but politically that’s out of the question right now.
A second-best alternative is to extend “bonus depreciation.” Bonus depreciation, which allows companies to immediately expense a certain portion of their capital spending, has the effect of lowering the hurdle rates for new investment.The provision officially expired as of the end of 2013. But Congress can renew bonus depreciation for 2014.
Extending bonus depreciation is not a panacea for the country’s economic ills. But at a time when Congress is deadlocked, bonus depreciation may be one of the easier ways of keeping business investment from weakening even more.
