Last Friday's jobs report, which showed 144,000 new jobs were added to U.S. payrolls in August, deepened the mystery over lame job growth in recent years. The White House economic team loudly proclaimed victory, even though the Economic Report of the President for 2004 forecast that the number of payroll jobs would rise by at least 300,000 each month in this election year. Meanwhile, the household survey, which partisan economists have been pushing as a far better gauge of the true state of the labor market than the payroll survey, showed that the economy added a mere 21,000 jobs in August. (So much for antidisestablishmentarianism.)
Bush supporters have argued that recent job growth, pathetic as it has been, is due in part or in totality to the president's tax cuts. And it's difficult to make the counterargument that tax cuts cause job losses. But what if some portion of the recent shift in tax policies is partially to blame for the slow pace of job growth? This is a question that Maxim Group market strategist Barry Ritholtz has recently asked. And it's well worth pondering.
In May 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003. The measure accelerated the reduction in income tax rates previously scheduled for 2004 and 2006, and cut taxes on capital gains and dividends. But other provisions were geared toward corporations, including an accelerated depreciation schedule for property acquired between May 5, 2003, and Jan. 1, 2005.
It may sound anodyne, but this is pretty powerful stuff, as Ritholtz explains in a two-part series in theStreet.com.To simplify greatly, depreciation is an accounting principle that recognizes the fact that if you buy something, its value declines over time. Thus, if a new printer is supposed to last for five years, a company can write off 20 percent of its value each year for five years against profits, thus lowering the tax bill.
The Jobs and Growth Act of 2003 aimed to give corporations an extra incentive to rush out and buy more capital goods by allowing them to write off larger chunks of the purchase price more quickly. Buy a $1 million piece of machinery expected to last five years and under the old regime you could write off $200,000 in the first year. Under accelerated depreciation, you can write off half of the total, plus half of the usual 20 percent, in the first year—or $600,000. Corporate executives thus were given a 20-month window in which they could buy new stuff that they needed and get massive tax breaks. But they had to act before Jan. 1, 2005.
The thinking behind the move? If more companies moved up orders and purchase decisions for trucks, machinery, and computers, that would create jobs for manufacturers and subcontractors and for the people who build, deliver, and install the goods. What's more, companies would then have to hire people to run and maintain all those new machines.
Jobs and Growth made simple, right? Yes, if this were still the 1950s, when capital purchases were largely labor-intensive goods made entirely in the United States. Today, an order for a capital good doesn't necessarily translate automatically into U.S. jobs. Instead of buying a Gulfstream G-450, a company could buy a jet from Brazil's Embraer. What's more, virtually every U.S. manufacturer outsources and buys foreign-sourced components. Almost by definition, an effort to simulate the purchase of capital goods would have nowhere near the domestic job impact today that it did in the past.
That explains why accelerated depreciation might not accelerate domestic hiring. But Ritholtz suggests that, because of a change in the nature of some capital goods, "the rule has had an unambiguous macro impact on the broader economy: Large capital purchases have come at the expense of hiring." Ritholtz hypothesizes that many companies have taken advantage of the temporary rule to increase their purchases of so-called enterprisewide applications. These are big, expensive software packages, made by companies like Cognos and Business Objects, that are designed to make operations more efficient. Buying a new copy of Adobe Acrobat 6.0 might not be a capital purchase, but when a large company like Home Interiors & Gifts Inc. installs BusinessObjects Data Integrator across the corporation, it can be. The rub is that such products, production and installation of which isn't particularly labor-intensive, are expressly designed to allow companies to operate with fewer—rather than more—employees. These productivity-enhancing solutions are supposed to pay for their expensive selves over time through reduced labor costs (read: fewer workers).
In theory, greater productivity is supposed to free up more resources for companies to invest, grow, and hire. But for the past few years, U.S. companies have proved to be remarkably shrewd about doing more with fewer—or the same number of—workers. And the temporary accelerated depreciation rule may have given companies an extra financial incentive to invest in these productivity boosters precisely at the time the administration was hoping they'd be creating new jobs.
We should be careful, however, not to overstate the role this temporary wrinkle in the tax code may be playing in tamping down employment growth. After all, many of the forces that have been holding down U.S. employment—excess capacity in many industries, tough foreign competition, and burdensome health-care costs—won't disappear next January.