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Stimulus Round 3: Will It Work This Time?

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President Barack Obama is expected to announce plans today to let businesses write off 100% of their new investments from now until the end of 2011.

Businesses can already deduct new investments from their tax liabilities, but under current rules, they have to amortize the amount out over many years. With the new proposal, they'll be able to take 100% of the write-off in year one.

The idea is that this will spur more investment. But will it? Perhaps some. But this proposal reminds me a lot of Cash for Clunkers and the first-time homebuyers credit. All it does is pull future demand forward, without actually creating any new demand. With Cash for Clunkers, auto sales had a few sensational months, which was a boon for Toyota (NYSE: TM  ) and Ford (NYSE: F  ) . But then what? Sales fell like a rock as soon as it ended. Same with the homebuyers credit. Pay people to buy a house, and they'll do it. Give them a deadline, and they'll rush to meet it. Once that deadline passes, look out below. Since the credit's expiration, homebuilders like KB Homes (NYSE: KBH  ) and PulteGroup (NYSE: PHM  ) have been slaughtered along with home sales.

With this new tax credit, investment will likely surge between now and the end of 2011. Come 2012, however, woe to us. That's the problem with these temporary stimulus packages. They provide a temporary sugar high followed by a hangover that often outdoes the high.

Also, the move to spur new investment doesn't seem like a solution to our economy's problems. The big fear right now is deflation. Where's deflation come from? Too much capacity, for one. How do you get around that problem? Let capacity erode, not add more.

Harvard economist Greg Mankiw brings up another great point:

[E]xpensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.

One side of the political aisle has been screaming for tax cuts; the other for more stimulus. Maybe this was just a grand compromise. Few, I think, will be happy with the results.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Ford Motor is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (9)

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  • Report this Comment On September 08, 2010, at 12:04 PM, talotu wrote:

    You seem to have two conflicting points

    1. All this will do is move demand up

    2. It won't do anything due to low interest rates

    I don't agree with point #2. Near 0 interest rates only matter to companies with no debt, which is a small minority. The rate that matters for each company is their own borrowing rate.

    As to bringing demand forward, I'm not sure if it will even have a huge effect there.

    Section 179 has been around for some time, I'm not an accountant, but at first glance it just seems to get rid of the $800,000 cap that Section 179 has. In that sense it don't help small businesses much, but will just create a similar benefit for big businesses.

    So my guess is the only effect it will have is giving CEO's higher bonuses, as they can manipulate their earnings by quicker depreciation. I give it about 24 hours before the TMF marketing machine gets that into the constant THE BIG SHORT barrage....

  • Report this Comment On September 08, 2010, at 2:58 PM, mDuo13 wrote:

    I agree with the article: I'm not too impressed with this one. Sure, it fits the bill for being both a stimulus and a tax cut... but who cares? I can't see it helping the economy in the long run nor can I see it making a major difference in anything except a marginal decrease in tax revenues...

  • Report this Comment On September 08, 2010, at 10:44 PM, cvizcaino wrote:

    Obama faith in government is misplaced, government can’t solve all our problems and it shouldn’t. However, all I hear is none stop whining from all the free market folks waiting for Obama to save the day, then when he fails just bitch about it. It’ about time industry and all it’s over paid CEOs get off their assess and get this economy moving, instead of playing it safe (as many have been doing fro the last 18 months) and waiting for someone else to go first. I never expected the stimulus to restore the economy to what is was, however I think its BS to dismiss that we went from negative 700 thousand jobs losses per month to a positive few thousand. I don’t know what the ROI is on this, but climbing out of such a immense job loss hole is credit the president well deserves. Regarding the national debt let remember that Reagan tripled it and Bush 2 more than doubled it taking it from 51/2 trillion to over 12 trillion.

  • Report this Comment On September 08, 2010, at 11:13 PM, whereaminow wrote:

    When it doesn't work, it wasn't big enough...

    (p.s. that's what she said)

    David in Qatar

  • Report this Comment On September 09, 2010, at 11:03 AM, bozomonkey wrote:

    I think that the deflation risk is real and the only way I can think of to combat that is to print more money to help replace all the credit that has eroded, which was driving our economy. And to keep a very sharp eye to inflation during the process.

    I guess you could scare people into spending their money by telling them inflation was coming and they better spend all they have soon or else their money would be worthless. That would get the spending/retail purchasing/ revival going.

  • Report this Comment On September 09, 2010, at 12:27 PM, sjoyner2 wrote:
  • Report this Comment On September 09, 2010, at 12:31 PM, redhorse29 wrote:

    Good try, but the Administration missed the target again. Focusing on business investment write-downs does not assure job creation. Business will take advantage of the breaks, especially where assets need replacement, but they will delay hiring until there is demand. There is no mention that there is relief for the cost of hiring. If there is not a reduction in the cost of employment will delay new hiring until the demand off-sets the cost. Unemployment is still high; banks are still going under; homes are being foreclosed; local and state governments are going bankrupt; this is does not make people confident or trusting. Without trust and employment spending is tightly controlled. Time will tell if the latest offer works. Business will get a little boost at the voter's expense; and some government agency will try to tax and fee the new investments.

  • Report this Comment On September 09, 2010, at 2:05 PM, dfrizzle03 wrote:

    morgan, very good points and very good article. I like your ideas, and i agree. the government has just lassoed future demand and pulled it forward. there are no policies from our administration to push for long-term growth and sustainability, and it's quite frustrating. where is the investment in our private sector companies that compete on a global playing field? why not work with companies and come up with new ideas and ways to get these company's products and services to dominate the global market? i know for a fact that our american enterprises have the capability and resources to control global markets. if the government is going to help out at all (which is debatable), why shouldn't they do something of this sort? maybe some government intelligence and government sponsorship would help our country grow internally, which of course would not be a bad thing. don't get me wrong, I'm completely pro private sector, and anti government intervention; but if any intervention at all, why not something like this? (all rhetorical questions)

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