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Why Capital Spending is Vital for Jobs Growth

FEDERAL RESERVE BOARD CHAIRMAN BEN BERNANKE ESTIMATES that the economy needs to create at least 100,000 new jobs each month for unemployment to hold steady as the labor force grows. The trouble is, this is not happening. While layoffs have increased, the larger factor increasing unemployment has been businesses cutting back on investment and entrepreneurs starting fewer companies. Consequently, they have created fewer jobs. Increased federal spending will not spur the private-sector investment and risk-taking necessary to create jobs and reduce unemployment. It will take a long time to re-employ the 7.5 million people who lost their jobs in the last two years.

If we want to change this we will need to boost capital investment. History has conclusively demonstrated that jobs are created out of new business investment. Accelerating depreciation has been used successfully by many past administrations in recent history. When businesses purchase capital goods, it stimulates production, creates jobs, and increases tax revenues and economic development. It’s the engine that drives the economy’s train. One good idea, advanced by FedEx CEO Fred Smith, is to incent American businesses to increase capital investment by accelerating the depreciation schedule as an expense item in the year of purchase.

The chart at upper right shows the correlation between capital investment and jobs over the past 60 years. Using a Christian/Robbins analysis, each $1 tax cut produces $9 in GDP growth through $3–$6 investment in new equipment and $2–$4 in additional labor compensation. The Bureau of Labor Statistics shows total hourly labor compensation of $29.40 in Q3 of 2009 (including benefits) – this translates into $58,800 annually (40 hours x 50 weeks). Assuming a $5 billion tax cut for investment implies $10–$20 billion in additional labor compensation, this translates into 170,000–340,000 additional jobs created, using the above annual compensation figure.

The Correlation Between Capital Investment and Jobs

Source: Bureau of Economic Analysis, Bureau of Labor Statistics

Over the past 60 years, the correlation between employment and capital spending growth has averaged 0.86 (with 1.0 being perfect correlation). Since 1949 there have only been five quarters that experienced year-on-year private sector employment gains without growth in business investment.

Pro-growth policies that promote capital spending – like allowing firms to expense capital investments and reducing the U.S. corporate tax rate – would go a long way in generating jobs and help ensure the sustainability of the economic recovery.

Forget government loan guarantees and one-time tax credits. If we want to accelerate the formation of capital and boost job creation, we need to reduce the costs imposed by government – at all levels – on those who create the jobs in the first place, and simplify and reduce the costs of raising capital.

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