Daniel Gross has an article in Slate which suggests that the Bush tax cuts worsened unemployment. There are two elements to his argument. Taxs cuts designed to boost capital spending “leaked”, that is, the moneywas spent on capital good purchased abroad. Gross’s second reason for stangant unemployment (and declining labor force participation) is that the tax cuts accelerated the substitution of capital for labor.
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. . .
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. . .
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.
Now the question is that why hasn’t the savings been translated into more investment and thereby more employment. One possible conclusion is that productivity is growing faster than demand (or effective demand), and therein lies the puzzle.