Goolsbee responds on R&D tax credits.

Another reason to like Austan Goolsbee: he responds to the blogosphere. I linked to JW Mason’s argument here and it bounced around the internet until Goolsbee responds to Atrios bringing it up:

I saw you link to an argument that my dissertation fifteen years ago on investment subsidies implied that the administration’s recently-announced policy calling for temporary expensing of capital investment and making the R&D tax credit permanent would not work. While I admit to a small amount of joy that someone actually looked at my old research, I think the details in that work say differently. I started from the obvious point that subsidizing the demand for something when there are capacity constraints or a steeply rising supply curve, should tend to drive up prices in the short run rather than purely inducing more purchases. This was often true of capital goods like machinery in the data period I studied (which was from the 1960s to the 1980s).

But this effect centered on the idea that this should be in situations where there were constraints on supply in an industry. The findings in that paper showed quite clearly that the price increases were concentrated only among those products where there were significant backlogged orders/capacity was tight. In places of significant slack, there were no price effects. In a period like today, where capacity utilization in the industrial sector has suffered greatly (and where there are substantial numbers of unemployed R&D engineers), the findings in my old work would clearly indicate there would be little reason to expect the increased demand to go into higher prices. Investment subsidies at a time like this could generate significant amounts of investment.
– Austan Goolsbee, Council of Economic Advisers

Atrios responds:

It’s true that to the extent that we believe the supply curve is much more elastic (increased demand will increase the quantity sold and not simply just jack up the price) at this point in time, either due to the depth of the recession or due to the different composition of industry now, we’d expect such policies to have a greater impact. We also might think that subsidizing R&D is in general good policy, as there are greater social returns to innovation than private ones. Still my comment was “terrible bang for the buck,” and while I’m willing to believe maybe it’s “not as terrible bang for the buck,” it’s hard to see how this is in any way “the best bang for the buck.” I suspect that while the full expensing of capital investment will be a nice bonus for firms, it’ll cost the government a lot in lost revenue for capital purchases that would have been made anyway. There’s also a bonus effect of making capital cheaper relative to labor, perhaps causing some capital substitution down the line. And the R&D tax credit will tend to benefit larger firms who have people on staff whose job it is to figure out how to take advantage of tax credits.

I’ll let Josh have the final say, and he comments:

All that makes sense. It seems strange to suggest, as Goolsbee does, that excess capacity in some capital-goods industries will dampen price effects, but excess capacity in other industries will *not* limit investment demand. But it’s not strictly inconsistent.

Seems to me a bigger problem for him is how well established the non-responsiveness of subsidies to tax changes is empirically. The 1960s and 1970s and 1980s included periods of slack demand too. So if subsidies work then, why didn’t that show up in the data?

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2 Responses to Goolsbee responds on R&D tax credits.

  1. zapster says:

    I am an electronics engineer that has been dealing with severe shortages of common parts. According to a number of sources, when the crash came, chip manufacturers laid off massively, especially in china and taiwan, and then allowed their inventory to be depleted. Now, demand is picking up globally, yet they’re still holding off on increasing production. They’re not unhappy about it–they’re posting record profits from jacking up prices. The reason given, tho, is that they are convinced that the demand will not hold–that we’re still facing a double-dip recession. Global noises about “austerity measures” quite likely are reinforcing that notion.

    They’re not worried about investment capital–many are simply sitting on expansion plans they already had in the works. They’re waiting for some assurance that this thing isn’t going to drag on for 10 years.

    The other problem I see is that china has become the sole source for nearly all critical IC’s. Is allowing one country to completely monopolize parts that are vital to our communications, medical devices, even cars a good thing? They could collapse the global economy in a matter of months, simply by not shipping.

    From the front lines..capital isn’t the problem. Monopolization and market security is.

  2. john_jj_joanidees@yahoo.com says:

    I have been reading about the R&D tax credit over at http://www.technologytax.com. It seems like there needs to be some incentive to keep R&D located in the US. It is really easy to send it out of the country, and the cost of this loss would be too great. Just my $0.02.

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