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Corporate Investment in the Face of Recession

In: Business and Management

Submitted By crchancio
Words 988
Pages 4
Recession is a particularly emotion-provoking word, especially considering that it has enveloped far too much of the economic climate over the past decade and a half. Whether is was the swift and absolute burst of the dot-com bubble or the implosion of the housing market, recessions have presented unique and troublesome economic times that have destroyed trillions of dollars or wealth and struck fear in business, consumers, and pretty much everyone that falls between the “1%” and those living below the poverty line. Recessions, by definition, are periods negative GDP growth that have occurred over at least two consecutive quarters. Recessions have been studied, analyzed, and written about from virtually every angle in everyone’s quest to identify and prevent future ones. One the more intriguing aspects of recession analysis is a look at how businesses choose to invest at the beginning of an economic recession given the history of the government promoting investment incentives or investment credits. In order to examine how a firm may act in anticipation of business investment, friendly policy it’s vital that we examine how they have acted when these policies have been enacted and legislated during past recessions. During The Great Recession of 2007-early 2009, pro-business investment stimulus measures were enacted to increase loss carry backs and additional incentives for firms making investment in these times of extreme uncertainty. Each economic measure taken in the wake of the most recent global recession include some element of business, investment incentives. “Allowing greater use of NOL carry-forwards and tax credits during recessions would provide a modest fiscal stimulus while also reducing tax penalties on risky investment. (Viard 2009)” The Jobs and Growth Tax Relief Reconciliation Act of 2003 gave businesses wide ranging incentives to investment in the aftermath of the dot-com bubble. Included in this act was a reduction in the long term capital gains tax rate for business from 20% to 15% and increased tax deductions and credits for small businesses. This policy was scheduled to expire in December of 2012 but was continued as solution to the Fiscal Cliff and currently have no expiration date. In my opinion, the proper anticipation of pro-business investment policies will a profound effect on business investment choices, timing, and overall firm policy. For starters, given an environment that both increases tax credits and loss carry back abilities, businesses are very much in a win-win investment environment. One important aspect that greatly increases the severity of a recession is an extreme tightening of the money supply. A crucial element of the money supply is the amount of cash-in of investments. Obviously when a firm or individual cashes in an investment, another firm must pay-out to that investor. If a firm anticipates a decrease in the capital gains tax, they should be less likely to cash the investment until the rate change takes place. Consequently, they have increased loss carry backs to net the gains against. On the other, investments that are already in the red are less likely to be liquidated in this environment for two reasons. The first reason is that a business will look to maximize the loss carry back benefit. The second reason is that as the economy improves, the investment may shift from the red to the green. In the event that the investment becomes a winner, the tax costs are already shaven by the decrease in capital gains tax. Gross Domestic Product (GDP) is made up of four factors of which consumer expenditures and investment are important drivers of growth. By increasing business investment incentives, stimulus measures should have the desired effect of increasing GDP. As the anticipation mounts and the enactment takes place of business investment should stabilize and gradually increase. As business investment stabilizes and increases, the job market should improve, employment pickup, and household incomes increase. As household incomes it will propel consumer expenditures and, by default, propel GDP growth from negative to positive. The previous scenario provides the desired atmosphere from business stimulus measures. As it is widely accepted, the purpose of stimulus measures is to increase Gross Domestic Product. The easiest way to improve GDP figures is to provide business incentives which will have a direct effect on 85% of the driver of GDP computation. Recessions are particularly troublesome and worrisome. As United States economic history has shown, recessions can destroy wealth, consumer confidence, and, in the worst case scenario, lead to an economic depression. As such, stimulus measures are especially important in pulling the economy out of a rut and into growth. One of the most pointed and targeted areas in order to do this is to incentivize business investment activity. Business investment has the advantage of wide ranging effects of influencing almost every aspect of the economy. Without businesses investment there is no job creation or additional wealth creation. Businesses are most likely to realize all of effects when the environment and timing is right for investment in themselves and others. Once of the most critical times for this in the beginning of the recession in order to prevent a snowball effect. Obviously, the only way a business can have the confidence to hold investments and make additional ones are with the proper anticipation of pro-business policy. The government is the lynchpin in this entire process because, in all honesty, without legislation a business is just as helpless anyone is in the face of a recession that may turn into something far worse.

REFERENCES:

Amadeo, K. (n.d.). Jobs and Growth Tax Relief Reconciliation Act (2003). Congressional Budget Office. Retrieved May 19, 2014, from http://www.cbo.com/cig/economics/consumption-investment-government.html

Viard, A. (n.d.). American Enterprise Institute. Tax Policy during the Recession: The Role of Fiscal Stimulus. Retrieved May 19, 2014, from http://www.aei.org/article/economics/fiscal-policy/tax-policy-during-the-recession-the-role-of-fiscal-stimulus/…...

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