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
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.
So will it have an impact? Sure, but that doesn't mean it's anything close to the best possible policy. If it's political compromise, then fine, but it isn't being offered as that, so...