The U.S. economy is going to be sick until job growth returns and unemployment is significantly reduced. President Obama’s economic team doesn’t seem to know how to stimulate jobs growth and what they have tried so far isn’t working very well. While Obama’s policy seems to have stopped jobs from disappearing, that is very different from actually creating jobs and reducing unemployment.
Today the Administration is hosting a “jobs summit.” While this sounds like a good idea, in reality it is nothing more than political theater designed to show concern. Unfortunately, political theater isn’t what we need to get unemployment down. The reason that unemployment isn’t falling is because small business and consumers are still living in the middle of the credit crisis. Rather than rhetoric, America needs the Administration to deliver on its promise of getting credit back to Main Street.
The problem with jobs growth in the U.S. is pretty simple: many small and medium size companies have demand for their goods and services but can’t get financing to grow. Also, many consumers with good, steady, high paying jobs, have found that consumer credit either doesn’t exist or has gotten very expensive. The combination of a small business and consumer credit crunch is killing off an entire generation of entrepreneurs that should be job growth engines. I am not a proponent of unsafe and unsound lending or high leverage, but the credit crisis is starving high quality borrowers.
Some of the Administration’s policies have been effective. The stock market has recovered and bond markets are liquid again. Some of the sickest big banks are out of intensive care. Just today, Bank of America (NYSE:BAC) announced that it will be repaying its TARP money. However, the stock and bond markets are used by big companies for big company finance and not by little companies and consumers; the banking recovery is concentrated in the biggest banks and not the institutions that historically serve small business.
The problem with a big business centered recovery is that big business isn’t a big job creator. Little companies are job creators because some little companies grow into big companies and, in the process, dramatically increase the numbers of their employees. Big companies are already big and the amount of new jobs that big companies produce, even good growing big companies, isn’t that large as a percentage of their employment base.
What is needed to help small business is easy to understand and doesn’t take a PhD in economics or public policy to figure out, i.e., little company finance needs to recover so that little companies that have demand for their goods and services can grow.
Small businessmen respond to demand for their goods and services. When they have demand they try to fill the demand for their products by ramping up production and hiring workers. If small businesses don’t have the cash or financing to ramp up production they can’t fill the orders and jobs aren’t created. Tax incentives, jobs programs and other big ideas that are being floated today at the jobs summit are good things for the media to talk about, and good for big business, but small businesses respond to orders and demand and generally don’t do the type of corporate planning that economists assume when the push tax incentives. It is the simple lack of funding for growing small business that is hurting employment and small businessmen have all the incentive that they need to increase employment if they have orders to fill.
The Administration’s economic policies have been well intentioned but misguided. They have concentrated on pushing money into Main Street by supporting big banks. However, when the credit crisis started it wasn’t the big banks that provided most credit to small business; by the Administration’s own admission it was smaller non-bank lenders that provided most small business credit. And, despite the latest round of hyped up big bank claims that they are working to get credit to small businesses, they aren’t. So, small business remains starved for credit and funding.
It is counterintuitive that commercial banks aren’t serving the needs of small business. After all, most business in the U.S. is small business and if commercial banks aren’t serving the needs of small business what are they doing? The contours of the credit crisis provide the answer. Most banks today look a lot like thrifts did in the 1980s. They are real estate lenders and don’t really serve the needs of America’s manufacturing and service sector.
Before the advent of securitization and the growth of Wall Street, commercial banks were the primary conduit for credit to Main Street. But, starting in the 1980s, things began to change and by the beginning of 2007, at least two thirds of credit that was delivered to Main Street was financed in the securities markets and delivered through non-bank lenders. By failing to recognize fundamental changes in how commercial credit is distributed the Administration missed an opportunity to actually turn around the employment picture.
Who could have predicted that jobs were going to be a problem because the Administration wasn’t delivering credit to Main Street? Well, I did back in the winter and spring, here, here, here, here and here.
I think jobs can be created by fixing small business, and to a lesser extent consumer financing, without a massive expansion of government or a lot of deficit spending.
The policy options that Obama should be considering include:
- Removing tax disincentives for foreigners to invest in pools of small business loans
- Removing tax disincentives for U.S. citizens in low tax states to invest in pools of small business loans made to businesses in high tax states
- Restarting the bond insurance business through the licensing of newly formed and specialized bond insurance companies (bond insurance companies were essential to the development of the capital markets 30 years ago)
- Updating and fixing SBA programs and granting new SBA 7a licenses to non-bank lenders that are currently shut out
- Modifying mutual fund laws so that specialized mutual funds, such as business development companies, can effectively and efficiently deliver high quality loans to small business
- Reorienting the Community Development Financial Institutions Fund (this is an IRS administered program that provides tax incentives to lenders) so that it stops subsidizing real estate development and starts delivering capital to manufacturing and service companies
Below are a few quotes from the articles that I wrote last winter. Too bad the Administration didn’t listen.
“Unfortunately, the Obama Administration isn’t proposing much to help restart lending to small and medium sized enterprises (”SMEs”). While SME’s make up the backbone of the U.S. economy and provide most of its job creation the credit crisis is making them economic road kill. SME’s are small manufacturing and service businesses and are innocent victims; they pay their bills, employ workers and aren’t particularly over leveraged. However, the credit crisis doesn’t discriminate between the “guilty” and the “innocent”; it is an equal opportunity business killer. Regrettably, while Washington knows that the economic recovery requires a normally functioning and sound small business lending sector, the Obama Administration hasn’t found the right policy initiatives to restarted SME lending. Even worse, pumping trillions into zombie banks has the unintended side effect of enabling these banks to suck the economic life out of SMEs.” (written in a joint article with Rob Blum on 2/19/09)
“Geithner made the rookie mistake of retreating into his “comfort zone” to solve the problem without examining alternatives. He is comfortable in the sterile world of Fed technocrats and not experienced in the down and dirty world o decentralized non-bank institutions…Geithner’s current proposals won’t get bank lending going again and certainly aren’t going to get non-bank lenders excited. The Treasury Secretary needs to get out of his comfort zone and start to look at supporting non-bank lenders and investors. They make up most of the market for consumer and business loans and ignoring the non-bank lenders won’t get the economy going again.” (written on 2/12/09)
“Neither TARP nor TALF is going to quickly or meaningfully stimulate the small-business sector, and the economy isn’t going to recover until small businesses begin to expand again. Small businesses are the backbone of the U.S. economy, and without a restart of normal lending to this sector, the economy will be stuck in reverse for a long time.
The small-business sector employs about half of all private-sector employees, and since the mid-1980s was responsible for more than 60% of new job creation. We need programs specifically focused on small-business lending….According the U.S. Treasury, before the credit crisis more than half of all small-business lending was funded through the shadow-banking system of non-bank lenders–not through insured deposits. In the last few months new loans for small business have been dramatically cut back, and there is a critical shortage of working capital credit for growing and healthy business.” (written on 3/11/09 for Forbes)