Obama’s Plans to Help(?) Small Business
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Does Small Business Need a Bailout?
2. Obama & the Democrats to the Rescue
3. What’s Not to Like About TARP III?
4. Higher Taxes Hurt Only 3% of Small Businesses – Wrong!
5. President Obama’s “September Surprises” So Far
6. My Thoughts on the Surprising Mood of the Electorate
Two key pieces of legislation that President Obama requested are working their way through Congress, both of which are supposedly designed to provide help for small businesses. Both bills passed comfortably in the House back in June. The legislation is currently bogged down in the Senate as most Republicans and some Democrats want to change it.
In essence, one of the bills would create a $30 billion stimulus fund that would be loaned primarily to local “community banks” that would, in turn, lend it to small businesses. President Obama claims that this $30 billion can be leveraged up by the banks to $300 billion in total lending to small businesses. The other bill would create $2 billion to be used in the form of loan guarantees and tax incentives for small businesses that want to make new investments, expand and/or hire more employees.
While all of this sounds good on the surface, there are numerous problems with this legislation. Obviously, this is yet another government bailout. There are questions about whether or not there is anywhere near $300 billion in demand from America’s qualified small businesses; most small and medium sized businesses have already adjusted to the slower economy; and many have no interest in expanding or adding new employees because of fears of a double-dip recession, higher taxes next year and rising health insurance costs.
And speaking of higher taxes, President Obama remains steadfast in his demand that the Bush tax cuts for those making over $200,000/$250,000 expire at the end of this year. The Obama administration says that these tax hikes will affect only 3% of small business owners. Yet IRS data show that 48% of small business income goes to households that make $200,000 or more.
At the risk of sounding political, I will try to explain in the following pages why this new $32 billion bailout for small businesses – at least as these two bills are structured – is not a good idea and will only put the country deeper in debt. These bills will, however, allow the Obama administration to influence a big chunk of community banks and many small businesses.
Does Small Business Need a Bailout?
We can all agree that small business is the largest growth engine in the US economy. We can all further agree that small businesses – defined as those with less than 500 employees – create between 60% and 70% of all new jobs, and they employ just over half of all private sector employees. Likewise, we can all agree that most small businesses have struggled during the credit crunch and the recession.
So you would think that virtually everyone would want to do something to help out small businesses, right? Not exactly. Many Americans are scared to death about our runaway federal spending and the exploding national debt. They don’t want to see another government bailout, especially one that many small business owners neither want nor need.
President Obama argues that small businesses are having trouble getting credit, and he has some solid statistics to back him up. In late July, the National Small Business Association reported that 41% of small businesses can’t get adequate financing, although other sources suggest this figure is overstated. This same report noted that among owners unable to secure capital, 44% said they have been unable to expand their business, while 20% have been forced to cut their workforces.
Regular readers will remember the chart I have reprinted several times this year showing the huge decline in bank lending since the credit crisis unfolded in 2008. I won’t reprint that chart again here, but suffice it to say it’s no secret that bank lending is still significantly below pre-recession levels.
So, is the small business lending problem more that the banks won’t lend, or that there is not enough demand for such loans? Actually, it’s some of both. Wells Fargo & Co. claims to be the nation’s largest lender to small businesses. Its CEO John Stumpf said recently that his bank is “sitting here with tons of liquidity and we’re marching double time in search of more loans.”
Bank of America Corp., the largest US lender, is trying to “make every good loan we can,” said David Darnell, president of global commercial banking, in a recent statement. “Our clients are telling us that until they see sales pick up, they are reluctant to hire and invest.”
So, it is clear that the decline in small business lending is partly due to still-tight credit and partly due to lack of demand – most likely more of the latter.
Obama & the Democrats to the Rescue
With part of the problem being tight credit and another part weak demand for loans, there is an amazingly simple solution: ramp up the Small Business Administration. The SBA is a government entity that has been in the business of making loans to small businesses since it was created in 1953. The SBA could make new loans to those businesses that want them, and those who don’t could just stay put. How simple.
The government would, however, have to add more funding to the SBA. But why not, since the vast majority of these loans are paid back? Unfortunately, the SBA’s Administrator Karen Mills said recently that SBA funding has stalled, and that more than 600 small businesses are currently waiting in line for loans.
Rather than take this relatively simple step, President Obama and many Democrats see an opportunity to both ease the problem with lending to small businesses and score some potentially big political points with these two bills pending in the Senate. Not only do the Democrats score points if they pass the bills, it purposely puts the Republicans in a very tough spot. After all, who wants to vote against small business?
There is another element to this that I hesitate to delve into. If the $30 billion bill passes, it will be loaned out primarily to so-called “community banks” around the country, with incentives to loan it to small businesses. With the government doling out all the money, Uncle Sam will have influence over these banks that it has never had, and ultimately, over the small businesses that take out the loans. (I must admit that I don’t know for sure if this was a major consideration for President Obama when he asked Congress to write this legislation, but it certainly could be.)
According to a number of articles I have read, many community banks around the country want no part of this money, which is now being called “TARP Junior” or “TARP III.” Many banks, small and large,take great pride in the fact that they took no TARP money. And there are some other reasons why they don’t want the money, as I will discuss later. Here’s how these loans will be structured if the $30 billion bill passes.
The Treasury will make the loans primarily to community banks (those under $10 billion in assets); the loans would be secured with the banks’ stock; and the interest on the loans will start out at 5%. The banks will be incentivized to make loans to small businesses. Specifically, if the banks don’t loan out the money over time, the interest rate can go up to 7-8%. If the banks loan all or most of the money, the interest rate goes down to only 1-2%, thereby increasing the banks’ profits. All these loans from the Treasury must be repaid within 10 years.
What’s Not to Like About TARP III?
Aside from the fact that the small business lending problem could be simply addressed by increasing SBA funding, there are several reasons not to like this legislation. As noted above, millions of Americans are deeply concerned about our runaway spending and exploding national debt. They don’t want to see another bailout. In addition to these general concerns, there are several specific reasons why TARP III may not work and could fail.
As alluded to above, many of the nation’s healthy, stable banks are going to avoid TARP III money like the plague. They don’t want to be stigmatized with TARP. What that could well mean is that most of the TARP III money will go to weaker banks that have higher odds of failing. The same could be said for most of the small businesses that take out these loans.
President Obama promises that this bill is fully paid for by fees, interest and other charges. He recently said the bill will cost taxpayers “not one single dime.” Yet this assumes that all of the money will be paid back. Maybe the president hasn’t seen figures like those in the chart below. Despite Mr. Obama’s assurances, taxpayers could lose a LOT on this bailout.
The next thing not to like in the bill is the fact that the banks that take the TARP III money are not required to lend it for up to two years, according to the bill passed by the House in June (H.R. 5297), and as far as we know in the Senate bill as well. This is ridiculous! While I don’t know if this new bailout is needed or wanted, if they are going to get this new federal money in any case, they shouldn’t be allowed to sit on it for up to two years.
Furthermore, the banks are not legally required to lend the money to any small businesses. They will merely be incentivized to do so. In fact, in the House version, any “commercial” loans will be counted toward the TARP III, whether they are made to small businesses or not.
Folks, it is madness such as this that makes me wonder if this isn’t just a new government takeover of the community banks and the businesses that borrow from them.
The next thing not to like in the bill is the lack of regulatory oversight. The Special Inspector General for TARP (SIGTARP) would be excluded from oversight of the new program, even though SIGTARP has developed the necessary expertise and systems to oversee the TARP program and is requesting access to the new program. Instead, the Inspector General of the Department of the Treasury would be given the responsibility of oversight, but it admits that it might not be able to direct sufficient attention to this task given its many other responsibilities.
Finally, CNBC reported this morning that H.R. 5297 also includes a provision to repeal the Small Business Act of 1958 under certain conditions. The Small Business Act requires that at least 23% of government spending contracts must be awarded to small businesses, as opposed to very large corporations. As of this moment, I have not been able to confirm whether or not this provision is also included in the Senate version that may be voted on this week.
My guess is that Senator Harry Reid will manage to get enough Democrats and the usual Republican suspects to pass this latest $32 billion bailout before the end of the year. I just hope that the banks that take the money and the small businesses that borrow it will understand that they are subjecting themselves to more government control and influence.
Higher Taxes Hurt Only 3% of Small Businesses – Wrong!
As you all know, the Bush tax cuts automatically expire at the end of this year – all of them. Congress must pass new legislation to extend the tax cuts or they expire by law. For several months now, President Obama has been saying that, due to the weak economy, he wants to extend the Bush tax cuts for all but those individuals making $200,000 and couples making $250,000 – those he labels as the wealthiest Americans.
There are strong arguments on both sides of the debate about whether or not to raise taxes on the “rich” – those making $200,000/$250,000 per year. Those who oppose the tax increase say that people making $200K/$250K a year are the very people who create the most jobs. Those in favor of the tax increase say that the rich can afford it and they need to pay their “fair share.”
Never mind that those making $200K/$250K already pay over 50% of all income taxes. And that’s not a fair share?
Recently, the debate has focused on how Obama’s proposed tax increase on the rich will affect small businesses. Many Republicans in Congress, including House Minority Leader John Boehner, want all of the Bush tax cuts to be extended, citing that higher taxes on the “rich” will harm small business owners. Vice President Joe Biden harshly rejected Boehner’s and others’ assertions that the tax hikes would harm small businesses.
Specifically, Biden said: “He [Boehner] has created this myth that a tax cut for millionaires is actually a tax cut for small business. There aren't 3% of small businesses in America that would qualify for that tax cut.” So where did this 3% number come from? I’ll tell you below.
House Speaker Nancy Pelosi flipped the number around, saying that the planned tax increases on those making $200k/$250K would exempt “98% of American families and about 97% of small businesses.” There’s that 3% number again.
The fact is, the impact will be far more severe than Ms. Pelosi and Mr. Biden suggest. The sound bite about 3% of small businesses, which has been picked up by numerous pundits, is one of the more misleading statements in the long history of economic propaganda.
The 3% figure, which is computed from IRS data, is based on simply counting the number of tax returns with ANY pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.
The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Ms. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?
It is clear that business income for large and small firms will be hit by the higher tax rates. And in point of fact, firms of all sizes contribute to the nation’s prosperity. So it’s a mistake to focus only on the impact of increased tax rates on small business. But will the higher rates actually cause a significant reduction in business activity? I suspect we are about to find out.
President Obama’s September Surprises So Far
In my August 31 E-Letter, I suggested that we might well see a “September Surprise” or two from President Obama, given the Democrats dreadful poll numbers ahead of the mid-term elections. My prediction proved true on Labor Day when the president announced a new $50 billion planto boost federal spending to rebuild roads, railways and runways. While this new stimulus is intended to boost the Democrats’ standings in the polls, the new program won’t add many new jobs, if any, until next year.
Then on Wednesday of last week in Cleveland, President Obama called for a $180 billion spending plan in what administration officials said was part of a new economic policy push. The new proposal would increase and permanently extend research and development tax credits for businesses that develop new technologies.
Second, and perhaps more important in the short-run, the new Obama proposal would allow businesses to fully expense investments in new capital assets such as new plants, equipment, computers, technology, etc. in a single year in 2011. While this should spark some additional economic growth next year, it will steal growth from 2012 and 2013. It will almost certainly be like the “Cash-for-Clunkers” program that simply moved future demand to the present.
While President Obama’s latest economic proposals were welcomed by many, keep in mind that ALL of this new money will have to be borrowed and will add to our already enormous deficits. And one other factoid: During the presidential campaign in 2008, candidate Obama opposed these same kinds of spending and tax credits to help the business community.
It remains to be seen if President Obama has even more September Surprises up his sleeve. If I had to guess, I would say yes. Of late, there are rumors that the White House is seriously considering a temporary payroll tax holiday that could cost upwards of $300 billion in lost federal revenues. Should the president actually go for the payroll tax holiday, he will get lambasted by his liberal base. But the Democrats are in such dire straits in the polls, he might actually do it. We’ll see.
My Thoughts on the Mood of the Electorate
Here are my brief thoughts on how we have gotten to where we are today.
There are millions of Americans who voted for Barack Obama either because they saw John McCain as the “same old, same old” or they thought “why not try something new” or both. After all, they wondered, how much damage could this relatively inexperienced guy do anyway?
Now, almost two years later, many realize just how naïve that kind of thinking can be, what with trillion-dollar deficits as far as the eye can see, and the national debt on-track to nearly double by 2020 or even sooner. Americans are rightly concerned about runaway spending and a ballooning federal government.
They see the impending takeover of one-fifth of the US economy in the form of ObamaCare that was promised to cost less, but now we know it will cost more, and care will have to be rationed. They see cap-and-trade legislation that, if passed, will raise all energy prices significantly, which raises the prices of just about everything else. They see a massive financial regulatory reform bill that will create a huge new government bureaucracy and will almost certainly increase costs on most financial transactions and investments.
They’ve seen the first American president to embark on a global “apology tour” with specific references to all the bad things the United States has done over the years. Not to mention bowing to foreign leaders, some of whom don’t like us very much.
The public has grown weary of this president who has spent his political capital to push through his liberal agenda while doing virtually nothing to directly stimulate the economy or create jobs. Most economists now feel that his $787 billion “stimulus” package has not worked, and the American people widely agree. No wonder Obama’s approval rating is now 45 or below.
It is also no wonder, then, that the Democrats are on course to take a beating on Election Day. The Republicans recently moved to a 10-point lead in Gallup’s “Generic Ballot” (Will you vote Republican or Democrat in November?). That was the largest margin any party has ever achieved in Gallup’s history of the mid-term election Generic Ballot.
Democrat pollsters are believed to have given up on holding the House of Representatives some time ago. Now it looks like the GOP could possibly retake the Senate as well. Political commentator Dick Morris and some others now believe the Republicans will win at least the 10 seats necessary to retake the majority in the Senate, but that is a tall order.
If all this happens, it will confirm that a majority of Americans feel misled and want the runaway spending stopped; they want less, not more, government intrusion into their lives; and they want the liberal experiment that is the Obama presidency to go away.
Gary D. Halbert
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