Small Business Bailout

It is nice to see that the economic stimulus package being prepared for President Obama’s approving pen throws a bone or two to small business. Here is what the summary prepared by the House Committee on Appropriations—Dave Obey (D-WI), Chairman—has to say:

Creating Small Business Opportunity

Small Business Credit: $430 million for new direct lending and loan guarantee authorities to make loans more attractive to lenders and free up capital. The number of loans guaranteed under the SBA’s 7(a) business loan program was down 57% in the first quarter of this year compared to last.

Rural Business-Cooperative Service: $100 million for rural business grants and loans to guarantee $2 billion in loans for rural businesses at a time of unprecedented demand due to the credit crunch. Private sector lenders are increasingly turning to this program to help businesses get access to capital.

Industrial Technology Services: $100 million, including $70 million for the Technology Innovation Program to accelerate research in potentially revolutionary technologies with high job growth potential, and $30 million for the Manufacturing Extension Partnerships to help small and mid-size manufacturers compete globally by providing them with access to technology.

Economic Development Assistance: $250 million to address long-term economic distress in urban industrial cores and rural areas distributed based on need and ability to create jobs and attract private investment. EDA leverages $10 in private investments for $1 in federal funds.

Is that what small business is worth to Obey, Pelosi and company? A paltry $880 million, some of which goes to guarantee $2 billion in loans? Out of a total package of $825 billion? No wonder I called it a bone—the kind of sad, dried-out bone my dog would dismiss.

Why Small Business Deserves More

Small business creates far more jobs in the American economy than larger businesses do while government does not create any private-sector jobs at all. Consider the following from the 2007 SBA report to President Bush, The Small Business Economy [emphasis mine]:

For research purposes, the Office of Advocacy often defines a small business as one with fewer than 500 employees.By this definition, about half of the private sector employment and output is attributable to small businesses. In 2004, the most recent year for which firm size data are available, small businesses with fewer than 500 employees accounted for all of the net new jobs. Small firms had a net gain of 1.86 million new jobs, while large firms with 500 or more employees had a new loss of 181,000 jobs.

Small firms employed 50.9 percent of the private sector work force and generated 50.7 percent of the nonfarm private gross domestic product. This 500-employee threshold also means about 99.9 percent of employer businesses are small, and of course all nonemployer businesses are small. The size difference between the average small and large business was stark in 2004, according to the latest U.S. Census Bureau data. The mean small employer had one location and 10 employees, while the mean large employer had 62 locations and 3,313 employees. The median employer size was about 4 employees for small firms and 1,000 employees for large firms.

So, we have a sector of the economy that provided:

·        All of the job growth

·        Half of the GDP

·        Employs over half of all Americans

·        Accounts for nearly 100% of the businesses in the United States

Go by the numbers and you can see why these are the businesses that should be getting real attention. Prosperity comes when people are employed and it is small business that accounts for most employment. It is the entrepreneur and the venture capitalist who create jobs and on that point alone the support for small business should be expanded. Gross Domestic Product (GDP) is another reason. By giving small business the tools it needs, this package could increase the small business side of the GDP, which, in turn, could jumpstart the big business side of the equation.

Why Small Business Doesn’t Get More

Let’s face it, Washington spending is not based on real or practical need. There is nothing really pragmatic about how Congress throws our money around, it is a matter of political need. That is, what do the politicians need, what does the party need and what do their loyal supporters need? Those are the questions most often asked and answered when spending is contemplated on Capital Hill. Let’s have a look at how Pelosi and her cohorts answered some of those questions:

·        $600 million for new cars for the federal government

·        $1 billion “to minimize undercounting of minority groups” in the 2010 census

·        $400 million for NASA for global warming

·        $400 million for “National Treasures”

·        $6 billion for colleges/universities, many of which have massive billion dollar endowments

·        $166 billion in direct aid to states, many of which have failed to budget wisely

·        $650 million more for digital television conversion coupons

There seems to be more than a little ideological spending here. The new cars are all to be “green.” There is really no economic stimulation associated with correct headcounting no matter how good and righteous the intent. Maybe the “global warming” money will finally put that issue to rest. I thought we had a Department of the Interior to take care of “national treasures.” How does money for rich colleges promote jobs on Main Street? Propping up bankrupt states will save the jobs of state and municipal workers. Digital TV money? We wouldn’t want folks to miss the latest episode of Rock of Love, would we?

If you get the chance, read the whole Appropriations Committee summary and see for yourself where your tax dollars are going to be spent.

The Bottom Line

Now, there is nothing wrong, per se, with any of these proposals. Helping the states out of their financial mess is, I believe, a duty of the federal government. Making sure that minorities are properly represented in the census is incredibly important but they, like the other items on the above list—and this is only a partial list—do not address the issues of employment and prosperity in any meaningful way. That leads me to the following questions: Why are we doing this? Why are we shuffling around money instead of creating wealth? Why is the most viable sector of the economy—small business—being given the short end of the stick? Most of all, I want to know how, if the tax cuts are carried along with the spending, will they pay for all of this?

The next hundred days are going to be very interesting. Stay tuned.