Friday’s gloomy economic forecast from Goldman Sachs solidified a consensus that the economy is just treading water. Goldman’s downgrade from 3 percent to 2 percent gross domestic product (GDP) growth for this quarter would nearly match last quarter’s anemic 1.8 percent growth rate if it bears out. The economy is growing at half the rate President Obama’s first budget projected it would this year. But the slowdown is not the whole story because there are, to borrow a phrase, two Americas: big business, which has enjoyed a legitimate recovery, and small business, which hasn’t had much to show for it.
Companies that finance themselves through the capital markets have been rewarded for being large enough to use stocks and bonds, which have rallied since early 2009. Even leveraged loans, at the heart of the capital-structure problem of the financial bubble, recovered and got refinanced. Meanwhile, lending to small businesses has dropped each year since 2008. A survey by the National Federation of Independent Business (NFIB) last month shows that slightly more small firms plan to make layoffs than add jobs. “Corporate profits may be at a record high, but businesses on Main Street are still scraping by,” NFIB chief economist Bill Dunkelberg said.
Given Obama administration public policy, this divide is not surprising. From the Troubled Asset Relief Program (TARP) to the auto bailouts to quantitative easing, the government has maintained a top-down focus on the private sector. Kevin Warsh, the Federal Reserve governor who stepped down this year, gave a candid assessment to International Economy magazine: “The broad suite of macroeconomic policies has tended to favor the big over the small - big banks have been advantaged over small banks; big businesses have been favored versus small businesses; and those big multinationals with access to the global economy and global financial markets have benefited more than those on the front lines of job creation.”
So far, Republican proposals for turning around the economy have tended to go further in this direction with cuts in the corporate tax rate and investment income. Without a concentrated effort to spur small-business growth, they will only be offering voters a less regulated version of Mr. Obama’s economy.
Republicans should focus on the effects of the Federal Reserve’s policies on the real economy. The consumer price index - an understated measure of inflation that leaves out energy and food prices - is rising at its highest rate in almost three years. Quantitative easing has left savers with negative real return. Interest rates held down by the Fed’s zero interest rate on overnight reserves have disrupted the market between borrowers and lenders. Commercial bank credit is down from a year ago.
Some have said there is no way the Fed can return to normal interest rates because doing so would increase the government’s borrowing costs. That’s another way of saying the Fed has been conscripted into financing Washington’s largesse. This is the logical outcome of a central banking system that can print money at will and has almost no accountability. Fixing it should be the first priority.
On tax policy, Republicans should focus on heading off the rate increases Mr. Obama is committed to seeing through next year in the personal income tax, which unincorporated businesses file. A low flat rate with no tax expenditures, similar to what the co-chairmen of Mr. Obama’s deficit commission proposed, would reward businesses and employees with a better deal.
Small business is at the heart of American capitalism because it incubates successful enterprises and is responsible for more than half of job creation. We shouldn’t allow our economic policies to leave it behind at the expense of big business and big government. The real recovery needs to start on Main Street.
Rich Danker is project director of economics at American Principles Project. Jonathan Hoenig is an owner of Thompson International Speedway.