- The Washington Times - Tuesday, September 21, 2010

Passage of the $42 billion small-business bill is virtually assured after two lame-duck Republicans joined 59 Democratic senators voting in favor of the bill on Thursday, but don’t expect this new stimulus bill to help the economy avoid a double-dip recession. Why? Look no further than the two key components of the bill: $30 billion to boost lending to small businesses and $12 billion in targeted tax cuts for qualifying small businesses.

First and most important, the $30 billion won’t actually go to small businesses in the form of loans; it will go to small banks in the form of capital. At its heart, this plan is nothing more than a Son-of-Paulson TARP (Troubled Asset Relief Program) bank bailout - except, of course, that it is much smaller and is focused on community banks rather than Wall Street banks. But won’t this new capital lead the recipients to make more loans to small businesses? To answer this question, we need only look at what happened to bank lending after the original TARP, engineered by George W. Bush administration Treasury Secretary Henry Paulson. From June 2008 to June 2010, commercial and industrial lending by commercial banks declined by $222 billion or 18 percent, from $1,204 billion to $982 billion. Over the same period, small-business lending by commercial banks declined by $57 billion or 8 percent, from $661 billion to just $604 billion. The lesson is clear: Investing taxpayer dollars in commercial banks leads not to more lending, but to less lending by the banks.

Why this perverse outcome? The answer is that TARP and this new mini-TARP are bleak examples of crony capitalism at its worst - an unholy alliance of big government and big business. Taxpayer money goes to bankers who made hundreds of billions of dollars in bad loans, which depleted their capital. The taxpayers’ investments recapitalize these failing banks but do nothing to remove the bad loans from the bank balance sheets. The troubled assets remain in the system, which could lead to a lost decade, just as a similar strategy did in Japan during the 1990s.

Instead of going to small-business loans, look for the $30 billion investment in bank capital to morph into a political slush fund for Democrats to use to bail out politically connected banks. Think Shorebank in Illinois and OneUnited in California. The FDIC’s most recent problem-bank list includes more than 800 banks - more than one in 10 - even though it already has closed 126 banks year-to-date. Look for these problem banks to line up at the public trough in yet another Obama bank bailout.

Second, the $12 billion in targeted small-business tax credits won’t result in new investment or hiring. Remember “cash-for-clunkers” and first-time-homebuyer tax credits? Those costly programs simply time-shifted sales of cars and houses from after to before the programs expired. In both cases, sales of cars and houses fell off a cliff when the programs expired. These tax policies are tantamount to handing out winning lottery tickets to those lucky enough to qualify for them at the time they are offered.

What are the real problems for small businesses? According to a recent survey by the National Federation of Independent Businesses, the biggest problem is slow or declining revenues (cited by 51 percent of respondents), followed by uncertainty (cited by 22 percent) and then by falling real estate values and access to credit (each cited by 8 percent). Even among those reporting they can’t get credit, twice as many firms pointed to poor sales as pointed to credit access. Moreover, those small firms responded that both their reported and planned capital spending are at 35-year lows. Most of those looking to borrow are doing so for cash flow, not for investment or hiring. Firms need sales, not the loans and tax credits promised by this bill.

Why is uncertainty the No. 2 concern of small businesses? Look no further than the two massive bills passed by this Congress: health care and financial reform. Each of those bills exceed 2,000 pages. For comparison, the much maligned 2002 Sarbanes-Oxley Act needed just 66 pages to do untold damage to our economy. What is in these bills? Well, as House Speaker Nancy Pelosi so eloquently said about the 2,074-page health care bill that not a single Congress-critter read before voting on it, “We need to pass this bill so that you can find out what is in it.” What we are finding now we don’t like.

For example, a business will have to file an IRS Form 1099 for each and every vendor from which it buys more than $600 of goods and/or services. I personally will have to file more than two dozen forms for companies like United Airlines, Hyatt Hotels and Dell computers. Where am I supposed to find the required taxpayer identification numbers and mailing addresses for these firms? How much time must I waste on this task? More important, what does this have to do with health care? Nothing. Yet just this past week, Democrats blocked Republican efforts to repeal this Obama abomination.

Rational adults (outside the Beltway) know the health care bill is going to cause health care costs for small businesses to skyrocket, but we won’t know how far until provisions of the legislation are fully phased in - in 2014. Why would any employer want to hire a new worker when he or she doesn’t know how much that employee will cost in benefits?

The Dodd-Frank financial reform bill is even worse, coming in at 2,319 pages that include mandates for 74 studies that will take a cumulative 79 years of studying by various bodies. Only after those studies are completed will scores of new regulations be written. Also, remember the 800-pound gorillas that were left out of the financial reform bill - Freddie Mac and Fannie Mae. What is going to happen to them and the housing market? Is there any wonder why almost three times as many small businesses cited uncertainty as cited access to credit as their biggest problem?

Tough times call for new thinking. If we really want to incentivize small businesses to hire new workers, we need to make long-term changes to the tax code, not rely on short-term gimmicks. What about replacing the combined 15 percent employer and employee levy of the payroll tax with a 15 percent national sales tax? That would provide a huge new incentive to hire, as well as a huge cost saving on existing employees that could be diverted to investment. At the same time, it would provide workers with incentive to boost savings. While both taxes are regressive, they essentially would cancel each other out and could be structured as revenue neutral.

Rebel A. Cole is professor of finance and real estate at DePaul University.

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