30 Million Small Businesses: The Army President Obama Has Yet To Deploy
by Cedrick Muhammad
President Barrack Obama’s decision to deploy more troops to Afghanistan should be a reminder and not a distraction that the country is involved in a two-front war. Not only one where the battlefields are Iraq and Afghanistan, but also a domestic economic war where saving an ailing banking system, is one front, while the struggle of small businesses to grow and expand is the other.
So far, that second war is only being waged on one battlefield.
It may be a generalization but not an oversimplification to say that when push came to shove, during and after the Financial Panic of 2008, the United States government – both Congress and two Presidential administrations – decided the interests of Wall Street and only a small portion of America’s 10,000 commercial banks, along with a handful of auto companies, were more important than the needs of approximately 30,000,000 small businesses [There were 6.1 million employer and 23.1 million nonemployer firms (a nonemployer firm is defined as one that has no paid employees, has annual business receipts of $1,000 or more and is subject to federal income taxes.) in the U.S. in 2008 according to Statistics of U.S. Businesses (SUSB) data from the U.S. Census Bureau].
The commercial banking sector is important – especially those smaller and community-oriented institutions that have been an after-thought in the plans of both Presidents Obama and George W. Bush. And if money is the lifeblood of a nation, then the financial system is somewhat like a circulatory system moving capital and credit wherever it is needed throughout the economic body.
This crisis was a financial one for sure, and its roots can be found in four areas.
First, a fractional reserve banking system which allows banks to lend out (or extend credit) several times the actual amount of money they actually have on deposit.
Second, a fiat currency (money with no sound backing) created gradually in three stages – initially when the Federal Reserve was born in 1913 giving a private central bank control over the issuance of America’s currency, a responsibility the U.S. constitution reserved for Congress. And then, when the gold standard was ended in two stages – in 1933 under Franklin Delano Roosevelt and 1971under president Richard Nixon.
Third, the out of control growth of a derivatives market initially built upon the legitimate need of farmers and businesses to insure themselves from disasters and unpredictable circumstances (like storms and poor crops) which grew to dwarf the real economy (the physical and digital goods and services that we need to survive and want to enjoy) in size. It should be noted that the first major derivatives market was in foreign currency and it grew out of the instability of a world where the dollar was no longer on the gold standard and investors, entrepreneurs, farmers and corporations had to guess and gamble each day over what the world’s currencies were worth.
Fourth, the birth of the modern securitization market in 1970s, started by the Government National Mortgage Association (GNMA) or ‘Ginnie Mae’ which allowed private institutions to gather mortgages extended to different customers and owned by different banks into large bundles to be resold to other institutions – like pension funds and investment banks. With the help of institutions like Salomon Brothers this practice grew to the size of trillions of dollars and saw bundles as large as 5,000 mortgages and up, sold all over the world. By 2009 loans of all kinds – mortgages, bank, student, credit card and business – were being made not because individuals and entities qualified for them but because banks could make more money off of securitizing and re-selling them to Wall Street investors and institutions and governments all over the world. When these loans could not be repaid the whole house of cards tumbled.
For the most part, first under President Bush, and afterward President Obama very little has been done to effectively address these four fundamental aspects of the financial crisis. When you combine this reality with a national debt of $12 trillion (around $60 trillion when you add in the money owed for Social Security and Medicare payments) it is not hard to see the hand-writing on the wall – the American economy is headed for a painful day of reckoning.
But there was an equally important problem to be solved, aside from the financial one. In fact, it was already in effect and looming on the horizon before the Panic of 2007-2008. It was the challenge of how the American economy was going to transition through the era of globalization that was eroding its foundation due to two practices – offshoring and outsourcing. Offshoring is the decision of a company to relocate an entire business process from one country to another and outsourcing is the subcontracting of a service or business process to a third party.
Former Federal Reserve Governor and Princeton University Professor Alan Blinder, before the recession, estimated that 30 million to 40 million American jobs have the potential to be offshored. These include such professions as tax accounting, film and video editors, computer programming, bookkeepers, architects, lawyers specializing in contract law, mathematicians, graphic designers, financial analysts, actuaries, microbiologists, and even economists.
And who was on the front lines of this battle best positioned to win it and create the jobs that will replace those being lost, but also suffering the greatest casualties?
Without question, it is the country’s 30 million small business owners.
According to the Small Business Administration (SBA)’s 2009 “Small Business Economy: A Report To The President,” ‘…since the mid-1990s, small businesses have generally created 60 to 80 percent of the net new employment, but in 2008 there was a net loss of 3.1 million jobs. While it is not yet possible to know how many were lost in smaller businesses, it is likely they were a significant share of the losses. In the first three quarters, the United States lost 1,695,00 jobs, of which 60 percent were in small businesses.’
And what has been the official policy response to this recognition?
Virtually none of the over $700 billion Troubled Asset Relief Program (TARP) under President Bush went to small businesses (including most of the nation’s 8,000 smaller community banks) and while President Obama signed the $787 billion American Recovery and Reinvestment Act, funding to the U.S. Small Business Administration (SBA) was increased by only $730 million. An SBA plan designed to generate $10 billion in loans to small businesses has been crawling for months.
When one considers other steps taken by the administration of President Obama including putting $2 trillion on the line in order to jump-start the previously mentioned securitization market (through the Federal Reserve-engineered Troubled Asset Relief Facility or TALF), it can be argued that while the U.S. government has put an estimated $4 trillion on the line to help revive the commercial banking sector and securitization markets, its best efforts to help small business may have not even reached $10 billion.
To make matters worse, the economic pain is not being distributed evenly across racial lines.
While the overall unemployment rate in the country was 10.2% in October it was 15.7% for Black Americans, with Black males 20 and over at an unemployment rate of 17.1% and Black teenagers of both sexes unemployed at the rate of 41.3%. This is all the more troubling when one considers that prior to the recession, it had already been determined that Black male unemployment in cities like New York and Milwaukee was over 50%.
With all of this doom and gloom what should President Obama do?
First, he should be applauded for hosting this week’s Jobs Summit.
But summits, meetings and conferences are only as good as their agenda, the quality of the dialogue and debate, and the follow-through on the best ideas, policies and decisions that emerge.
To that end here is a nine-point platform for consideration at the Jobs Summit that could jumpstart the American economy from the ground up:
1) Cut the Payroll Tax. In his November 18, 2009 Wall Street Journal op-ed, Michael J. Boskin makes the case, “…to evaluate the stimulus properly we should consider not just what we got for the $787 billion cost but the effects of alternative policies that might have been enacted. My Stanford colleague Pete Klenow and Rochester economist Mark Bils estimated that cutting the payroll tax by six percentage points (of the 12.4% Social Security component) would, under standard assumptions, increase employment by three million to four million workers—an amount equal to all the job losses since the stimulus was passed. The payroll tax cut would have reduced firms’ costs by roughly the same amount as from the entire decline in employment. It would have cost less than half as much as the stimulus bill, gotten far more income into paychecks quickly and, most importantly, greatly reduced incentives for firms to lay off workers. In fact, it would have created incentives to hire. Even using the administration’s claims of one million jobs ‘created or saved,’ the stimulus program passed in early February is millions of jobs short of what a cheaper payroll tax suspension would have delivered.”
2) Enact Job creation tax credits (as proposed by the Economic Policy Institute: http://www.epi.org/publications/entry/bp248/).
3) General capital gains tax rate reduction to 10%, indexed for inflation and made permanent.
4) Reduce the holding period to qualify for capital gains tax elimination in distressed rural and urban areas from 5 years to 6 months. This will encourage investors to make investments in struggling inner cities because they know they don’t have to wait 5 years to see a return. Entrepreneurs don’t want patient capital (what makes 5 years a magic number for the government anyway – especially since most small businesses have failed by then?) as much as they want smart capital.
5) Expand of the number of Empowerment Zones and Renewal Communities that receive incentives for economic development in distressed communities. If, since the financial crisis, the rest of the country has been receiving incentives that were previously reserved for these areas, something must be done to maintain their comparative advantage.
6) Increase incentives and worker tax credits for any business which hires a previously incarcerated person. This gets at the core of the unemployment problem (aggravated by state laws that make it illegal for ex-offenders to be employed in certain jobs) in the poorest areas, and in communities where the social fabric is the frailest.
7) Complete capital gains tax elimination for investment clubs which invest in businesses with less than 5 paid employees, and an increase of the limit from 99 persons to 250 on the size of an investment club before it falls under SEC regulations. This may inspire the merger of several successful existing clubs – increasing their scale and reach – and fill the void in areas of the economy where venture capital and private equity are unavailable or unwilling to invest (the government’s SSBIC program to bring venture capital into the Black economy has been a failure, as Senator John Kerry has so duly highlighted, and which I discuss in my book, The Entrepreneurial Secret). If something is not done to move these areas away from debt-dependency and toward equity capital, a mass of small businesses are set to go under as the government fails to re-start lending and unfreeze credit, even in programs it sponsors through the SBA.
8) Reduce combined state (of course with the assistance of Governors and State legislatures here) and federal corporate tax rates. Perhaps the problem with the corporate tax is that only an elite group of corporations has the resources to avoid paying it. The motivation here is not only to produce shareholder earnings, capital investment, higher wages, and lower prices for goods and services but also to increase the attractiveness of the limited liability company to sole proprietorships. Utilizing the corporate legal form of business will allow them to raise capital more efficiently (only 10% of Black businesses utilize the C or S corporate form of business), share and spread risk, and develop a managerial hierarchy (about 90% of these businesses do not have more than a single paid employee).
9) Reduce regulations that hamper entrepreneurship and create a burden on cash strapped and employee-thin small businesses. As John Berlau and William Yeatman wrote recently in a Washington Times op-ed, ‘Solutions: How To Reduce Unemployment’: “Congress also should pare back job-killing mandates like those embedded in the Sarbanes-Oxley Act of 2002, which was rushed through Congress in the wake of the Enron and WorldCom scandals. This law has showered business with massive accounting procedures that may have created jobs for auditors — the law is often called the Accountants Full Employment Act — but discouraged business expansion by making it so costly for a firm to raise money by going public.” Sure enough, according to the Small Business and Entrepreneurship Council, the Small Business Administration (SBA)’s Office of Advocacy has noted, “Very small firms with fewer than 20 employees annually spend 45 percent more per employee than larger firms to comply with federal regulations. These very small firms spend four and a half times as much per employee to comply with environmental regulations and 67 percent more per employee on tax compliance than their larger counterparts.”
The above proposal is an eclectic mix of policies favored by some on the Left, Right and Center, members of both political parties and Independents. It is a framework that would invite creative compromise and deal-making – always a function of the political processs. What is required to help this economy can only be advanced with this kind of electoral coalition and a wide cross section of support from others, which the skillful and gifted President Obama can uniquely convene, organize and build.
If President Obama could enlist the support of a leading pro economic growth Republican like Congressman Paul Ryan (who I know understands the economic challenge from past discussion with him: http://www.blackelectorate.com/articles.asp?ID=591) and a liberal, business conscious Democrat like Senator Charles Schumer (surprisingly the strongest political voice on the crisis of Black male unemployment: http://jec.senate.gov/archive/Hearings/03.08.07BlackMaleUnemploymentHearing.htm) , and have the initiative spearheaded by the rare embodiment of compassion for the poor and understanding of the rich – the brilliant and nimble Jared Bernstein (Vice-President Biden’s Chief Economist and co-author of the penetrating ‘The Benefits Of Full Employment’: http://www.epi.org/page/-/old/books/full_employment-intro.pdf) – the country would find if not these, then other realistic and radical solutions that the time demands.
With these policies – the nation’s army of small businesses will have more of the weaponry, ammunition, and moral support they need to do what they do best – innovate, and create jobs.
It should be noted that there are one and not two wars underway that will determine the future of America. What is more obvious are the war underway in Afghanistan and Iraq. What is less obvious is that the battle to save the American economy has a second front.
An army – 30,000,000 million strong – awaits its orders from the Commander In Chief.
Cedric Muhammad is a business consultant, political strategist, and monetary economist. He is author of the book, The Entrepreneurial Secret: To Starting a Business Without A Bank Loan, Collateral Or Revenue (http://theEsecret.com/). His talk show, ‘The Cedric Muhammad and Black Coffee Program’ can be viewed every Wednesday from 12 to 5 PM EST (USA) at: http://www.cedricmuhammad.com/media/. He can be contacted via e-mail at: cedric(at)cmcap.com