How Can We Spur Job Growth?

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Here’s some pretty good ideas from the National Federation of Independent Business Research Foundation.

1.    Recognize the problem – a plurality of small business owners today considers the lack of demand (poor sales) as their single most important problem.  Over eight times as many cite poor sales as finance and interest rates.  (The second most frequently cited single most important problem is taxes.)  Consumer spending power which constitutes 70 percent of GDP, must therefore be restored to create wealth and output.

Additionally, over the last two months, a double digit percentage of small business owners reported both that the climate for small business expansion was not good and the primary reason for that attitude was the political climate.  Thus, confidence needs to be restored.  No single policy action is likely to do that.  Confidence will be restored only by a general positive climate that includes both economic and policy factors.

2.    Retrench, at least temporarily, from the proposed threats to small business productivity and profitability – The horizon is filled with cost unknowns, from healthcare to cap and trade to yawning deficits and the need to come to grips with them, from paid family and medical leave to card check, from expiration of the Bush tax cuts to state decisions about their finances.  Washington cannot expect small business owners, facing difficult economic circumstances anyway, to commit themselves to investing in new employees or equipment and vehicles without acknowledging and revealing the policy-inspired costs that will be imposed on them. It is all about uncertainty and confidence.

Retrenching is not the same as abandoning goals, so retrench.  Establishing priorities is not the same as abandoning goals, so establish priorities.

3.    Payroll tax cut, maybe.  Full tax write-offs for new firms, probably.  A general jobs tax credit, probably not.

Tax write-offs for new firms – Policy should encourage new firm formation.  One important way to encourage larger formations is to liberalize the tax write-offs a new business can claim in its first year.   Current tax policy requires substantial investments in a new business to be written off in subsequent years, reducing liquidity and cash flow, and effectively demanding greater initial investment. Though this step should be taken in any event; it is more urgent now than it might otherwise be.

Payroll tax cut – During consideration of the stimulus earlier in the year, NFIB proposed the payroll tax (FICA) be eliminated for a specified period.  The rationale was as simple then as it is now:  cutting the payroll tax puts more cash directly in consumers’ hands, in relatively small amounts that are likely to be spent rather than saved.  Given that the single greatest economic problem small business faces is the lack of customers, the additional spending would be an obvious way to improve sales and balance sheets.  Second, cutting the payroll tax reduces the cost of employees to business.  The effect is to save jobs as well as generate new ones.  Both are highly desired.

Jobs tax credit – A general jobs credit was attempted (1977-78) and found wanting in its short lifetime.  Major issues from the business perspective included excess complexity, largely the result of political trade-offs, low awareness, and the difficulty determining the credit’s value early in the tax year. Effectively, the credit went to employers who would have created jobs in any event.  The relative significance of various aspects may change in a new iteration of the general jobs tax credit.  However, the overall impact will not.  The credit simply focuses too narrowly, offering a solution to a problem small business currently holds in a secondary position, while ignoring the important issues, the lack of customers and a shortage of sales.

4.    Lending, not just small business, but real estate, particularly housing – The business press contains considerable anecdotal information about a shortage of credit for small businesses needing to borrow.  It also contains less, though still a considerable, amount of anecdotal information about small businesses’ reduced demand for credit.  While loans to small business are down, it is not clear what portion of the decline is a supply issue and what portion is a demand issue.

Weak banks, real estate hangovers, crowd-out from massive federal deficits, and lender reaction to recent experience pose serious threats to adequate credit supply for bankable deals.  Getting the fundamentals right is the principal answer to the longer-term small business credit problem.  But even that may prove inadequate and additional steps necessary.  At a minimum, this condition should be carefully monitored over time.

Small business has a huge interest in and reliance on the real estate industry.  As of last December, one in eight small employers owned at least one upside-down property.  Moreover, a similar number collateralized real estate to support borrowing for business purposes.  Those two facts imply a significant number of small business owners are hamstrung in job creation efforts by real estate issues.  Until the real estate situation improves, therefore, many small businesses will simply be unable to borrow, depressing their presence in the job generation game.

5.  Get everyone in the loop – Officials of government programs who disburse funds for the purpose of stimulating employment should have some idea of an employer’s requirements, or at least easier ways for small business owners to reach an objective.  Too often, they simply do not.  The same applies to other contacts with government. The Regulatory Flexibility Act is the one method available that systematically requires federal personnel to address such potential issues before they become institutionalized  The act thereby often reduces or eliminates much needless expense and other unproductive impediments to small business growth, impacts documented over the prior two administrations.  Though perhaps not a large jobs generator, a positive employment effect can only result from the lesser cost and fewer hassles vigorous enforcement of the act engenders.

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