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Tuesday, February 9, 2010

Producing Jobs: Thoughts on Obama’s Plan for Small Businesses

We need six months of political silence.

The ears of small business America must have perked up last month when President Obama spoke about that critically important sector in his State of the Union address.  And mine did as well.   Here’s when it really got interesting: “I’m … proposing a new small business tax credit -– one that will go to over one million small businesses who hire new workers or raise wages.  While we’re at it, let’s also eliminate all capital gains taxes on small business investment, and provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.”

Later the President explained there would be a $5,000 tax credit for employing an additional worker, forgiveness of the employer’s 6.2 percent portion of Social Security payroll taxes for newly added salaries and other salary increases, an end to capital gains on investment, and continuation of rapid write-offs for new capital investment, all to be targeted to business with 50 or fewer workers.

Mr. Obama was right to be concerned about small businesses. According to ADP’s latest report, firms with fewer than 50 workers employed some 48 million in December 2009; those hiring more than 50 had 60 million on the payroll.  So America’s  small businesses employ close to half the workers in the economy.  But their hiring plans now are decidedly bleak.

On first hearing the President’s message, and captured by the moment, I shouted out, “Right on!  Now we are getting somewhere.”  According to press reports, I was not alone in my enthusiastic reaction. John Arensmeyer, CEO of Small Business Majority, happily said, “These tax credits are simple and straightforward, and will support small businesses to generate the jobs Americans so desperately need. And they’ll start doing it now.”

My response must have come from a stored-up love for small businesses that goes back more than 40 years.  But after settling back in my chair, I had other thoughts on the matter.  Let me explain.

For some 15 years, starting when I was still a college student in 1952 to 1967, I was a part- owner of a small business enterprise, which in 1967 had about 50 employees.  As corny as it may sound, I still remember what it takes to make a payroll on Friday night.  I understand how hard it is to generate enough additional dependable business to add just one more employee. And I know how great it feels to bring one on and to introduce the new employee to the team members he or she will join.  I also know how much it hurts everyone in the firm to cut back, to have to fire a good worker because business has fallen off.  Because of the pain that goes with layoffs, I know how careful one will be before hiring another worker. In the case of small business, that person is likely to be a friend, former colleague or family member. Also, if the firm employs ten people, which is common, adding one more amounts to a 10 percent increase in personnel.  And that ain’t hay, especially in a recession when you are not sure if the next month will be your last.

I hope that some of Mr. Obama’s close advisers know these things as well as, if not better than, I.  I am betting they do.

No one in his right mind wants to bring on a new employee only to face the plight of having to pass out more pink slips.  Before hiring that one person I would want to see a lot of black ink on the operating statement, not just one or two profitable months.  Because of this, I don’t think a $5,000 tax credit will get the job done.   What we need is some certainty.

This seemed to be a base concern when Susan Eckerly, senior vice president, federal public policy, of the National Federation of Independent Business, was asked about the Obama tax credit.  She indicated that small businesses wouldn’t start hiring until earnings improved.  “An employer is unlikely to hire someone just to get a $5,000 credit,” she said.  When I read Eckerly’s comments I was reminded of a wise guy’s response to tax incentives that allowed a firm to “to take it off your income tax.”  The response:  “First off, I’ve got to have income.”

Too Many Boulders

Mr. Obama wants to see one million new employees added to the ranks of America’s small businesses.  I do as well. But adding just one new full-time hire when your toes can barely touch the bottom in a recession’s deep end is risky business, and for one major reason.  In February 2010 there is no way to know what really lies ahead; there is no way to distinguish between stimulus and the real economy.  Too many policy boulders are being dropped in the water.  One can hardly determine the effects of one before another one is thrown in the pool.

There is stimulus one.  Then stimulus two.  And now talk of stimulus three.  There is TARP.  Cash for Clunkers.  Cash for Appliances.  First home buyers tax credits. Health care revision.  Copenhagen.  Cap and  trade.  Jobs programs.  Financial reform.  Each announced in short succession.  The effects of some of these programs are so large that they are readily seen in GDP and construction data.  By some counts, about half of 2009’s fourth quarter 5.7 percent GDP growth is explained by Cash for Clunkers, a program that came on like gang busters and then faded into oblivion.

Imagine yourself as owner of a small business with 20 employees.  You are trying to decide if you should build up inventories again, hire one or two people, and lease another pickup truck.  Would you make your decision on the basis of the fourth quarter GDP numbers?  Would you base your plans on the explosion of existing home sales that followed the first-home-buyer stimulus?  Most likely not.  I’ll bet you would wait so that you could get a better fix on the real economy.

Perhaps we need six months of political silence.

When I think about the situation and Mr. Obama’s proposal, I wonder if it might be better to expand the noble elements of his idea to all businesses, small and large, and do so permanently.  Instead of having a complicated jobs-based tax system, why not just cut the marginal tax rate?  And instead of allowing a temporary moratorium on capital gains taxes for small business, why not just abolish capital gains taxes for all businesses.  Doing this would put an end to trying to determine what is stimulus and what is real and what may change at the end of the year.

There is a supply side to the economy that wants to spring forward.  A growing economy will produce more jobs and more tax revenue.  This is the time to give a nudge and then stand back and let the real economy recover.

  • Bruce Yandle is dean emeritus of Clemson University's College of Business & Behavioral Science and alumni distinguished professor of economics emeritus at Clemson. He is a distinguished adjunct professor of economics at the Mercatus Center, a faculty member with George Mason University's Capitol Hill Campus, and a senior fellow emeritus with the Property and Environment Research Center (PERC).