Small Biz Is Still Sucking Wind

President Obama had a shinning moment on Thursday when the Senate pulled together (in barley bipartisan fashion) and passed the assistance package for small business. Now there will be a quickie conference with the House, which passed its own version in June. The bill basically puts billions of dollars into the hands of community banks in the hope they in turn will be encouraged to make more loans to local businesses.

What’s not to like about a $30 billion boost to small biz, which has been taking it on the chin on this lethargic recovery? Perhaps only that it will be insufficient to counter the strong headwinds that small companies are facing. True, they have been denied access to credit for too long, but neither have they been clamoring for loans–the latest report from the National Federation of Independent Businesses which shows small business capital spending plans continue heading down, confirms this. Why expand when business is so poor?

We know that this has been a particularly harsh recession for small business. As colleague Barbara Kiviat observed in a recent post the brunt of the job losses in the recession came from small business. To counter the pain and give business owners the ability to expand and rehire, the Senate bill establishes the Small Business Lending Fund and fuels it with money from the U.S. Treasury. The infusion to banks will be made in the form of preferred stock and will require participating institutions to pay a 5% interest rate on the federal money. As part of the plan’s incentives banks will pay an even higher interest rate if they don’t step up their lending, and a lesser rate if they do lend more. It all sounds like plan with oomph, but it won’t get banks to do what they don’t feel like doing. Sam Sherraden of the New America Foundation put his finger on the plan’s weak spot:

After a two-year period, if banks have not increased small-business lending, the dividend payment increases to 7 percent. The program also has a pricey incentive built in to encourage banks to repay the Treasury and get out of the program: After four and a half years, dividend payments on all participants in the program leap to 9 percent.

The program is structured, however, in a way that leaves the Treasury with few teeth to ensure that community banks are using Treasury funds to increase small-business lending. While banks that increase lending to small businesses pay the Treasury a smaller dividend payment, there is no financial penalty for failing to increase lending during the first two years. This does little more than encourage banks to participate in the program.

True, there are additional small business boosters in this package, including a smattering of tax breaks such as the one that lets small biz owners deduct their cost of health insurance as well as an extension of accelerated depreciation deductions beyond 2010. But these breaks are not the bulk of the plan–Sherraden puts the value of these breaks at just over $4 billion.

The plan will surely help small business, but it won’t deliver what small business owners need most. The bigger issue facing small companies–and that includes small companies that are bigger than the ones addressed in this bill– is that the U.S. economy is not creating enough domestic demand. That’s a far more serious problem for small companies than it is for large. Don’t take my word for it. Here are the numbers, from Steven DeSanctis, head of small-cap strategy at BofA Merrill Lynch:

Given the fact that small caps derive 80% of their revenue from the U.S., earnings growth is more tied to US GDP. The correlation between profit growth and GDP stands at 0.72 for the small caps versus 0.48 for the large caps. Despite the fact that small caps have increased their overseas exposure over the last few years, this correlation has actually risen more recently.

It’s a simple and costly truth: If you want to increase hiring among small companies, yes, keep their health costs and related taxes affordable, but most importantly stimulate economic growth–with more federal spending if necessary. Small business will hire when there is rising demand for their products and services.

Facebook, Wall Street Banks Sued Over Pre-IPO Financial Forecasts

Just days after its controversial IPO, Facebook and its Wall Street bankers have been hit by shareholder lawsuits alleging that the social networking giant and its underwriters concealed the company’s decelerating revenue growth from investors. The lawsuits come amid a growing furor about whether Facebook’s banks selectively disclosed information that gave favored clients an unfair advantage over other investors. Top U.S. regulators have begun examining the IPO, and now the U.S. Senate Banking Committee and other lawmakers want answers from Facebook about issues raised in the offering’s aftermath, according to The Hill newspaper.

Small Dairies Go Under as Milk Prices Sink Again

PLAINFIELD, Vt. — The MacLaren brothers are third-generation dairy farmers, but they will likely be the last in their family.

After working all their lives on the hillside farm in Vermont that their grandfather bought in 1939, rising to milk cows at 3 a.m., even in blizzards and sub-zero temperatures, they decided to call it quits, auctioning off their roughly 200 cows and equipment ranging from stalls and hoof trimmers to tractors and steel pails.

http://rodgermmitchell.wordpress.com Rodger Malcolm Mitchell

Convoluted, complex and byzantine, requiring lots of oversight, penalties, investigations, lawsuits. How about eliminating FICA, which would save companies money they could use for expansion and save workers they could use for spending. Simple, direct, fast.

Rodger Malcolm Mitchell
deconstructiva

John, here’s another simple, costly truth: it’s hard to raise demand when too many people are out of work. Breaking the vicious cycle has to start somewhere. Folks would like to go back to work (and need to, but I digress) and are trying, but employment is a two-way street, remember?
randymiller

Have the credit markets really thawed out? Did they go from frozen in Oct 2008 to maybe slushy today? I keep hearing that CFO’s are still reluctant to use the commercial paper markets for day to day financing of operations.

A lot of evidence points to this: there is a lot of money out there trying to find a home, a place to go and get some returns. A great deal of that money is speculating on commodities and financials, instead of investing for the long term good. There is money to be made investing in energy conversion, investments that will move us away from dependence on foreign oil. A lot of our housing stock needs to be replaced with moderately priced houses less than 2000 square feet, but builders are having trouble with bridge loans.

Will this program thaw out the credit markets further? If it only raises it a couple degrees, that might be enough to get money flowing again.
http://rosemaryaz.wordpress.com rosemaryaz

How nice of NFIB to show up along with the Chamber of Commerce to whine about what crappy plans everyone came up with. How very productive. And where have they been with suggestions, help, programs, grass roots movements, or anything else for that matter. There’s more than enough hot wind blowing around AZ businesses to do without their addition. Requests are down because it’s obvious to anyone who has asked for a loan that regardless of the merit, if there’s a conceivable reason to turn it down, it will get dumped. The bar is set higher. The smaller banks will not get the same great rates that the big guys got, but they also got at least some direction and some incentive in terms of increased business within their communities. You know, where the people who pay the taxes that make these loans possible live and work?
Zack Fivenson

The last thing small businesses need is more central economic planning. http://www.mises.org
bryanfromhouston

“Small business will hire when there is rising demand for their products and services.”
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I’m going to ask the several trillion dollar question nobody has answered so far….how do you increase organic demand?
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What is the most effective way historically to ramp up internal demand? And why aren’t we doing it?
vstillwell

No. Tax cuts do not work. They don’t save jobs. They never have. I bet there isn’t one American job that was saved by the blizzard of tax cuts over the last 30 years. Have any of you ever tried to figure out these stupid tax credits? Sit down one day and try mocking up a domestic production activities tax credit.

The economy is bad because the money supply is tilted heavily to the wealthy. Now the stupid Republican response would be to cut FICA taxes. Real freaking smart Robert Malcom Mitchell. Do you think Social Security will survive 10 years? No it won’t. The poverty rate will double and possibly triple when that happens.

We have a skilled and educated workforce. The problem is supply side economics and unfair trade agreements have robbed the middle class of their share of the money supply and given it to the supper wealthy. Now you have trillions of dollars sloshing around in the global financial markets creating bubbles. This is just stupid.
http://rodgermmitchell.wordpress.com Rodger Malcolm Mitchell

“Tax cuts do not work.”

The above statement undoubtedly is based on zero data. A growing economy requires a growing supply of money. Today’s economy is starved for money, which is why everyone wants the banks to lend more. Tax cuts add money to the economy.

If you think tax cuts don’t stimulate the economy, then you also must believe tax increases don’t slow the economy. If you believe that, you will make a good Congressperson.
rdorrett

“Barley bipartisan fashion”… What does bipartisanship have to do with grain. Come on, ladies and gentlemen, proofread before you hit the ‘send’ button! Spelling errors like this are pathetic.