Monday, February 01, 2010

U.S. Small Business Woes Continue

Sources: FT.com: Small Businesses Fail to Profit from Rebound; Reuters.com: The State of Small Business; USAToday.com: Strategies: Making Obama’s Small Business Plan Work.

President Barack Obama released his 2010 budget proposal Monday, setting forth concrete financial plans for the coming year. In his State of the Union address Wednesday, January 27, the President expressed the view that in order for the nation to recover from the recent financial crisis, there must be a renewed interest in creating and sustaining small businesses nationwide. This commitment to small businesses was expressed by the President with a promise to allocate $30 billion of repaid TARP funds to small community-owned banks and credit unions. It is the intention of the Administration that funding these small loaning institutions will help alleviate the small business credit-crunch that has stifled the growth of the small business sector since the financial meltdown. The credit-crunch refers to banks’ unwillingness to lend to small businesses in order to avoid risky lending. Since the financial crisis of late 2008, banks have made substantial cuts on the amount they are willing to loan. In addition, home equity credit lines are much more difficult to obtain as they are also considered risky to banks.

In addition to the President’s plan to re-distribute the repaid bailout funds, the White House budget proposal includes other small business incentives. The President has proposed a total of $33 billion to be directed towards rejuvenating the small business sector. A chunk of that money will be distributed to businesses as a tax credit of $5,000 for each new employee hired. This plan will not only boost the return on having a small business, but will also have a positive effect on the unemployment rate. Tax incentives will also be available for small businesses that invest in new plants and equipment. Lastly, the President has also proposed zero capital gains tax for investments in small companies. A capital gains tax is a tax on the profit earned in an investment situation where a trader buys for low and sells for high. Zero capital gains tax will likely result in a surge of investment in small companies, which in turn will result in the accumulation of wealth for smaller businesses.

Economists agree that small businesses play a central role in America’s economy. The President’s past effort to aide small businesses has been to allocate funds to the Small Business Administration (“SBA”) which are then used to waive fees and increase the amount of lending money. The results of President Obama’s past plans have been insufficient, however, as the SBA is currently loaning half of what it was before the financial crisis.

Discussion Questions:

1) Some criticism has been centered on the fact that TARP assets have a stigma attached to them and that small banks might not want to get involved with that stigma. Is that a rational fear for small banks to have? How can the government ease those fears?

2) Recently, a spotlight has been placed on the extreme deficit that the U.S. has accumulated. Would it be better for the Administration to use the refunded TARP money to pay down some of the deficit?

3) Why are small businesses so important to the United States economy?

1 comment:

Steve said...

I have just discovered your body of work and am glad to have done so. The credit freeze may have begun to thaw among early Tarp recipients that are stable. But that is a drop in the bucket. The President's plan seems very vague. Is it for capital? Then how is it different than TARP? Is it for loans? Then how different from SBA? Community Banks in general are not a perfect answer. What type if behavior is needed from Community Banks must be defined. They are often run for their own stakeholders as well: Management and closely held shareholders.