Free Markets, Free People

Recession cafe: today serving Obama economic hash

CNN has a story about a bike store owner who has retrenched and is weathering the recession. Contained in the story is the kernel of the economics of the problem we face and how the administration still doesn’t get it.

Here’s the quote:

Both then and now, D’Amour said the chief problem for small business owners is access to financing. And lawmakers want small businesses to know this complaint is reaching Washington.

President Obama urged Congress last week to move forward on a bill designed to help small businesses, including a $30 billion lending fund to loosen credit lines and $12 billion in tax breaks.

That will help but it won’t solve the problem, said Anne Mathias, director of policy research at Concept Captial.

"It’s not going to bring a rush of people into stores to buy whatever it is these different small businesses have to offer, but it will help," she said. "It’ll help kind of at the back end."

Republicans say the bill won’t have much effect and are urging the president to extend the Bush administration’s tax cuts.

Todd McCracken, the president of the National Small Business Association disagrees.

"Putting money in the pockets of both consumers and small business people so they can take advantage of the opportunities when they come along is crucial," McCracken said Sunday morning on State of the Union with Candy Crowley.

Access to financing, although important, isn’t the base problem. Consumption is – or the lack thereof. Additionally, payroll taxes will be going up for everyone in January (a little known part of allowing the Bush tax cuts to expire).

Question: if you are charged – both short term and long term – with getting the economy moving by implementing policies/laws at a national level, how would you go about it?

Well, in the short term you can provide businesses with all the financing in the world, but unless consumption steps up, it doesn’t do anything useful.  Until buyers are buying, businesses won’t be hiring.

So what’s the best way to quickly boost consumption?  Obviously it is to put more money in the hands of consumers.  And one such way to do that is to cut payroll taxes, or, as has been suggested, have a payroll tax holiday.

That, of course, has been rejected by the Obama administration which feels it would “cost” the government to much money.  They’d rather government “cost” the consumer too much money and the consumer stay home as a result one supposes. 

Instead, the administration is proposing a $100 billion “research and development” credit for businesses.  A couple of observations – that’s not a short term fix and not all businesses engage in R&D. 

The point, of course, is the administration is more concerned about the government revenue stream than the economy and it is, as John McCain has said, just “flailing around”.  It is much more concerned with the “cost” incurred by government necessary to actually have some impact on the economy than it is the “cost” it will impose on the tax payer for it’s future multi-year deficit fueled budgets. 

It refuses the other side of tax cuts – spending cuts.  Instead, it simply intends to shift the burden of its profligacy to you.  And these tax cuts are for show only – a way of claiming to do what the GOP wants without really doing much of anything.  When this tiny and piece meal approach fails to get the dead weight of the economy moving, the left will claim to have tried the right’s prescription and that tax cuts didn’t work.

Anyway, the administration plans to “pay” for this tax credit (oh, so now PAYGO is important) by increasing taxes through closing “tax loopholes” for multinational corporations and some energy companies. This, dear friends, is simply another much desired wolf from the liberal agenda in sheep’s clothing.

The National Tax Payer Union points out that those taxes being proposed as “closing loopholes” will actually make our domestic oil and gas business uncompetitive.   It will, for instance, tax all the revenue Chevron earns (both here and overseas) because Chevron is an American based company but won’t do the same to BP (or Venezuela or China) because BP isn’t an American based company.  Unilateral nonsense like that will put Chevron in an unenviable competitive situation.

Make sense?  Especially in times of recession? Can anyone guess what a Chevron may decide to do (hello Toronto, any office space to lease up there?).  And, of course, the taxes in question will be passed along to the hard pressed consumer with increased prices.  That’ll spur increased consumption, won’t it?

The rest of the proposed economic package is the usual failed stuff – increased infrastructure spending.  The only laudable portion of the package is the proposed extension of the middle class portion of the Bush tax cuts.  But again – that doesn’t put more cash in the pockets of consumers, it simply maintains the status quo.

But the “rich” – tough noogies.  You may have seen administration flunkies out pushing the canard that the tax will only effect 3% of the small businesses out there.   The Wall Street Journal blows that bit of spin out of the water – first by explaining the smoke and mirrors the administration used to produce that number and then pointing out what the number really is:

According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.

So, the proposal by the administration to get the economy moving is maintain the status quo taxes on the middle class (no immediate impact), provide a limited benefit (at best a long term impact) cut to some business in the area of research and development, more infrastructure spending (long term because of the government project process), an increase in taxes on American oil and gas companies (immediate negative impact) and an increase in taxes for 48% of the small businesses in America (immediate negative impact).

If that’s not a bad tasting hash of ideas, I’m not sure what to call it.  And yeah, you can bet your bottom dollar it will get the economy moving.

Excuse my sarcasm, but obviously this is “rocket science” to the administration, and they’re totally baffled by it.  Someone, anyone, tell me why the GOP should support this?



19 Responses to Recession cafe: today serving Obama economic hash

  • 1.  There is no dearth of capital for small (or any) business, according to what I read.  There is LOTS of money being held all through the economy.
    2.  Nobody in government needs to fund R&D (except…sometimes…military stuff).  If it needs funding, and has merit, it will find $$$ in the private sector.  There is at least an argument for government R&D in esoteric basic science, but I’m still not convinced.
    3.  People right through the economy have the sense…quite well-founded…that the Obami HATE capitalism, markets, and the American standard of living.  They intend to “transform” each.  That scares everyone spitless, as it certainly should.  As long as that continues, the economy isn’t rebounding, and people are not investing.  It would be irresponsible to do so, when your firm could be the target of the next whim by some Obami.

  • After the billions already spent there is plenty of money around, but it’s being held back by the banks. And why not? In these difficult economic times where no one knows what this administration will do next the word is “CAUTION” in big red letters. So dumping more money into the economy isn’t going to do a thing if the banks hold on to it, especially after their fiasco with the whole loan game they just went through.
    Obviously the Obama administration doesn’t have a clue. And I pretty much agree with the above comment by Ragspierre.

    • Banks used to be in the business of loaning money.  I’m not so sure they are now.
      They can ‘borrow’ money from the Fed at near zero interest, ‘invest’ in commodities/futures, make their profit, and payback the Fed, all while not having to deal with borrowers (and all that entails).

  • You’re confusing median and mean.  That most small businesses won’t be hit w/ the increase on top marginal rates isn’t inconsistent w/ the fact that half of income from pass-through entities goes to people in that bracket.  (in fact, I’d expect that to the case, given the extraordinary amounts of income that pass through hedge funds and private equity partnerships, which certainly account for a very large portion of that 48%)
    As much as just counting the # of returns w/ business income may be misleading, looking at average income is going to be far more misleading given the skew from investment partnerships.

    • I’m not confusing anything – I’m pointing out the difference in the numbers and essentially asking if anyone believes that the 48% = 3% of small businesses (sole proprietorships, partnerships, and S corporations)? Frankly, it’s hard to imagine that amount of money going to 3% and those 3% still being classified as “small businesses”.

      • I’m not a green-eye-shade kinda guy.  I don’t KNOW what the numbers ought to be, but I can’t buy the 3% Bite Me Biden is using.  It seems ridiculous on its face.  But I go back to this; WHATEVER it is, the MONEY IS NOT THEIRS TO TAKE.  ASSUME the number is 3%; how is that right?  ASSUME the number is 3%; how is it SANE to penalize these VERY PRODUCTIVE people…in mean FURTHER?
        Another thing; push more money into the economy, dedicate it for small business loans, and you are setting up a “small-business financing bubble”.  You get the same perverse, market-distorting outcome that came from pushing money into the housing market and mandating the suspension of good practice in qualifying loans.  This really cannot continue.

      • I agree that hedge funds raking in millions and millions of dollars shouldn’t be classed as “small business.”  The problem w/ the WSJ methodology is precisely that they lump those hedge funds in w/ small business.  Back those out and that 48% number is going to go down substantially.

        • The upper limit, per the SBA for Subsector 523 – Financial Investments and Related Activities is $7 million dollars. Are you claiming that every one of those hedge funds are under $7 mil? If they’re not, then they don’t fit the SBA definition of a small business in that sector (link – see page 29)

          • The WSJ included all partnerships, S-corps, and LLCs in their definition of “small business.”  So they included tons of entities that clearly aren’t small businesses.

      • I could believe that sole proprietorships, partnerships, and S corporations are 3% of all returns filed and 48% returns with incomes above $200,000.
        This would mean that returns above $200,000 are about 6% of all returns.

  • BTW, the data seems to bear that out.  Close to half of income in pass-throughs is attributable to entities in the finance data, while they account for only about 25% of partners / members. (I reviewed the bottom chart “GPs, LPs, and LLCs)

  • @ Ragspierre:
    Correct, all counts.

  • The GOP should support it because they have to have ‘ a plan’, according to the pundits.
    Therefore, I expect some will sign on, their spines being as solid as they are.

    In aviation terms, the vertical speed indicator is currently pegged at a -5000 fpm; several in the GOP will jump on thereby reducing the veritical speed to -4000fpm.

    And the above will be hailed as leadership…meanwhile, the descent continues and the earth is getting awful big in the window.

  • Obama & friends seem to belong to the “When in danger, when in doubt, run in circles scream and shout”  school of economics.  

  • How about they just funnel the unspent portion of the already “failed stimulus” to this new effort, instead of adding any taxes.  In fact, stop the “old stimulus” entirely.

  • Recession Cafe: I guess they are doing Korean cuisine today …

    “They Talk About Me Like A Dog”

  • If I recall correctly, it has always been tough for small businesses to get loans. This is understandable since small businesses have more risks than large ones. That is why our federal government  created, in 1953,  the Small Business Administration which, among other things, provides financing to small businesses. Problem solved.

    This ‘problem’, like the alledged dearth of mortgage money (for which there is also federal assistance), is probably exaggerated.