So the President's big job speech was tonight. I think President Obama is barking up the wrong tree. This is not a personal fault per se... beltway arrogance is a sand trap many politicians of both parties fall into. Many there are prevented by their own myopia from charting a better path. And as a lawyer who has never run a private enterprise, Mr. Obama is somewhat excused from understanding what is required to make, let alone meet, a payroll.
Look businesses create new jobs when they think the added cost of doing so will result in higher profits relative to their investment in human resources. They cannot create jobs when they do not have the capital to do so, be it capital they generate themselves from ordinary operations or must borrow in the form of loans that have to be paid back with interest.
Kicking the can should be a national pastime.
The President has proposed a number of gimmicks that just aren't likely to get the job done. These consist of high-cost tinkering to the tax codes, but ultimately won't stimulate the majority of the businesses to expand in any meaningful way.
These are like saying to a cash-strapped family... "come buy a new car, free satellite radio for six months!" A few may bite.. a few more will nibble.. but most will stand pat.
Other proposed items are variants on 'infrastructure' spending that should be rolled into normal government operations anyway, such as school maintenance, highway maintenance, and so forth. This is the cost of keeping our nation stitched together and should be accounted for from existing revenues, not framed as some special item that requires a big recession to justify fixing.
The reality is that there is no such thing as 'shovel ready' projects and any government-funded program comes laden with so much red tape, rules and bureaucracy, not to mention usual contractor padding of expenses, that these end up creating relatively few jobs that have defined shelf-lives. They certainly do not happen overnight and can take years to get going.
Oh, and the grand plan is to tack the half-trillion dollar price tag to a long-range debt plan that doesn't kick in until most everyone in charge of Washington today has retired.
We have already solved the problem.
There is a better way to provide capital for businesses. In
March 2010 and
August 2011 I mentioned the issue of Excess Reserves. These are the dollars banks hold at the Federal Reserve when they do not wish to deploy them in normal bank operations, such as ... loans.
One of the bailout quirks created a disincentive for banks to loan money and instead park their cash at the Fed... they now receive interest paid on those reserves. They get paid interest on their savings accounts while they dropped your rate to zero percent.
Oh, and this is where a lot of the stimulus money went, by the way. $1.6 trillion (that's $1,600 billion, or $1,600,000 million). Give or take a Bill Gates or three.
What Obama Should Have Done: Proposed Bank Fees on Banks
President Obama should have called for a new law that charges an Inactivity Fee on Excess Reserves. This would force banks to choose between paying the US taxpayers a fee for not lending stimulus money they gave to them, or making loans to businesses so they have viable options to grow.
Those sectors of the economy that sense opportunity could then take out a loan and deploy the capital to hire workers, add capacity, and grow their revenues. Banks could either respond to that demand and supply the liquidity, or stand pat on their reserves and pay the taxpayer some predefined rate, such as the AA-rated corporate bond average as an Inactivity Fee.
The law could have called for some easily understood parameters; for example:
- Loan allocations are proportional to job creation. If small businesses create 50% of the jobs, then they get 50% of the loans. If medium sized businesses create 30% of the jobs, they get 30% of the loans. And so forth.
- Domestic Only. Loans made that did not result in domestic job creation would not save the banks from the Inactivity Fee. The last thing a large multinational needs is cheap capital to close down a domestic operation and outsource.
The Invisible-Hand and the Law-of-Unintended-Consequences ... are a couple made for Jerry Springer
I fear that this new jobs proposal is going to create more capital distortions instead of a fair playing field. For example, subsidizing workers wages with existing unemployment benefit streams creates incentives for companies to reduce their cost structure..
not prevent layoffs or add new workers.
Why hire new workers when one can reduce hours of existing employees and cover the gap with Federal subsidies (as modeled after the GeorgiaWorks program)?
In this scenario you've just made your business more profitable without any changes and put yourself at a price advantage to your competitors, who are now weakened and must match the strategy or lay people off to keep up.
I know they say there will be rules but the law will be written by lawyer-lobbyists to benefit corporate sponsors before it is kissed by Congress and put into effect by bureaucrats who won't know what they are doing.
The progression of good intentions-to-law in Washington has a lot in common with the old game of "telephone" played by kids today. It just gets curiouser and curiouser the more they mess with it.
Creating Free Jobs without using the Bat-Phone
The bottom line is that instead of adding $450 billion to our national debt/increased taxes... we already have so much dry powder just waiting to be used. Let's use a part of that which we have already paid for before we pick up the Bat-Phone. We could take just a third of the Excess Reserves and create the incentives for it to be lent out.. and no new debt would have to be issued and no taxes would have to be raised.
Picture hundreds of thousands of business owners with fresh capital options, who could then make the choice to grow in meaningful leaps and bounds in a manner that makes sense for their particular business: retail, construction, services, real estate, whatever.
With a large loan that needs to be paid back ... they would have incentives to quickly choose willing and capable workers who are more than ready to commit to the workforce. Workers that would help them grow the business profitably and pay back the loan (which also helps make the banks profitable again).
As these workers rejoin and become taxpaying family providers... proportional revenue flows to the Treasury increase and correspondingly reduces our need for further national debt issuance.
Capital Trumps Taxation. "That is what creates jobs."
Richard Silverman is the CFO of TheFreshDiet.com, a Miami-based food.
On CNN he said:
"It is capital availability that matters, not the tax rate that you pay... the difference between us paying a 35% corporate tax rate and a 25% corporate tax rate is peanuts at the end of the year compared to our ability to raise a couple million dollars when we need it. That is what is important. That is what creates jobs."
I agree.
I'll vote for the free jobs option anytime over the one that adds another half-trillion to the debt. Let's save the Bat-Phone for a real crisis.
