Getting it wrong on small business

Douglas Holtz-Eakin Former Director, CBO
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The economic news yesterday was dominated by two pieces of labor market data: new claims for unemployment insurance rose to 500,000 this week and small businesses accounted for 86 percent of job losses in the 4th quarter of 2009 (up from about 64 percent a year earlier).  Small business employment dynamics link these two facts.  But the White House has the diagnosis and policy wrong.

The most convenient source of small business employment is the monthly ADP Employment Report.  These data mimic the findings reported by the Labor Department in its Business Employment Dynamics data.  Specifically, during the 4th quarter of 2009, firms with fewer than 500 employees contributed 72 percent of net job losses.

Thus, in the White House narrative, small businesses are in free fall and need a round of quick fix stimulus.  The president started the day by blaming Republicans for the failure of the Senate to pass a small business bill to help hiring.  But there is only one impediment to passage: a $30 billion fund for small business lending that not even liberal icon Elizabeth Warren believes will work.  Like the TARP, the mini-me-TARP will carry the stigma of government lending, invite political interference in lending and bank management, and fail to enhance lending.

But the real story is that small businesses are the source of job growth in the recovery.  Since jobs started growing in February, 40 percent are in firms with 1-49 employees, while 60 percent are in firms of 50 to 500 employees (as measured by the ADP).

Thus, small business has been steadfast in the face of difficulties.  So, instead of this “help” for small business, perhaps the administration could: (1) drop its plans to raise taxes on small businesses that employ over 20 million workers, (2) stop running deficits that threaten higher interest rates or financial panic, (3) try a do-over on health care reform that controls health care costs and does not impose costly administrative regulations and coverage mandates, (4) drop support of unionization without a private ballot, (5) and work to open world markets to our manufacturers.  Small businesses are resilient, but there is no reason for the White House to work so hard to make them prove it.

Douglas Holtz-Eakin is president of the American Action Forum.