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Creating jobs without busting the budget

President Obama Monday signs the Small Business Jobs Act, which aims to help get credit flowing back into small business investments and job creation.

This measure is a step in the right direction. But with unemployment officially at 9.6 percent 15 months after the recession officially ended -- and a more accurate unemployment figure for today being close to 20 percent -- these are small steps at a time when bold strides are required. And with further federal deficit-financed stimulus programs for unemployment insurance, education, health care and public safety considered politically impossible, what are other large-scale programs that could contribute to a strong recovery? In a paper for a recent New America Foundation forum,"Plan B for Economic Recovery," University of Massachusetts-Amherst economics professor Robert Pollin offers a plan that deserves a wider audience.

Pollin argues:

The single most important reason for the failure of the recovery to take hold thus far is that private credit markets are locked up, especially for small businesses. Private business borrowing and lending is at a standstill, while private banks are holding an unprecedented $1.1 trillion in cash reserves in their Federal Reserve accounts.

The solution is for the federal government to create strong incentives on both the borrowing and lending sides of the market to push affordable credit back into the market -- again, especially for small businesses -- where these funds will start financing business investments and job creation. The federal government already has the power to accomplish this with minimal impact on the federal budget. It will entail working with existing policy tools and agencies, in particular the loan guarantee program now operating at the Small Business Administration (SBA).

This proposal could be a grand compromise between President Obama and Wall Street.

Consider that this policy includes just two main features, a carrot and a stick. "The carrot is an expansion of existing federal loan guarantees by $300 billion, which would roughly double the amount of total annual guarantees. Small businesses would be the primarily recipients of the guarantees. The stick is a 1 to 2 percent tax on the excess reserves held by banks," which will create a strong disincentive for banks to continue holding excess reserves.

Pollin estimates that this program could "generate about 3 million new jobs, if it succeeds in pumping about $300 billion into new productive investments....The impact of the program on the federal budget would be modest, most likely no more than additional 0.3 to 0.5 percent increase in federal spending" to cover the guarantees on defaulted loans. Some of these costs could also be covered from the revenues generated by the reserve tax.

This should be a program that everyone can support. Who could be against measures that have the potential to generate millions of jobs, provide cheap credit for small businesses, dramatically lower the level of risk for banks to support small businesses and do all of this on the cheap? And for those deficit vigilantes, remember the only direct cost of this program would be covering the guarantees on defaults. Finally, all of this can be accomplished with relatively modest administrative costs for the federal government.

What Pollin's proposal makes clear is we have the policy tools to move the credit markets in the right direction. But we have to begin now; we have to stop thinking small; and we have to start leveraging private credit markets to see economic recovery.

By Katrina vanden Heuvel  | September 27, 2010; 12:00 PM ET
Categories:  vanden Heuvel  | Tags:  Katrina vanden Heuvel  
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Comments


You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price by calling 877-882-4740 or check http://bit.ly/9fDY7U If you have health insurance and do not care about cost just be happy about it and trust me you are not going to loose anything!

Posted by: chadwick23 | September 27, 2010 12:24 PM | Report abuse

Federal deficit-financed stimulus programs for unemployment insurance, education, health care and public safety are large-scale programs that could contribute to a strong recovery? - Wow, absolutely no mention of business, manufacturing, or agriculture.

Scarey that liberals think this is what drives the economy. No wonder the Trillions of dollars spent have been ineffective.

Posted by: kitchendragon50 | September 27, 2010 12:58 PM | Report abuse

Great idea Katrina - let's do government by untested academic models that don't even try to account for all the variables and make no allowance for unintended consequences.

I have a novel idea - let's try having a reasonably free market again. Government is the problem -not the solution!

Posted by: pilsener | September 27, 2010 2:05 PM | Report abuse

"Federal deficit-financed stimulus programs for unemployment insurance, education, health care and public safety are large-scale programs that could contribute to a strong recovery? - Wow, absolutely no mention of business, manufacturing, or agriculture.

Scarey that liberals think this is what drives the economy. No wonder the Trillions of dollars spent have been ineffective."

Posted by: kitchendragon50

Consumer Demand drives the American Economy. So far there has not been sufficient consumer demand to stimulate business to hire (create 8.3 million lost jobs) and get all the unemployed back to work. You bet we need additional stimulus, "big time" to get people back to work and yes the needed additional stimulus will cause short term deficit spending. What is the alternative - possibly sliding into a full fledged depression or an economy limping along with 20% unemployed or underemployed for the forseeable future!!!

Posted by: garywamp | September 27, 2010 2:31 PM | Report abuse

Too little too late... we've got amateurs in the White House, who don't understand the real world. Just throw more money at it, that's their answer to everything.

Posted by: ohioan | September 27, 2010 2:33 PM | Report abuse

As long as residential and commercial real estate values keep falling, banks will maintain excess reserves as a cushion against declines in the value of the assets they hold.

Once real estate bottoms then banks will begin to take more risk. Any attempts by the government to support the real estate market through foreclosure prevention or other methods will not do the job - it has to find its level on its own.

Taxing bank excess reserves will not push them to lend more - they fear the bank examiner more than the 1% - 2% tax.

Posted by: sold2u | September 27, 2010 3:04 PM | Report abuse

Are you looking to file for bankruptcy? Compare your bankruptcy options and information http://bit.ly/avB0jI

Posted by: kerisable28 | September 28, 2010 5:10 AM | Report abuse

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