Facing the stark reality of double-digit unemployment and the failure of his first $862 billion economic stimulus, President Barack Obama unveiled his second stimulus plan last month including a mix of subsidies and government-subsidized loans targeted solely at small business. Obama’s Second stimulus will be funded in part by roughly $33 billion from the TARP, that will be then redirected to community banks through the Federal Small Business Administration (SBA).
While the aim of promoting job growth through the “acceleration” of small business creation and expansion is laudable, businesses do not want more government intrusion. Unfortunately, in an attempt to stimulate job creation and small business growth, the last round of pledges from the White House will only further expand government regulation over business.
Small business certainly comprises a large share of total employers in the US economy and as small businesses expand—or originate—there is more employment in local economies. It is not clear, however, that there is a direct link between the loan guarantees provided through the SBA and the volume of small business lending in local markets
Most importantly, despite holding nearly $90 billion in total loans (an increase of 70 percent since 2001), the SBA’s system of lending has fallen short on its ability to keep up with industry standards where the average quality of an SBA federally-guaranteed loan (in 2008 corresponding to a Moody’s rating of Ba) falls below that of a typical private, non-government subsidized loan. In a 2009 report, the Government Accountability Office discovered that the “SBA does not follow sound validation practices or use its own data to independently assess the risk ratings, the effectiveness of its lender risk rating system…may deteriorate as economic conditions and industry trends change over time.”
In addition, the President is promising that the SBA will guarantee the loans dispersed under this new round of stimulus spending at the 90 percent level. Considering the mounting evidence against the ability of SBA to maintain industry standards, this should be worrisome to the American taxpayer since they subsidize these loans—under the current lending structure, SBA guarantees up to 90 percent that SBA lenders make to small businesses.
Leaving aside the fact that the SBA has a poor track record of targeting effective loans and overseeing these loans it is vital to reiterate that small businesses will continue to react to uncertainty. The most pressing issue for every American is ensuring that the economy and net employment begins to rebound.
Rather than entertaining poorly targeted policies, the White House and Congress should be spending time assuring American businesses that they are committed to a policy mix centered on permanently lowering capital gains tax rates, income tax rates, the estate tax, as well as mitigating regulation and employer mandates which would give businesses the necessary incentives to innovate and expand in the most efficient manner.
Yesterday the U.S. Constitution and federalism won a key battle. The Virginia Senate, which has a Democrat Majority, passed a bill prohibiting a requirement for Virginians to purchase health-care insurance. Five Democrats from swing districts joined all of the Senate Republicans in voting in favor of the measure. And with a Republican State House and Governor, this bill is expected to make it into law.
Some would argue that the legislative implications are negligible as the federal government, if it wants, can override state law and that an individual mandate could be authored in such a way to not run afoul of this Virginian measure. However, the practical implications of this effort are widespread. What are these?
The Constitution is Back in Vogue. Many of the elite politicians and media insiders ridicule anybody who questions health care federalism and the Constitution. The liberal leaders in Congress could not believe that the American people would value our nation’s Founding principles over their precious health care reforms. However, the fact of the matter is that these are serious issues that deserve deep thought and discussion.
Obamacare Setback. Passage of the Virginia measure will further stymie efforts in the House and Senate to get Obamacare to the President’s desk. Even if the federal government can supersede State authority, members from those states that pass these initiatives will have a hard time voting for something that is clearly against the will of their constituencies. For example Sens. Jim Webb (D-VA) and John Warner (D-VA) in particular will now have to justify why they have not considered the expressed will of the elected legislators from Virginia.
States Fighting Back. With the health care debate in limbo, news outlets are highlighting state efforts to protect their residents from federal Government intrusion. In addition to Virginia, over 2/3rd’s of the States have introduced measures to stop individual mandates on health care. Many State Attorney Generals have threatened to sue if current federal reform proposals are passed into law. State legislators across the country are considering various bills that would allow their state to opt out of key provisions of Obamacare or provide state voters a chance at the ballot box to reject nationalized health care in their state.
Regardless of legislative components of the Virginia action yesterday, Conservatives should cheer the resurgence of federalism and what it means for reigning in the rapidly increasing federal government. With most states starting their legislative sessions, this may be just the beginning of what could be the “Year for State Sovereignty.”