Topic: Government and Politics

“Small” Businesses Not Getting “Fair Share” of Government Cheese

The decades long battle over what constitutes a “small business” for purposes of government contracting set-asides (and subsidies for that matter) continues in today’s Washington Post.  Once again, it appears that the federal government has been negligent in making sure the “big” guys aren’t swiping slices of the “small” guys’ cheese.  Oh dear.

With regard to set-asides, regardless of who gets the government contract, taxpayers lose because they foot the bill.  Because set-asides effectively limit the competition for a government contract, taxpayers can end up paying even more – especially when economies of scale would have allowed a larger business to offer a lower-cost alternative.  Thus, I had to chuckle at the bereaved “small” defense contractor cited by the Post who bizarrely claims that these set-asides “keep down the cost to the taxpayers.”

Not to be outdone, the ever-excitable defender of small business set-asides, Lloyd Chapman, told the Post that the economy has been damaged by small businesses not getting their “fair share.”  Lloyd heads up a group called the “American Small Business League,” which sounds innocuous until one discovers that it’s just another special-interest outfit fighting to secure a suckling position on the federal underbelly.

The federal government’s flagship promoter of the small business plight, the Small Business Administration (SBA), has been “helping” small businesses since the 1950s.  However, Cato adjunct scholar, Dr. Veronique de Rugy, has found that “no more than 1 percent of [all] small business loans each year are SBA loans.  The private sector finances most loans without government guarantee and, hence, the SBA is largely irrelevant in the capital market.”  Moreover, because SBA financed loans have below market rates, small businesses who aren’t subsidized by the government are placed at a competitive disadvantage.  (Read de Rugy’s entire piece here.)

So how does a bureaucracy that is a detriment to the interest it is supposed to promote still alive?  The simplest reason is that, like thousands of other unnecessary government programs, the SBA has developed a vocal constituency.  The small minority of businesses on the SBA dole obviously have an interest in its survival.  Banks lobby for the SBA’s existence because SBA-backed loans guarantee lenders up to 85% repayment in case of default (i.e., SBA loans represent welfare for bankers).

Historian Jonathan J. Bean touched on additional reasons for SBA’s survival during his 2006 testimony before a Senate subcommittee hearing on the agency.  The context is the Reagan administration’s failed attempt to abolish the SBA in the 1980s (click here for entire testimony):

“To a large extent, the SBA is a “creature of Congress.”  Why was Congress so interested in the SBA?  Many members were sincerely interested in small business issues.  Others used their committee membership to strengthen ties with the business community.  The SBA was a useful conduit for the constituent work of the Small Business Committees, a dumping ground for politicos, and a “petty cash drawer” for the pet schemes of Congress. The agency’s extensive field structure served many congressional districts; the field directors were “often as loyal to their district Congressman as to the agency.”  It is little wonder, then, that Congress was so fond of the SBA.”

Set-asides and subsidies aren’t good for small businesses – they’re only good for politicians and taxpayer-dependent special interests.  If Congress really wants to help, it should drastically reduce the tax and regulatory burden that inhibit a small business’s ability to compete and prosper.  Heck, just doing away with the SBA would be a plus.

Obama Tax Plan and IRS Data

Senator Obama wants to “restore fairness to our tax code” by raising taxes on those earning more than $250,000. Let’s look at the most recent IRS income tax data for 2006 to see what we can learn about tax fairness.

See line 42 in this IRS table, which shows data for those earning less than $200,000 (the closest income breakpoint). This group paid 9.7 percent of their adjusted gross income in federal income taxes.

Now scroll down to line 58 in the table. Those earning more than $200,000 paid 21.8 percent of their income in income tax, thus paying more than twice the tax rate of the other group.

Is that fair?

McCain Unleashes His Inner Goldwater

Dropping in the polls and running out of time, John McCain has finally gone on the offensive against Barack Obama on core Republican values that appeal to libertarians, conservatives, and Reagan Democrats. In his Saturday radio address he seized on Joe the Plumber’s question to candidate Obama:

My opponent’s answer showed that economic recovery isn’t even his top priority. His goal, as Senator Obama put it, is to “spread the wealth around.”

You see, he believes in redistributing wealth, not in policies that help us all make more of it. Joe, in his plainspoken way, said this sounded a lot like socialism. And a lot of Americans are thinking along those same lines. In the best case, “spreading the wealth around” is a familiar idea from the American left. And that kind of class warfare sure doesn’t sound like a “new kind of politics.”

This would also explain some big problems with my opponent’s claim that he will cut income taxes for 95 percent of Americans. You might ask: How do you cut income taxes for 95 percent of Americans, when more than 40 percent pay no income taxes right now? How do you reduce the number zero?

Well, that’s the key to Barack Obama’s whole plan: Since you can’t reduce taxes on those who pay zero, the government will write them all checks called a tax credit. And the Treasury will cover those checks by taxing other people, including a lot of folks just like Joe.

In other words, Barack Obama’s tax plan would convert the IRS into a giant welfare agency, redistributing massive amounts of wealth at the direction of politicians in Washington. I suppose when you’ve voted against lowering taxes 94 times, as Senator Obama has done, a new definition of the term “tax credit” comes in handy.

At least in Europe, the Socialist leaders who so admire my opponent are upfront about their objectives. They use real numbers and honest language. And we should demand equal candor from Senator Obama. Raising taxes on some in order to give checks to others is not a tax cut it’s just another government giveaway.

That just might remind lots of voters why they don’t like to elect Democrats. Of course, it might work better if the Republicans hadn’t raised spending more than a trillion dollars. And if the current Republican administration hadn’t just nationalized the banks. And if McCain himself didn’t have a health care “tax credit” that also means that “the government will write them all checks.”

The Madness of King Rod

While Hawaii’s experiment with universal coverage is disrupting health coverage for thousands of children, a similar drama unfolds in Illinois:

Last year, the legislature twice turned down [Gov. Rod Blagojevich’s] plan to expand health care – first for universal coverage, then to expand income-eligibility requirements for state-subsidized care. But Blagojevich began enrolling families anyway, claiming he had sufficient authority…

[Cook County Circuit Judge James] Epstein issued a preliminary injunction in April banning state officials from spending money on the program. That decision was upheld last month by the Illinois Appellate Court.

[Epstein] said he sympathized with low-income families, some of whom have paid insurance premiums under Blagojevich’s expansion and would lose coverage. But he said they “do not have a right to continue to receive coverage under this improperly promulgated program.”

Patients are getting jerked around by their government?  You don’t say.  The Blagojevich administration’s response to this judicial smackdown was something short of penitent.

The Illinois Department of Healthcare and Family Services issued a statement following the judge’s action saying it was “currently reviewing the decision, but the governor is committed to making sure that these families continue to get the insurance they need.” 

Did King Rod miss that day in Civics class when they explained that the legislature writes the laws?

I’ve criticized supporters of universal coverage for practicing what amounts to an unacknowledged religion.  But this has to be the first time I’ve seen religious fervor tempt one of the faithful to assume the powers of a monarch.

“Press Release Economics” in New Jersey

My misadventures in state government led me to coin a phrase for what has become the economic growth model of choice for a lot of governors:  “Press Release Economics.”  It comes in many shapes and sizes, but it basically boils down to the orchestrated PEZ-dispensing of taxpayer money on short-term “economic growth” schemes for crass political gain.

The most common form is probably the targeted tax break and/or corporate welfare grant/loan to incite a company to relocate within a state’s borders.  Politicians love these taxpayer-financed giveaways because they come complete with lots of visible media coverage: press releases, newspaper articles, radio and television reports, and best of all…the photo op.  Ah yes, that priceless picture of the governor all dressed up with a hard hat, ceremonial spade in hand, and a big toothy grin.

One would be hard pressed to find justification for these political endeavors in the economic literature, but then again the little Potemkins who run state “economic development” bureaucracies don’t have time to be bothered with trivialities when there are “jobs to create.”

Today I read that Gov. John Corzine has come up with a $150 million package to help the New Jersey economy.  The concoction includes two peculiar items: money for banks to get them to lend and a $3,000 check to small businesses for each employee they hire and employ for a year.  “Create a job and we will send you a $3,000 check,” Gov. Corzine says.

With regard to the first one, the New York Times reports:

James Silkensen, president of the New Jersey League of Community Bankers, said he had not heard complaints from his members about needing more cash. “Our members are telling us that they’ve got money to lend,” Mr. Silkensen said. “They aren’t going to change their underwriting standards. I can’t say every bank has sufficient funds to lend. But most I have talked to are lending, though they’re being careful.”

With regard to the second one, it’s pure press release economics.  Why not $4,000 an employee?  Or $5,000?  Why just “small” businesses?  Do “large” businesses contribute nothing to the New Jersey economy?  How will this initiative be enforced?  How much will it cost taxpayers for New Jersey bureaucrats to make sure each and every new hire was employed not less than 365 days?  How many of the $3,000 check employees would have been hired anyhow?  How many jobs will be lost because of the tax burden needed to pay for this scheme and others?

Here’s a better idea, Governor: propose serious tax and spending cuts.  New Jersey’s general fund is up 40% from just five years ago, which amounts to a $1,000 per New Jersery citizen spending increase.  At the same time, New Jersey’s business tax climate was recently found to be the worst of the fifty states.

Is Barack Obama like Al Smith?

At the Al Smith Dinner, Barack Obama said, “I feel right at home here because it’s often been said that I share the politics of Alfred E. Smith and the ears of Alfred E. Newman.” That’s the best news I’ve heard all year. Because Al Smith was not only America’s most visible opponent of our first version of Prohibition, he was a leading critic of Franklin Roosevelt’s New Deal. Indeed, he was a founder of the American Liberty League, the leading organization in opposition to the New Deal.

As David Pietrusza wrote in Reason, the Liberty League grew out of the earlier organization Americans Against the Prohibition Amendment. And, he said,

In summing up the League’s philosophy, liberal author George Wolfskill (The Revolt of the Conservatives) outlined a remarkably coherent libertarian position. They believed, he said, that the New Deal was a threat to the Constitution and represented a danger of tyranny via centralization; that it was based on coercion, deceit, and false economic principles: that recovery was in fact retarded by government intervention; that government agricultural controls were “a cure worse than the disease”; that the New Deal combined aspects of socialist and fascist economic systems; that private enterprise was being damaged; that deficit financing and high spending threatened the nation with inflation; and that the banking community was now under the political control of the federal government.

So if Barack Obama indeed shares the ideas of Al Smith, maybe as president he’ll take on our current version of Prohibition, and get the government out of the banking community, and start to undo the unconstitutional excesses of the federal government that have merely accelerated from FDR to Bush and Cheney. We can only hope.

McCain’s Misguided Mortgage Bailout

As promised in an earlier post, here is the latest iteration of my Los Angeles Times debate on financial markets, housing policy, and the role of government. Wednesday’s debate featured a discussion of Senator McCain’s $300 billion scheme to buy bad mortgages. Not surprisingly, I explain why taxpayers should not be responsible for rewarding borrowers and lenders who were imprudent. Next installment will be up tomorrow.