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 Assistant Secretary for Economic Policy and Chief Economist Alan Krueger Speech to Charlotte Chamber of Commerce's Summit on Access to Capital for Small Businesses and Entrepreneurs as Prepared for Delivery




Thank you, Bob Marshall for your kind introduction.   I am pleased to be able to talk to you today because as an economist I know that small businesses and entrepreneurs are at the heart of sustainable job growth and prosperity in America.   As an economist, I also understand the concept of opportunity cost, and I appreciate the time that everyone is taking to attend today's event.  

We are meeting at a time when the U.S. economy is recovering from a very rough patch.   I like to say that we had an abnormal recession but we are seeing signs of a normal recovery.   In a normal recovery, the stock market usually turns up before the real economy.   Inventories rise before consumer spending.   And work hours increase before jobs are added and unemployment declines.   There is a rhythm to recoveries.   We are seeing the normal pattern, which is reassuring and a remarkable achievement when you think about it.   When President Obama was sworn into office a year and half ago, the economy was on the brink of a second Great Depression, but now shows signs of a normal recovery.   GDP has expanded for three quarters in a row after contracting for four quarters in a row.   

You have seen the change here in Charlotte.   During the two years from December 2007 through December 2009, the Charlotte metropolitan area lost 73,500 nonfarm payroll jobs.   Thus far in 2010, the area has added nearly 7,000 jobs.

Now, I also like to say that recoveries do not move in straight lines.   There are ups and downs.   We're certainly seeing that in some of the housing indicators.   But recoveries also have internal momentum.   The income generated from restocking inventories leads consumers to spend more, which in turn leads businesses to sell more goods, invest in more plants and equipment, and hire more workers.   Although the recovery will move in fits and spurts and is still fragile, I think the most reasonable forecast is for economic growth to proceed in the 3 percent range this year and to be stronger next year.  

I do not want to sound Pollyannaish.   The financial crisis caused a lot of damage to confidence and has left many banks reluctant to lend.   The economy faces many headwinds.  

The economic headwinds have been particularly tough on small businesses. We see this in many indicators, but it is clear and most worrisome in the jobs figures.   Small businesses ¨C defined as establishments with less than 50 employees ¨C account for about 40 percent of all employment in the U.S. but they accounted for 60 percent of the net job losses from December 2007 to December 2009.  

Big businesses have been growing since September, yet small businesses continue to struggle.   This is a contrast to the recovery from the recession of the early 2000s, when small businesses led the expansion.   Small businesses were facing difficulties before the financial crisis worsened the recession, but their challenges have been magnified since the financial crisis.   Big businesses can access credit through corporate bond markets, while small businesses are dependent on bank financing.  

Surveys turn up three major problems confronting small businesses today:

  • Weak overall demand stemming from the recession;
  • Restricted access to credit on reasonable terms; and
  • Uncertainty over the future which delays hiring and investment.

The Obama Administration is taking steps to address each of these problems. We have also cut taxes and support additional tax incentives to spur small business growth.  

To boost aggregate demand Congress passed the American Recovery and Reinvestment Act in February 2009.   When all is said and done, the Recovery Act will have injected over $800 billion in stimulus into the economy ¨C about a third in tax relief (e.g., Making Work Pay tax cut), a third in support for the most vulnerable populations (e.g., unemployment assistance and aid to states) and about a third in infrastructure spending (e.g., Charlotte received almost $25 million in Recovery Act grants for its light rail and bus system).

The key point is, the Recovery Act has worked.   The free fall in the economy has stopped. Growth has resumed. More still needs to be done ¨C which is why the President asked for an extension of Unemployment Insurance benefits, an extension of small business tax cuts and other proposals ¨C but the economy is in a much better position now as a result of the Recovery Act.  

To ease the credit crunch, the Administration has worked on many fronts.   The seizure in the financial system was widespread after the collapse of Lehman Brothers, and a multifaceted approach was needed to resuscitate the system.  

A number of Administration policies have contributed to restarting securitization markets, which are important for consumer and small business credit.   The Term Asset-Backed Securities Loan Facility (TALF) has supported $70 billion of asset-backed securities.   The Public-Private Investment Program funds have purchased, to date, $12 billion of securities from banks, which facilitates new lending.   And earlier this year Treasury began purchasing securities backed by SBA-guaranteed loans, which helps clear the way for more small business lending.  

As part of the Recovery Act, the Administration and Congress increased the maximum guarantee on SBA 7(a) loans from 75 percent to 90 percent, and temporarily eliminated borrower fees for the 7(a) program.   Further, both borrower and lender fees for Section 504 commercial real estate loans were eliminated. In part due to these Recovery Act provisions, the SBA has expanded its support for small business lending during the credit crunch, and since February 2009 has supported over $27 billion in lending to small businesses.

Together these emergency programs have helped lower borrowing costs and expand credit for homeowners, consumers, and businesses by rebuilding confidence in our financial system and by rehabilitating the key markets that support consumer and small business credit.

While U.S. banks have stopped tightening lending standards for consumers and small businesses, this is not enough: we would like to see these standards loosened so more credit flows to credit-worthy borrowers.   The President has made additional proposals to Congress to increase the flow of credit to small businesses, and I am hopeful that Congress will move these proposals forward.  

In his State of the Union Address in January, President Obama proposed creating a new $30 billion Small Business Lending Fund (SBLF) that would provide small and community banks with new capital and incentives to increase small business lending.   The smaller banks targeted by the SBLF do a large share of their lending in small loans to small businesses.   The SBLF would reward banks that expand their loans with lower dividend rates, and through this incentive structure will lead to further expansion of loans to small businesses.   Participating banks that do not increase their lending will face a higher dividend rate.

In consultation with several Governors and Members of the House and Senate, the President has also proposed an initiative that aims to strengthen state programs that support lending to small businesses and small manufacturers.   This initiative will allow states to build upon successful models for state small business programs, including Capital Access Programs (CAPs), collateral support programs, and loan guarantee programs. North Carolina has a CAP program that is available to entrepreneurs who live in designated counties and this program would receive significant funds to lend to small businesses if this legislation is enacted.

Finally, we are working with Congress to enhance the effectiveness of the SBA by extending the Recovery Act provisions that increase the SBA 7(a) guarantee amount and eliminate fees for 7(a) and 504 loans, and by increasing the maximum loan size in the SBA's 7(a) program from $2 million to $5 million, and raise the loan caps 504 and micro loans as well.  

Two weeks ago, we were pleased to see the House pass the Small Business Lending Fund Act, which included the SBLF as well as support for state lending initiatives. T he Senate will hold an important vote on whether to consider these proposals later today.   We hope bipartisan support to take up these proposals rather than have them filibustered.

Uncertainty is not good for the economy.   While uncertainty cannot be eliminated, it can be reduced.   Reducing uncertainty helps economic adjustment.   The bank stress tests initiated by Secretary Geithner, for example, reduced uncertainty about the banking system and helped the banks to raise private capital and repay TARP funds.  

I want to highlight two areas where the Administration is working hard to reduce uncertainty that affects small businesses.   The first is health insurance reform.   As you know, landmark health reform legislation was signed into law earlier this year.   While there has been much misinformation about it, I think that small businesses will find that health insurance reform helps lower their costs compared with what they otherwise would have been and that access to exchanges will lower administrative costs and reduce uncertainty in premium growth from year to year.   If small businesses purchase their insurance through the exchanges, they will be subject to lower year-to-year fluctuations in premium costs because they will be pooled together with other businesses.  

The health reform act will reduce the cost of health care for your business, so that you can invest your energy and resources in what makes your business grow and prosper.  

The second area is reforming our nation's financial system, which is also a top priority of this Administration.   Financial regulatory reform is necessary to ensure a stable financial sector for the future. We are very pleased that the Congress has agreed to legislation and is on the verge of final passage.   This legislation will close the regulatory gaps that were partly responsible for the financial crisis, and end the specter of too-big-to-fail financial institutions by giving the government the tools to resolve failing financial institutions rather than bail them out.  

Any economist will tell you that fixing the economy is largely a matter of improving incentives.   I want to highlight several tax incentives that should help small businesses.

First, earlier this year, in response to a request from the President, Congress passed the HIRE Act, which exempts businesses from paying payroll taxes for newly hired unemployed workers for the rest of the year.   To give you an idea of how much this can matter, if you hired an unemployed worker at a $40,000 a year salary, you would save $2,500 in payroll taxes over the year, and receive another $1,000 tax credit if the worker stays on for a year.   This is an incentive for all of you to go out and hire soon because the tax break goes away at the end of the year.  

The Recovery Act also allows small businesses to immediately write off up to $250,000 of qualified investment for 2009, providing an immediate tax incentive to invest and create jobs. And this provision was extended through 2010 by the HIRE Act.

The Affordable Care Act (health reform) included a Small Business Health Care Tax Credit ¨C effective immediately ¨C that will help small businesses and non © profits afford the cost of covering their workers. The tax credit is estimate to save small businesses $40 billion over this decade according to the Congressional Budget Office.  

The Administration is also working with Congress to provide additional tax relief for small businesses.   In order to attract additional capital to small businesses, for example, the President has called for eliminating capital gains taxes on certain small business investments.   And the President has proposed provisions that will increase small business incentives to expand and create jobs such as extending a Recovery Act tax cut that allows businesses to accelerate the depreciation of investment in plants and equipment.  

Conclusion: A Stronger Foundation

President Obama has said that rescuing the economy from the deep recession is necessary but not sufficient.   It is critical that we rebuild the economy on a stronger foundation.   This includes the landmark health insurance reform legislation that was signed into law earlier this year.   It also includes financial regulatory reform that is about to pass Congress.   And it includes improving the infrastructure of the U.S. so that entrepreneurs like yourselves will be in a better position to develop and market new ideas.  

To take one example: North Carolina was awarded $520 million in high speed rail funding to improve the link between Charlotte and Raleigh. This will allow twice as many round trip trains to run between the cities at speeds of up to 90 mph. This will help Charlotte and the region grow in the future and turn the research triangle into a research trapezoid.

And lastly it includes putting the federal budget on a sustainable path.   Economic prosperity for the nation depends on the success of small businesses and entrepreneurs such as those of you assembled here today.  Your success is what will return prosperity to the region and to the nation.   The Obama Administration is focused on putting into place the foundation that is needed for small businesses to thrive and for new businesses to form and grow.   However, it is up to all of you to generate the ideas, products and services which will move our economy and our nation forward.

Thank you.


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