Deficit-Obsessed Lawmakers Are Bad News for Small Businesses

As the weak recovery continues, Congress and President Obama are about to engage in the first major debate over the economy since Republicans won control of the House in mid-term elections. Small businesses have a major stake in the outcome, but where do their interests lie?

Job Creation – The Overriding Issue

Much of the early clamor has been over the need to cut burdensome regulations such as the 1099 reporting requirement; that’s a given. But the tough choices are going to involve the budget deficit and spending, and these choices will have a profound impact on the nature of the recovery. For small business owners, the right course should be obvious, but partisan politics and ideology are clouding the overriding issue – job creation.

In survey after survey, small business owners cite the lack of sales as their biggest concern. Consumer spending drives 70 percent of the economy, but with 26 million people unemployed or underemployed, household spending isn’t anywhere near the level it needs to be to create all the jobs necessary to get the economy moving.

In a column last month, I detailed the extent of the problem. The unemployment rate has been locked above 9 percent for almost two years, and the task of digging out of the economic crater we’re stuck in remains formidable.

The economy is still 7.2 million payroll jobs short of where it was at the start of the recession three years ago. In addition, the economy would need to add 3.7 million jobs just to cover those who entered the workforce for the first time since then. This means the labor market is now nearly 11 million jobs below the level needed to restore the pre-recession unemployment rate in December 2007, which was 5.0 percent, according to an analysis by the Economic Policy Institute (EPI), a Washington-based economic think tank.

The government’s priorities couldn’t be clearer. No matter how much taxes are cut or red tape is eliminated, businesses large and small will not start hiring or spending until they see an underlying increase in sales to justify expansion. The net result is already evident: Corporations are sitting on mountains of cash, thanks largely to cost-cutting and layoffs.

The Deficit Obsession

President Obama’s proposed FY2012 budget will be the starting point for the upcoming debate. After all, a budget at its most basic is an expression of priorities. Examined through the prism of job creation, the president’s budget clearly misses the mark. What’s worse, Republican and Tea Party proposals emanating out of the House are even more damaging to job creation.

Of course the elephant in the room is the nation’s budget deficit. It’s large and growing larger, and cutting it has become a litmus test of fiscal conservatism. But the clamor over the deficit is largely political, and at this stage of the weak recovery, as important as it is, the deficit shouldn’t be the overriding concern in Washington.

Yet the administration is proposing more than 200 budget cuts amounting to about $33 billion in 2012 alone. That’s essentially double the cuts the President proposed in his FY 2010 budget and about $10 billion more than he proposed last year, according to a new EPI analysis.

Beyond that, President Obama is extending his budget freeze on non-security discretionary spending for three more years. The move will cut the deficit by just over $400 billion in the next decade and drop non-security discretionary funding to its lowest level as a percentage of the nation’s gross domestic product since the Eisenhower administration in the 1950s.

Back then the nation had 170 million people, GDP was about half a trillion dollars, the unemployment rate was 4.3 percent, and a first-class postage stamp cost three cents. Government spending amounted to about 27 percent of GDP, and during most of Eisenhower’s administration, the government ran small surpluses. But the era was marked by almost full employment, and the top marginal tax rate was 87 percent on income over $400,000.

Lessons from History

A better comparison would be the years prior to and during World War II (1941-1945). The deficit in 1943 at the height of the war peaked at more than 28 percent of GDP. By the end of the war, federal spending amounted to more than 50 percent of GDP. Total government debt amounted to 121 percent of GDP by the war’s end.

Prior to the war’s start (1940), the unemployment rate was a staggering 14.6 percent and had been close to 20 percent for much of the 1930s during the Great Depression. By war’s end (1946), the rate was 3.9 percent.

In short, it took a national mobilization and government spending on an unprecedented scale to snap the nation out of the Great Depression and lay the groundwork for the booming Eisenhower years. The period of high, post-war deficits was followed by decades of unprecedented economic growth. In short, the nation grew its way out of debt.

So how does President Obama’s budget stack up to counter the worst economic recession since the Great Depression? It doesn’t.

Obama’s budget does succeed in dropping the deficit to 3.2 percent of GDP by 2015, and 3.0 percent of GDP by 2017 (the level his fiscal commission was charged with bringing deficits to), according to the EPI analysis. Non-security domestic appropriations would fall to 1.9 percent of GDP from 2.7 percent – a 30 percent reduction. But it ensures that the battle to create jobs and jump-start future economic growth will be limited at best.

In contrast, House GOP leaders are proposing cuts — anywhere from $74 billion to $100 billion below Obama’s FY2010 budget request — that would result in 700,000 to 1 million job losses, according to the EPI analysis.

With all the hue and cry over the deficit, one might believe that the country is drowning in red ink. Yet that’s not the case; the deficit only amounted to around 9 percent of GDP in 2010 and is projected to be 10 percent of GDP in 2011. While total debt is around 90 percent of GDP, it is still well below World War II levels.

No Customers, No Recovery

The problem is the economy is nowhere near strong enough to grow its way out debt like it did in the 1950s and 1960s. As for deficit reduction, the cuts outlined in the President’s budget barely offset the $858 billion added to the deficit by extending the Bush tax cuts, including $125 billion for Americans making over $250,000.

So while lawmakers in Washington wring their hands over the deficit, small business owners may have to wait years to see customer levels return to the days prior to the recession, if at all. And one thing is certain: Without customers, all the tax cuts in the world won’t spur hiring.