Want to Aid Small Business? Boost Consumer Demand

President Obama’s plan to help small businesses create jobs is drawing lukewarm reaction among small business owners, who are grateful for the help, but believe the initiative misses the forest for the trees.

While the plan tries to assist small businesses by providing tax incentives for hiring and borrowing money, it doesn’t address the fundamental problem many businesses face—a lack of sales.

Few business owners are likely to take out loans to buy inventory or spend to expand their operations and hire new workers—no matter how sweet the incentives—until they see an increase in consumer demand. But consumers are unlikely to spend more because they don’t feel secure in their jobs and real wages aren’t climbing.

Two weeks into the holiday shopping season, retailers aren’t seeing the kind of spending by consumers that would give them the confidence to expand inventories and hire workers, no matter how much they receive in tax credits and lending assistance.

In fact, consumers plan to spend an average of $682.74 on holiday-related shopping, a 3.3 percent drop from last year’s $705.01, according to National Retail Federation’s annual consumer survey. And those consumers who are shopping will be looking for bargains.

“It comes as no surprise that the economy was an overriding theme throughout this year’s survey,” according to the group. “Two-thirds of Americans [65.3 percent] say the economy will affect their holiday plans this year, with the majority of these consumers saying they’re adjusting by simply spending less.”

Therein lies the problem. What part of the president’s plan will encourage more consumer spending?

The administration’s initiative hinges on four key tax provisions. Three of them would expand on provisions passed in the American Recovery and Reinvestment Act of 2009 (ARRA) earlier in the year, according to the National Small Business Association.

The three include elimination of the tax on capital gains for spending on small business investment, up from the current—but temporary—75 percent exclusion; a one-year extension on enhanced Section 179 expensing of up to $250,000 in 2010; and a one-year extension allowing for accelerated bonus depreciation through 2010.

These relatively moderate expansions of ARRA tax provisions will help small business owners reinvest in their businesses and have more cash on hand, according to the NSBA.

The fourth tax proposal would provide a short-term employment tax credit to help small businesses add and keep employees. Although the president has put no specifics on the table, small business groups say a hiring tax credit through a temporary elimination of payroll taxes on new employees, or a payroll tax holiday on all employees, are the two most likely approaches.

All of the proposals would put more money into the pockets of small businesses, but to what end? Businesses are unlikely to spend the money, even if they wanted to. The NRF found, for example, that retailers are still cutting back on inventory. Goods moving through the nation’s ports have fallen to levels not seen since 2003, it notes.

“In anticipation of weak demand, many retailers scaled back on inventory levels to prevent unplanned markdowns at the end of the season,” said NRF president and CEO Tracy Mullin. “Once the most popular items are gone, retailers won’t have anywhere to get them, so if there was ever a holiday season to buy early, this is it.”

If consumers are shopping at all, they are mainly combing the discount stores and sales racks for gifts. The majority of holiday shoppers (70.1 percent) will purchase from discounters this year, though more than half (55.8 percent) will also check out department stores. One in ten holiday shoppers (11.4 percent) will buy gifts or other holiday-related merchandise at thrift stores or resale shops.

More than half of holiday shoppers say that sales and price discounts (43.3 percent) or everyday low prices (12.7 percent) will be the most important factor when deciding where to shop. Factors that were important during good times, such as selection, quality, convenience, and customer service, are less important than last year.

“With a variety of factors still up in the air, including uncertainty over job security, many Americans just aren’t buying into the talk of recovery,” said Phil Rist, executive vice president, strategic initiatives, for BIGresearch, which conducted the NRF survey.

So which of the government’s initiatives is providing the biggest bang for the buck?

Believe it or not, the administration’s plan to spend about $100 billion to extend unemployment insurance and health care benefits for jobless workers next year will produce the biggest payoff, economically. About 3 million workers would benefit in the first quarter of 2010 and as many as 6 million for all of 2010, according to some estimates.

What’s more, it will add $1.61 in economic growth for every $1 spent, according to Mark Zandi, chief economist of Moody’s Economy.com.

The action also would save an undetermined number of jobs. Workers who exhaust benefits “pull back their spending,” constricting growth and eliminating jobs, Zandi told USAToday in a recent interview.

Economists say the government’s plan to pump as much as $60 billion into building and repairing highways and transit systems and improving the energy efficiency in homes is a winner as well. It will aid demand for goods and services as well as produce returns down the road in the form of higher productivity through greater efficiencies.

All this suggests that the president’s effort to aid small businesses through hiring credits and other tax incentives must go hand-in-hand with initiatives that will boost demand—and spur consumer spending—much like the cash-for-clunkers program that provided critical aid to the auto industry.

Sales tax holidays, rebates, and broad-based tax incentives that encourage purchases of targeted consumer goods would do more to generate the demand that’s necessary to help the economy recover. As the president said, we need to spend our way out of this recession.