How to create new jobs, spur innovation

On the surface, last month's economic indicators introduce a dose of positivity into the market: the private sector added 200,000 jobs and the unemployment rate dropped to 8.5 percent, its lowest point since February 2009. But take a closer look and you'll see that small businesses are still struggling to catch up, as tight access to credit continues to hinder business expansion. The precipitous drop in home prices has made it very difficult for small businesses to use home equity mortgages as a source of business credit, making them more heavily reliant on banks for private capital. 

Making matters worse, 60 percent of small business bank loan applications were denied in 2011, leaving small businesses with few options for expansion and job creation. Yet, the outlook for small businesses appears mixed. A National Federation of Independent Business’ November survey reported its best results in years, finding 24 percent of small business owners were planning capital expenditures and only 7 percent planning to hire.  With small businesses normally accounting for 60 percent of new jobs in the economic recovery, improving access to private capital is the key to a sustainable and robust economic recovery. 

In exquisite timing, a Senate and House duo of bills would help by allowing credit unions, in aggregate, to increase the amount they can loan by $13 billion. Legislation in the House (H.R. 1418) and in the Senate (S. 509) would increase the percentage of credit union assets that may be loaned to its member businesses. Lending is capped at 12.25 percent, but the proposal would increase it to 27.5 percent, subject to safeguards and monitoring. For a welcome change, these bills are not about taxes, entitlements or government subsidies.  Instead, they are about private sector jobs, small business expansion and benefits to credit union members through competition with banks. Competition, in turn, will encourage banks to ease up on credit, further opening up small business access to capital, which will encourage investment and creating jobs.

The safeguards assure that credit unions have the experience and talent to handle business loans, and at the same time make sure that lending to members is not neglected by pursuit of higher yield business loans. Credit unions have a long track record of lending wisely, and their percentage of loan losses is regularly lower than banks’ track record.  Done right, a portfolio that’s one-quarter business loans can benefit the credit union members, the small businesses who borrow, and the public who will see an additional 140,000 new jobs as a result of this business credit improvement. 

Since credit union “profits” go back to members in the form of lower cost services and loans, members should  especially welcome the improvement.Providing increased access to private capital would provide a much needed spark to businesses that are very small, innovative and more diverse.  According to the Small Business Administration Office of Advocacy, over half of small businesses are home-based; they generate nearly 17 times more patents per employee than large businesses; and they include 8 million women-owned, 6 million minority-owned, and 2.4 million veteran-owned firms.  Having access to private capital is necessary to spurring investment and innovation, stimulating economic output and creating jobs – all without increasing federal debt.   

For consumers, the bigger picture is that improving small business access to capital, as the legislation proposes, would create a significant number of private sector jobs, require no government funding, and foster more competition between banks and credit unions.

Indeed, Congress can get it right when it tries.

 

Alan Daley and Steve Pociask write on public policy issues for the American Consumer Institute, a nonprofit educational and research institute. 

---