Why Businesses Can't Create Jobs Even if the Recession Is Over

And what the Democrats plan to do about it.

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Senator Byron Dorgan said he needed to get something off his chest, for "therapeutic reasons." "I'm so furious that the same institutions that we threw a lifeline, the same institutions whose selfishness and greed steered us into the ditch, have now decided that once they got their lifeline... they're going to turn their backs on lending needs to small businesses," Dorgan said at a Democratic Policy Committee hearing on Wednesday. This statement was in reaction to statistics Dorgan cited that over the past six months, the 22 banks that received the most money from TARP cut their small-business lending by a collective $10.5 billion.

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At the hearing, several small-businesspeople testified that this lack of lending is putting their abilities to employ additional workers in jeopardy. The recession is supposed to be over, but unemployment is still high, and the freeze in small-business lending might be a big reason. Mark Zandi of Moody's Economy.com testified at the hearing that firms under 100 employee accounted for half of the net job loss since 2007. "Without small businesses, the job machine can't get going again," said Zandi.

Two main solutions emerged that the Democrats in Congress may be putting forth as job creation tools:

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1. Adjust Small Business Administration lending.

The president's stimulus plan increased the amount of a bank loan to a small business that the SBA may guarantee—from 75 or 85 percent up to 90 percent. Congress also gave more money to the SBA to give out these guarantees—although, as several small-business owners testified at the hearing, many banks are not interested in SBA loans, partly because of the extra government hurdles involved.

Another witness was Alicia Lingenfelser, co-owner of Dallas-based 4D Equipment and Services, a small company that leases construction equipment. She said that despite her business's spotless credit record, she has been unable to get financing to build a new plant that would permanently employ 14 more people. "If we can't get credit, who can?," asked Lingenfelser. Wells Fargo said they were interested in providing credit, but the problem goes back to the SBA loan guarantee Lingenfelser applied for—the SBA's 7(a) program only guarantees up to $2 million, beyond her loan needs.

So the policy the small-business owners recommended, along with Zandi, was to increase the amount the SBA can guarantee up from 90 percent to 95 percent (or higher) and from $2 million to $5 million. Obama has endorsed the $5 million limit, so it is likely to to be in any jobs bill.

But critics of the SBA, like economist Veronique de Rugy at the Mercatus Center, argue that increasing loan guarantees would do little to solve the employment crisis. De Rugy told me that banks didn't start lending the first time Congress upped the guarantees, and they won't if Congress does it again. "The reason why we're in the situation we're in is all the free money going around," she told me, drawing a comparison with the subprime morgage lending crisis. "Federal guarantees lead to moral hazard, as we saw with Fannie and Freddie."

She also said that, despite the anecdotes of those who testified at the hearing, in general small businesses are not trying get financing or expand their businesses due to the uncertain economy. "They're insecure about what's going to happen," de Rugy said. The National Federation of Independent Business has found, through monthly surveys of its members, that capital spending among small businesses is historically low, with only 17 percent planning to make capital expenditures over the next several months.

2. Tax incentives.

Zandi also mentioned a jobs tax credit as a way to shore up employment among small businesses. It would be a tax incentive for each employee hired. Some economists are concerned that a tax credit wouldn't work fast enough to reduce unemployment. So Zandi suggested a model for any tax incentive program: cash-for-clunkers. The money to trade in a car was only available for a short amount of time. Zandi's idea was to strictly limit the length of the tax incentive so businesses will cash in right away. Some of the senators at the hearing seemed eager to restrict the tax credit to only small businesses. But Zandi said that throwing in additional strings like a maximum number of employees would only dissuade businesses from taking the credit. "If you limit it by business size, it gets too complicated," he said.