President Obama mentioned "jobs" 44 times in his Thursday night address before Congress, promising to put the dismal unemployment situation at the forefront of plans to reinvigorate the ailing economy. What remains murky is how the American Jobs Act will help small businesses, often credited as being vital job creators.
"Everyone here knows that small businesses are where most new jobs begin," Obama said. Small businesses have historically fueled the vast majority of job creation, generating nearly 65 percent of net new private-sector jobs over the past decade and 98 percent of the nearly two million private-sector jobs created since January 2010, according to ADP.
[In Pictures: 20 Industries That Are Bouncing Back.]
Acknowledging the importance of shoring up small businesses, the president proposed halving the payroll taxes paid by companies on the first $5 million of taxable wages they pay. With credit markets still fairly tight, that should give small businesses increased cash flow and reduce the expense of bringing on new employees, says Todd McCracken, president and CEO of the National Small Business Association. Another subsidy would temporarily eliminate taxes on any amount of 2012 wages that's higher than the year before, as an incentive to boost hiring and give more raises.
"The impact of payroll tax cuts is fairly substantial," McCracken says. "It gives [small businesses] the cash flow that they need to think about expanding. If they're thinking about hiring, it's going to make it more affordable for them in the near term."
The tax break could also put extra money in Americans' wallets, hopefully spurring higher consumer spending, economists say. That, in turn, could lead to more hiring to meet the uptick in consumer demand for goods and services.
But that positive impact is all speculation, especially since low consumer confidence has caused Americans to spend less, save more, and pay down debt. While that's not necessarily bad for the long-term health of the economy, in the short term, the lack of consumer spending remains a major headwind for the recovery and could even push the nation into another recession.
Obama's jobs plans have the potential to help a good chunk of businesses, but the measures are temporary, McCracken cautions. Near-term fixes may not be enough motivate a business to hire that otherwise wouldn't consider bringing on a new employee who will have significant costs far beyond the tax-cut expiration dates.
Also, the payroll tax break might give small businesses a small boost when it comes to financing expansion, but it doesn't address the problem of locked up credit markets, still a major hindrance to small business growth and hiring. "That would be one of my criticisms of the speech—there's not a lot in here to improve access to credit and capital for small companies," McCracken says.
The plan also falls short on investing in job training, research, and science and technology, some critics say. "What I would really like to see talk about engineering, science and math, and that we're going to be investing in the next horizons of technology," says Larry Barton, president and CEO of The American College. "I would like the president to say he wants a multi-billion dollar investment in research and development to help all businesses invest in American innovation."
Despite the critiques leveled at the president's plan, most experts agree that progress toward a well-defined plan can only help bolster confidence, the lack of which has been devastating for the economic recovery. If passed, the biggest thing the American Jobs Act would accomplish is establishing a sense of confidence and direction, McCracken says. Many small businesses have seen a drop-off in longer-term contracts due to uncertainty about the economy, he says, which has only added to their apprehension about investing in new employees. Without confidence in the economy, growth and hiring plans get put on hold, unemployment stays high, and GDP growth remains low.
Heading into an election year, politicians can restore the American public's confidence by presenting a unified front in the face of the country's severe economic problems. "Looking at this over the next 12 to 18 months, on both sides of the aisle, we have to be thinking bigger and broader with more innovation toward a new American economy," Barton says.