Sometime this week, perhaps as soon as tonight, the House of Representatives is expected to vote on what is referred to in Washington environs as the small-business jobs bill. It's an Obama administration proposal to address unemployment that, while reduced to relatively meager size by political constraints, will be the government's most significant economic program this year. Moreover, by replicating the most effective ideas in the much-maligned bank bailout and the nearly as controversial stimulus act, it will give Democrats a new opportunity to make the case for their economic policies.
The legislation targets small businesses for two reasons: Somewhat misunderstood research that suggests small business provides the bulk of job growth (the truth is closer to: younger businesses provide the bulk of job growth) and Republicans are inclined to support help for small business over more direct economic intervention. Two Senate Republicans, George Voinovich and George LeMieux, crossed the aisle to support this bill. Not coincidentally, both are retiring this year.
Politics aside, the bill is trying to correct a problem that has hindered recovery since the financial crisis: Small businesses are finding it tough to get affordable credit to invest in equipment, hiring, and expansion. With economic growth slowing, banks worry that lending is too risky. Large Wall Street banks with the capacity to lend remain focused on trading and corporate clients; small banks, whose bread and butter is lending to small businesses, haven't been as effective in trading their way out of losses incurred during the crash. Today, most Wall Street banks have paid the government back for the aid they received through TARP, and then some. Many small banks, however, remain fragile -- 120, about one-sixth of the banks in the TARP program have missed deadlines to pay their debts -- and are unable to marshal the resources to drum up new business.
That's why the Obama administration requested and the Senate approved this bill, whose centerpiece is a new $30 billion fund at Treasury, designed to inject capital into small banks with the condition that it be used to lend to small business -- exactly the kind of conditionality progressives desired in the original bank bailout. Not only will the bill help get needed cash to small businesses and encourage hiring -- Democrats hope to see 500,000 jobs come from the bill -- but it will also shore up the balance sheets of Main Street banks that rightly feel overlooked by the administration.
That the plan looks set to pass with some Republican support is tacit recognition that the TARP program did, in fact, benefit the economy and a timely reminder of its conception nearly two years ago under President George W. Bush. TARP was a success -- it has mainly been repaid, with profit -- despite the invectives directed against it from all points on the political spectrum. As Matt Yglesias has observed, much of the scorn directed at TARP comes from the failure of progressives to explain how the policy was not an aberration in the government-market relationship but rather the first step toward turning that long-existing partnership to better public outcomes. Let's hope progressives won't forget that lesson if they have an opportunity to promote this new legislation.
The small-business bill is also modeled after another little-appreciated but largely effective American Recovery and Reinvestment Act, the Obama administration's inaugural policy push. While that bill did not meet the White House's expectations -- due to its inefficient construction and small size relative to the scale of the crisis -- it has provided the foundation of the expansion we've seen since last June. One of its most successful aspects was allowing temporary expansions of the Small Business Administration's loan-guarantee program.
The SBA program provides lenders more security by promising to cover a portion of potential future losses. While the long-standing SBA program pays for itself, ARRA authorized a larger guarantee and waived fees to make credit cheaper. Under the temporary rules, $680 million in additional funding over the last two years has resulted in $29.6 billion in loans, nearly 70,000 in total. If the small-business jobs bill passes, $500 million will be available to continue the program and the maximum size of these loans will be increased.
While these two mechanisms to stimulate small-business lending -- and a package of tax breaks for small business also included in the bill -- will have a beneficial effect on the economy, it isn't a silver bullet to addressing unemployment. In so far as that exists, it will come from more direct stimulus from Congress or the Federal Reserve, which met yesterday and announced it would maintain current policies while hinting, once again, at the potential for action in the future.
But this new legislation presents an opportunity for Democrats to explain again how the government shapes markets, especially financial markets, and how it ought to take steps to do so for the broadest possible benefit. This same principle guides the National Infrastructure Bank, another pet idea of the Obama administration that would use public money and patience to leverage private investment in much-needed infrastructure improvement. This bill, especially the TARP-like fund administered by the Treasury, will be one of the few laboratories for this kind of policy following likely Republican gains in Congress this fall.
