Why have attempts to remedy the endless recession failed, and can anything be done to turn things around?
Attempts by the Obama administration to fix the economy have proven to be unsatisfactory. Inflation is on the rise and unemployment abounds There is no reason to believe that suggestions by the left, like creating a second/third stimulus package, will work any better than the first stimulus package.
The Republican alternative of major tax cuts to the rich in the form of capital gains reductions or income tax decreases is also unsatisfactory and unimaginative. Such an approach produced zero job growth over the past decade.
So far, these actions have been unsuccessful and citizens fear that the long anticipated decline of the American experiment is finally at hand.
What can be done? Are there policies that could result in massive private sector job creation in a relatively short period of time? If one takes Obamas definition of what constitutes a job, the answer is no. When Obama speaks of jobs, he means union jobs. That is why his orientation is toward public sector employment and large company private sector employment the unions dominate in both sectors. Illustrative of this point is the National Labor Relations Board, which ruled against Boeings decision to open a plant in a right-to-work state on the basis of union complaints. This is consistent with Obama administration actions against secret-ballot elections before a workforce can be unionized. Both of these examples show that when the Obama administration thinks of jobs, it is thinking of union jobs.
What is unfortunate about the Obama administrations emphasis on union jobs is that according to the Kaufmann foundation, virtually 100% of the net gain in jobs in the American economy between 1980 and 2007 was produced by new businesses existing for five years or less. This means that new private sector jobs for the past 30 years have been created primarily by new business (read nonunion) rather than big business.
Sadly, the current policies of the executive branch actively frustrate entrepreneurial activity. Historically, the primary source of capital for new business investment has been small community banks. Even as the President actively courts big business, large banks and investment banks (his largest source of campaign contributions), the administration has been busy crippling the ability of community banks to lend money.
Since 2008, 367 banks have been closed by the FDIC. In contrast, only 27 banks closed between 2000 and 2007. Those that remain have been forced to significantly enlarge their cash reserves. Fed Governor Daniel Tarullo recently argued that capital ratios should be increased up to 100% of current levels. Arguing against this notion, Rochdale Securities analyst Richard Bove states, There is now $1.5 trillion sitting in the Fed earning virtually nothing while unemployment rises and the economy falters. It is simply incomprehensible that this nation can be so poorly served by those people who should be expected to know what they are doing.
All of this stands in stark contrast to the Reagan Administrations policies during the savings and loan crisis of the 1980s. During that time the S&Ls were not permanently closed. Rather, the Feds would arrive on a Friday, write off bad debt, and then reopen the S&L on Monday under new ownership. The only people hurt were owners and top managers. Conversely, the policies of the Obama administration have been aimed almost exclusively at serving the owners and top managers of the largest banks. This helps to explain why the economy is refusing to recover. Government initiatives are being focused in the wrong places.
Funding New Ventures
Can anything be done to revitalize our flagging economy? Rather than follow Obama-like policies that give cash to investment bankers and big businesses like GM and GE, we propose that similar amounts of money should be lent to new businesses. These loans should flow through community banks, historically the primary source of money for business start-ups. We propose that a fund of $50 billion (the same amount given to GM) be made available to community banks. These institutions would have the authority to make loans of up to $2 million to viable start-up, fast-growth firms.
Creating a revolving fund for fast-growth new ventures is important because in the current economy it is just about impossible for such businesses to acquire capital. The title venture capitalist is an oxymoron because investors with an entrepreneurial bent are currently providing little or no money to create new businesses. Rather, they are investing in existing companies that have established track records and can demonstrate growth potential. Hence, under the Obama administration venture capitalists have become growth capitalists.
Potential new billion dollar enterprises are not coming into existence because they lack seed money and there is no place for them to get funding. For example, in 1982 a friend of ours, who was then a 24-year-old newly minted MBA, obtained a license from Texas Instruments allowing him to make software for the companys home computer division. Armed with the license and a business plan, he was able to obtain a $1 million line of credit at a community bank. His start-up business was sold a year later to a major video game company creating about 100 jobs in the process. In 2011 community banks simply are not making loans or extending lines of credit on the basis of a licensing agreement or a business plan.
Tragically, tens of thousands of great ideas are currently going unfunded. Here is just one example. At a recent business plan competition, one group proposed manufacturing a remedy for diabetic ulcers. Diabetic ulcers are the primary cause of amputation in diabetics. This over-the-counter remedy could heal ulcers that doctors deem untreatable. The plan won honors in a major business plan competition but could not attract the capital needed to begin large scale manufacturing either from community banks or from venture capitalists. As a result a potential billion dollar company creating thousands of jobs does not exist and preventable amputations occur daily.
With the one easy step program firms receiving monetary awards will be determined by a panel of experts through evaluations of written and orally defended business plans. Such panels already operate in business plan competitions sponsored by AASCB-accredited colleges of business. These panels are usually comprised of business strategy, entrepreneurship and marketing professors, bank loan officers and venture capitalists persons who are experts at evaluating such plans.
Under our proposal community banks will administer loans and keep any profits, while being held blameless for any losses. The repaid loans will then be recycled into new rounds of business plan competition, thereby allowing new ventures to create positive cash flow and documented sales. This will allow new ventures to seek additional funding from more conventional sources community banks and growth capitalists. We estimate that once fully deployed, the $50 billion will, within 18 months, create 2.5 million jobs directly and millions of jobs indirectly. Compare this to the $50 billion loan given to GM to preserve 74,000 jobs.
Both political parties have focused almost exclusively on solutions aimed at big unions, Wall Street, big business and the wealthy, ignoring Main Street America. It is time for the politicians to do their jobs and focus on the average American rather than special interests and put Americans back to work. Otherwise we can look for another round of voting out incumbents regardless of political party; it is currently the only remedy available to average Americans.
Politicians are nave if they think the citizenry is going to continue to sit back and do nothing while their life savings evaporate. We conclude with a warning to both parties. Take our advice. Do not awake the sleeping giant. You will not like what it does, especially to you.
Timothy J. Wilkinson is professor of Marketing and interim dean at Montana State University Billings. He earned a Ph.D. from the University of Utah, and taught for eight years at the University of Akron, where he served as the associate director of the Institute for Global Business. Wilkinson is the co-author of the AMA-Berry Award winning book, The Distribution Trap.
Lance Eliot Brouthers is professor of Management in the Coles College of Business at Kennesaw State University. He has consistently been ranked among the top international business scholars in the world and has appeared in print over 90 times.
The Distribution Trap