24 August 2019
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David Park
CEO of Austin Capital Trust
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Lending reform is a key to strengthening job creation
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The latest employment report from the Bureau of Labor Statistics suggests that the labor market recovery has lost significant steam in recent months, and is the first clear indication that excuses for prior mediocre job gains is not attributable to any other factors such as weather or temporary loss of momentum in the labor market recovery across jobs, hours worked and the unemployment rate. This raises the likelihood that the Fed will embark on a renewed round of policy easing. Furthermore, this makes a strong case for policies that encourage more small business lending. 

Small businesses are more dependent on external sources of financing because they have less ability to offset their exposure to financial crises through hedging and have less access to the bond markets. The pace of small-business lending in the United States fell by six percentage points from 2009 to 2010. Small-business lending as a percent of total number of commercial loans hasn't returned to pre-recession levels, the OECD report stated. Small-business loans were reduced by banks of all sizes from 2007-2010, reducing lending to small businesses by $43 billion.  

  

The recently enacted JOBS Act could be a huge boon in small business lending. The new rules coming from the recently passed JOBS Act are designed to reduce the regulatory burden on small banks and will create opportunities that didn’t exist and remove such restrictions. Previously many banks had to carefully maintain shareholder count at 350 because it wanted to avoid the cost and hassle of registering with the Securities and Exchange Commission – estimated at an average of $200,000 per year for filing alone. The JOBS Act includes a provision that raises the number of shareholders at which small banks must register with the SEC to 2,000. The newly enacted JOBS Act also makes it easier for small banks to deregister with the SEC, permitting them to do so with 1,200 shareholders, compared with the current threshold of 300. 

Other bills that could enhance small-business lending are currently being discussed in Congress. Some address the need to increase the cap on member business lending, and to allow credit unions to offer more opportunities and options to small-business members.  

Another approach other leading countries have taken to deal with the financing gaps for small businesses was to increase the number and amount of government loan guarantees. These nations provided additional programs such as tax exemptions and deferments and credit mediation to domestic businesses. Small business loans in these countries outpaced small business loans here by a significant margin.  

Reforms that aid job creation are part of the American Institute for Growth policy plan for economic growth, and the need to incentivize lending is particularly critical. Our plan for steady, sustainable economic growth covers such areas as education, energy, tax reform, fiscal policy, banking reform, immigration, and international trade. These are all areas that need to be fundamentally addressed if we are to have a comprehensive and cohesive economic recovery.  

Policymakers from both sides should put partisan bickering aside and put their focus on passing reforms and creating programs that will allow businesses to grow the economy and create new jobs. Small businesses are the primary source of the majority of new jobs in America, and they need access to this kind of credit, this kind of reduction in unemployment insurance taxes, and this kind of business-oriented education.  

Our policy prescriptions include items like comprehensive tax code reform, the removal of the burden and uncertainty of the federal regulatory regime crippling small businesses, and a rational approach to government fiscal policy and entitlement reform. The American Institute for Growth’s policy platform can serve as a guide map for leading America back to sustainable, stable economic growth and job creation. 

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