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Lloyd Chapman

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President Obama's Jobs Plan Has Three Major Problems

Posted: 09/07/11 09:35 PM ET

The first problem is that $300 billion is much too small to stimulate an economy the size of the United States. The federal government bailed out AIG, one company, for approximately $150 billion.

The second problem is ignoring the fact that small businesses are the engine of job creation in America. The latest data from the U.S. Census Bureau shows small businesses create more than 90 percent of net new jobs in America. Moreover, small businesses are responsible for half of GDP, employ more than half of the private sector workforce and produce more than 90 percent of all U.S. exports. Additionally, small businesses generate 13 times more patents per employee than large businesses.

Conversely, large businesses haven't created one net new job in nearly thirty years. The infrastructure spending that the President proposes will almost surely focus on large scale projects like building roads and bridges, projects almost exclusively done by large businesses. Directing infrastructure spending to large businesses will not create new jobs.

Congress realized the economic potential of American small businesses when it passed the Small Business Act of 1953. The Small Business Act established the Small Business Administration (SBA) and small business reporting goals for federal agencies and prime contractors to ensure that a fair portion of contracts and sub-contracts were awarded to small businesses. Today the law requires that 23 percent of all federal contracts go to small businesses.

It appears that the actual annual federal acquisition budget for all classified and non-classified government contracts is in the neighborhood of $1 trillion. Twenty-three percent of $1 trillion would be $230 billion per year in federal contracts going to small businesses and the middle class.

Unfortunately, since 2003 a series of federal investigations have found that the majority of federal small business contracts go to some of the largest companies in the U.S. and Europe, including General Electric, Northrop Grumman, Lockheed Martin, AT&T, Finmeccanica in Italy, and Rolls-Royce and British Aerospace (BAE) in the U.K.

During the 2008 presidential campaign Barack Obama acknowledged the magnitude of the issue when he stated, "It is time to end the diversion of federal small business contracts to corporate giants." So far he has done nothing to address the problem. The latest data released by the Obama Administration indicates that 61 of the top 100 small business contractors in 2010 were actually large businesses.

The third problem is simply this: it has never been proven that tax cuts create jobs. When President Bush's tax cuts were first proposed and later passed by Congress between 2001-03, over a dozen Nobel Laureate Economists openly disagreed that the tax cuts would create jobs. Among these Nobel winning economists were George Akerlof of UC Berkeley, Franco Modigliani from MIT, Paul Krugman of Princeton, Kenneth Arrow of Stanford, and Joseph Stiglitz of Columbia. Janet Yellen, former Chair of the White House Council of Economic Advisors under President Clinton, Peter Orsazg, former director of the Office of Budget and Management, and Laura D'Andrea Tyson, former director of the National Economic Council, all concurred that the Bush tax cuts would not create jobs.

Eight years after the second round of President Bush's tax cuts and eight months after they were extended under President Obama, unemployment remains above nine percent. Even worse, U-6 unemployment, a more accurate description including partially employed and chronically unemployed, is over 16 percent.

During the past three years our economy lost nearly nine million jobs, while the top tax bracket continued to receive generous tax cuts. From 1993 to 2001, when the top marginal tax rates were merely four percent higher, nearly 23 million jobs were added in America.

It seems the only option the Obama administration has not yet tried in its efforts to create jobs is to take advantage of existing federal programs designed to direct infrastructure spending to small businesses.

The Small Business Act defines a small business as being independently owned, which would exclude publicly traded companies. I wrote a bill that was introduced in the House of Representatives titled the Fairness and Transparency in Contracting Act that simply stated this: the federal government will no longer report contracts awarded to publicly traded companies as small business contracts. If President Obama issued an executive order along these lines, it would redirect more existing federal infrastructure spending to the middle class and create more jobs than anything he has ever proposed. It's deficit neutral, requiring no new spending or new taxes. Moreover, it would end a ten-year contracting scandal and keep at least one campaign promise.

It doesn't make sense to allow America to slip into a depression while the Obama Administration continues to divert federal small business contracts to the largest companies in the U.S. and around the world.

 

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