Congress has it hands full again. With the potential of cutting government spending and raising taxes, most Democrats and Republicans have one thing they can agree on - either option could jeopardize an already weak economic recovery.
But there is one win-win solution that can encourage economic investment, help small businesses grow, create jobs, and do so without costing the U.S. Treasury a dime. Introduced last Thursday by Representative Carolyn McCarthy (D-NY) and Representative Ed Royce (R-CA), the Credit Union Small Business Jobs Creation Act (H.R. 688) allows credit unions to provide additional loans to small businesses by raising the current credit union lending cap from 12.25 percent to 27.5 percent of assets. By raising the lending cap, market competition would be encouraged and small businesses would have greater access to capital.
The lending cap is an arbitrary regulation designed solely to protect big banks - not consumers and not small businesses. These "too big to fail" banks are not lending. While bank lending fell sharply in the last recession, credit unions increased loans by 40 percent, but the current cap is now suppressing this access to capital. In fact, the Small Business Administration reports that 60 percent of small business loan applications are being rejected by banks, despite their 95% market share. Given the upside-down real estate market, home equity loans are not much of an option for small business startups.
The vast majority of businesses are very small businesses with many being proprietorships. Without startup capital, these very small businesses do not grow, entrepreneurially ideas and investments are put on hold, and jobs are lost.
The slow economic expansion and stubbornly high unemployment rate are in large part due to the inability of small businesses get adequate access to capital for investing and expanding their operations, and that is slowing job creation. For startup businesses, increasing the lending cap would mean increased access to capital; and for workers, it would means more jobs.
Small business expansion is the key to sustaining future economic growth, accounting for nearly 65 percent of jobs created in an economic recovery. Since small businesses account for 16 times more patents per employee than other businesses, some these investments often lead to advancements in new technology.
And there are other benefits too. Credit unions have one-third of the delinquency rate and the bad debt, compared to banks, which means that credit union lending has lower market risk. In addition, increasing competition between banks and credit unions would mean addition economic benefits that make consumers and small businesses big winners. Moreover, the resulting economic expansion will not put taxpayers on the hook, like the big bank bailouts have.
And, the benefits would be sizable. One report finds that H.R. 688 would lead to 140,000 new jobs. When considering the full multiplier effects, we estimate that the increase in $13 billion in capital would contribute $32.7 billion to Gross Domestic Product, $8.2 billion in employment earnings and 188,000 new jobs. Whatever the exact number, estimates suggest that the benefits would be significant.
For Congress, there will be a lot of differences of opinion on how best to get the budget in fiscal order, but there should not be disagreement on the need to eliminate a cap designed solely to protect banks from competition. When it comes to spurring economic growth, investment and job creation -- and accomplishing this without increasing federal spending -- this is certainly something we can all agree on.
Simply put, there is no downside, just upside, to lifting the lending cap and letting small businesses grow. H.R. 688 deserves the full consideration of Congress.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research organization. For more information about the institute, visit www.theamericanconsumer.org.
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