Posted by Joseph Y. Calhoun, III

Mark Zandi has an Op-Ed in the NYTimes today of that title. Mr. Zandi believes that government hasn’t intervened quite enough yet:

It is conceivable that businesses will resume hiring soon. Employment growth historically lags a pickup in gross domestic product. But firms typically increase production by first increasing workers’ hours and adding temporary help. Neither has happened so far: working hours remain stuck at a record low of 33 hours a week, and the number of temporary jobs is still in decline (nearly a million have been lost in the past three years).

Small firms are now struggling to obtain credit; their principal lenders, small banks, are under intense pressure, and hundreds more are set to be taken over by the Federal Deposit Insurance Corporation. Credit card lenders, another key source of loans to small business, have aggressively raised their underwriting standards. Policy makers could offer quick relief by empowering the Small Business Administration to provide more credit.

The Small Business Administration guarantees bank loans to small businesses, but banks aren’t making very many because the loan’s interest rates are capped at less than 6 percent — not enough to compensate for their risks at a time when business bankruptcies are high and rising. Creditworthy small firms would gladly pay somewhat higher rates to obtain credit. Increasing the maximum size of an S.B.A. loan and temporarily raising the percentage of the loan guarantees to as high as 97.5 percent, from 90 percent, would also prompt much more lending.

To help small companies with cash flow, policy makers should also extend provisions in the current stimulus bill that allow money-losing firms to receive refunds of taxes paid on profits earned in previous years. (In return, they agree to pay higher taxes in the future.) Rules permitting such refunds are scheduled to expire at the end of this year; an extension through next year would provide quick cash for many firms that might otherwise be forced to close. Given the tens of thousands of bankruptcies in the works by businesses of all sizes, expanding this tax benefit to bigger firms than are now permitted in the stimulus package would be a plus. Allowing companies with as many as 250 employees to take advantage of the benefit could potentially help well more than a quarter-million firms.

Finally, the government could help minimize the number of new job losses by promoting work-share programs. Nothing damages morale at a company more than layoffs; the experience not only is crushing for those who lose their jobs, but also weighs on those who remain, including managers. Layoffs are also costly, given severance expenses and the costs of rehiring or training new employees when business picks up again. Seventeen states offer effective work-share programs. Under these arrangements, employers cut workers’ hours — not their jobs — and states make up a portion of workers’ lost wages with unemployment insurance payments. Congress should provide financing to expand such programs nationwide.

None of what Zandi offers will have any effect on small business hiring. Banks are not making small business loans primarily because there isn’t demand for small business loans. I’m not sure what Zandi is talking about when he says in one sentence the SBA guarantees loans and in the next says the rate isn’t high enough to compensate banks for the risk. If the SBA guarantees the loans what is the risk?

Zandi also makes a common mistake of macro economists in looking at aggregates. Yes, hours worked are low and temporary hiring hasn’t picked up, but that doesn’t mean we can’t get a net gain in employment. Composition isn’t Zandi’s strong suit. Like many people he thinks in terms of existing businesses; new business could still hire even as existing businesses are raising total hours or hiring temps.  Maybe Zandi is assuming that new business formation will remain weak as long as the Obama administration demonizes business.

Small business hiring isn’t weak because the Obama administration won’t rebate past taxes. Small business hiring is weak because the Obama administration wants to raise future taxes. Hiring is weak because business owners don’t know how much health care reform will cost them. Hiring is weak because business owners don’t know how much energy will cost after the EPA gets done regulating CO2 emissions. Hiring is weak because business owners have no idea how the Obama administration will demonize them next. Hiring is weak because small business owners are discouraged at watching their larger competitors get bailed out. It’s called regime uncertainty; businesses can’t plan because they don’t know what the government will do next.

Helping small businesses hire again does not require the government to do more; it only requires that they do a lot less.