The public sector is an important portion of our lives, certainly. We are dependent on it for such critical elements as defense, public safety, education, as well as much of our transportation infrastructure.
From an economics perspective, though, the public sector is almost totally dependent on the private sector for its funding. If the private sector is not healthy, tax revenue for the public sector dries up and the only way to finance public sector jobs is to spend money we dont have by borrowing it. We all know how that story ends. Spoiler Alert: If you dont actually know how it ends, you should not read any news stories that mention California or Greece.
There are some economic policy advantages to providing a boost to the private sector at this time. First, the federal government would not have to come up with cash, something it has little of right now. Businesses, unlike state and local governments, are not accustomed to or expecting direct cash payments. While budget impacts must be considered, a major economic stimulus could be provided without having to write a single check.
Second, the more private sector economic stimulus works, the lower the cost to the federal government and the taxpayers. This is not generally true of public sector stimulus programs, which often require continuing subsidies of tax revenue after the project or program has been completed.
The private sector, of course, covers a lot of ground, from corporate giants with global reach to retail stores, small manufacturing operations, sandwich shops and Internet entrepreneur-wannabes in pajamas. There is a certain sameness to government bureaucracies at every level, but the private sector is as diverse as America itself.
That diversity does present some problems for economic policy makers in general and certainly in our present situation where many larger companies enjoy Double H status Healthy and Hiring while many smaller companies dont have an H to their name.
One of the problems is the failure rate. Small business, especially new, entrepreneurial ventures, fail at a rate that would discourage all but the most optimistic. And many of us, in our enthusiasm for ventures, either believe that the mortality statistics dont apply to us, or are blissfully unaware of the unpleasant facts about business startups. A very successful entrepreneur once said to me that his business succeeded partly because, I was too dumb to know that it couldnt be done.
Beyond actual failure, smaller businesses are, more than large ones, more susceptible to a debilitating type of economic disease that leaves them in semi-zombified state an existence where the business is losing its life force gradually over time, sometimes years, as its profits and financials shrink.
Neither new ventures nor zombie firms are attractive targets for bank lending or economic policy initiatives. Banks have a fiduciary responsibility to their depositors to the taxpayers, and these loans simply present too much risk.
There are undoubtedly small businesses that are good credit risks but cant get financing. But telling banks to lend more is effective only in that it keeps small businesses on the banks radar scopes. When banks are allocating resources, assigning lending officers, and developing marketing , they tend to forget about small businesses, especially when so many firms couldnt qualify for loans during the recession.
There are some positive economic policies and some small business stimulus programs available even to a federal government that is tapped out:
Initiate a tax-deferral program that would allow smaller businesses to delay payment of all, or a portion of, their income and payroll taxes. This would have an immediate effect on their cash flow and working capital and would provide a sharp economic boost without worsening the total federal debt picture.
Launch an investment tax credit that would kick in immediately, but containing a wind-down period instead of ending with a sharp break,.
Any or all of these programs would help, but nothing would help more than the administrations paying attention, encouraging but not legislating, coercing, or subsidizing bank lending, and, more generally, recognizing that the private sector is more than a list of its shortcomingss.
James McCusker is a Bothell economist, educator and consultant..