President Obama and Washington politicians tell us Main Street’s economy is getting better, yet people are losing jobs and the unemployment rate remains in double digits. Maybe they’re referring to Wall Street. The Dow Jones average has risen from a low of 6,500 points to 10,500, a huge gain by anybody’s measure. That’s good news, right?
Common sense says the stock market is supposed to forecast economic activity and more activity equals more jobs. Actually, the market is only forecasting a profits rebound, not a jobs rebound.
Investment firm J.P. Morgan Chase just reported a profit of
$11.7 billion for 2009. Other large investment firms will soon follow suit. One year removed from needing a government bailout, Wall Street firms are earning billions. The same cannot be said for Main Street.
Alaskans have been lucky. We’ve fared better than most. But even a look around here shows us Main Street is hurting.
Small businesses are the engines that drive our economy. Small businesses account for 99.7 percent of all employer firms. They employ just more than half of all private sector employees, and small businesses have accounted for 64 percent of net new jobs during the past 15 years. Yet, small businesses are bearing the brunt of new economic policies coming from Washington.
Businesses that have survived this steepest downturn since the Great Depression did so by becoming terribly lean — they trimmed costs everywhere, cut back on inventories and probably laid off workers. If a business had too much debt two years ago, it’s likely that business is long gone. The lean and well-financed survived; the rest did not.
Those that survived were no doubt shocked the recession was so severe, and they remain wary of any rebound forecast by political pundits from Washington.
Meanwhile, the Obama administration has the view that government overspending should be paid for by the wealthy.
Who is considered wealthy? If you own a small business, the answer most likely is you.
Indeed, with current Washington spending, almost every American will see higher taxes and costs as a result of the struggle to pay for the bailouts, the new health care initiative and the stimulus package.
But what about the super-wealthy, folks with seemingly more money than is rightfully theirs to keep?
Surprise — about 75 percent of all small businesses qualify as super-wealthy by the government.
For most small businesses in this country, profits are taxed as if the profits were earned by the individual.
Targeted as super-wealthy by Washington, a small business that earns $500,000 likely will see its marginal tax rate rise from 35 percent to almost 50 percent.
But tax writers ignore the crucial fact of small business, namely, profits are the capital generator for the enterprise and not “take home” pay.
Reinvestment might include buying a new cash register or display equipment, adding to inventory or hiring a new sales associate.
Under the new tax scheme, almost half of a business’s profits will be taken by the government, leaving less for expansion and hiring employees.
Far worse for small business owners is that the marginal rate of taxes — the highest rate — will be higher on Main Street than on Wall Street.
Suppose a person owns a small hardware business and has to compete directly with Home Depot. Under the new tax scheme, the “super-wealthy” business owner could pay half of his or her earnings in taxes while Home Depot pays less than a third.
Small businesses will be forced to pay for Washington’s reckless spending instead of reinvesting and creating new jobs.
So is it any wonder that small businesses aren’t hiring? Would you? New taxes likely will keep our most important generators of jobs on the sidelines for quite some time.
A jobless recovery is what we are getting from Washington, despite an upsurge in profits. Wall Street profits are not enough to inspire Main Street job growth.
Bob Gillam of Anchorage is president of McKinley Capital Management, a professional investor and an economist.