Nearly a year into the stimulus and the economic recovery’s climb is still uphill. Andrea Belz of Belz Consulting gives some reasons why.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, popularly known as the stimulus package, which included:

  • $288 billion in tax cuts,
  • $224 billion in extending unemployment benefits, education, and health care,
  • $275 billion for federal contract, grants, and loans.

Unfortunately, the unemployment rate continues to hover in the 10 percent range in most states, and is reportedly even higher if one accounts for those who have given up or are underemployed. Similarly, in some areas delinquent loans account for as many as 10 percent of all mortgages; with another 5 percent in foreclosure, it looks like nearly one out of seven of us is struggling in one form or another. The stimulus package has clearly not been a rousing success. Why not?

  • Bureaucracy slowed down the recovery. First, in many arenas the federal bureaucracy ballooned, keeping funds from hitting the streets. In a remarkably clear summary, Kimberly Amadeo has described how over $80 billion was allocated to federal infrastructure projects, generating jobs in construction and related activities. Dr. Ronald Utt of the Heritage Foundation has detailed how barely half of the projects had not been funded. Similarly, of the funds allocated to research grants and contracts, only $131 billion has been spent so far. There are many small companies with innovative ideas that have been looking for federal funds to bring them to maturity and market readiness, but those awards have been in limbo thanks to the lengthy review process. The Recovery Act calls for improved transparency and effective proposal review, important components; however, if it takes six months for a company to learn if it will be awarded $100,000 in a research grant, the company could collapse by then. Projects of all sizes have been trapped in bureaucratic purgatory.
  • Small businesses have been hamstrung. The Ewing Marion Kauffman Foundation reported in November 2009 that companies less than five years old created nearly two-thirds of new jobs in 2007; this should motivate the creation and support of new companies. The Recovery Act allocated $54 billion to small business tax incentives and write-offs. This may seem significant, but consider that the government spent $100 billion in 2009 to bail out the auto industry and the small business contribution seems paltry. It is particularly galling in light of the fact that the marketplace has driven thousands of small companies out of business because an unforgiving marketplace did not have sufficient demand for the product, but large corporations are apparently exempt from market forces. Similarly, the rock-bottom interest rates generated a “liquidity trap” in which banks reduced credit lines and kept their cash on hand. Raising the interest rates would paradoxically probably stimulate more lending (read economist Ronald McKinnon’s highly technical but interesting discussion of this point; although it may be easier to think of this process as a simple mismatch between rates and perceived risk profiles). Small companies have simply not been able to obtain financing and continue to operate under crushing tax burdens.
  • The health care distraction. The debate over health care reform has created a significant distraction, taking precious resources to overhaul a system that works for most Americans and imposing additional penalties and costs without providing added service. If small companies create jobs, then tax reduction would enable small companies to affordably insure their employees, allowing people to join small companies creating new value without risking their health and that of their families.
  • Insufficient support of technology innovation. Unfortunately, 20 years of misplaced priorities have undermined the American educational system and innovation is no longer a priority. We as a nation understand this; the Kauffman Foundation also reported a survey demonstrating that while 78 percent of people say innovation is important to the health of our economy, only 3 percent believe that the stimulus package encourages innovation. The $18 billion allocated to technology research and development seems particularly meager. Science research requires work at all levels and would generate jobs immediately for many entry-level and moderately trained workers in addition to highly educated laboratory leaders. Furthermore, this is an important investment in the future because it can lead to spinning off companies to commercialize the innovations. A Congressional Study Report described how almost 6,000 new companies were created between 1980 and 2008 to market the results of academic research and development; of these over 3,000 were still in business as of 2007, according to a study by the Association of University Technology Managers (AUTM). Innovation is the backbone of the economy and government funding should drive this engine.

A culture of creativity generates both optimism and wealth as interesting technologies enter the marketplace. Unfortunately, the stimulus package dragged out the recovery process by maintaining a bloated bureaucracy, reducing the incentive for innovation, and keeping small businesses hamstrung with a lethal combination of high tax burdens and an inability to tap into the credit markets. While infrastructure improvements are necessary, they do not stimulate excitement and have not hired sufficiently to generate confidence. The plodding “eat your vegetables” approach to renewing American optimism has failed. Incentives for entrepreneurship and technology innovation, in concert with effective tax and fiscal policy, would create more jobs and improve the economy far more effectively.

Andrea Belz is principal at Belz Consulting, LLC, which serves companies that develop new technologies, use them in novel ways, or are otherwise seeking to capitalize from rapidly changing supply chains. Email her at andrea@belzconsulting.com or visit www.belzconsulting.com.