Is The Government Stimulus Plan Doing Anything For Entrepreneurs?

May 6, 2010

Every recession inspires government leaders to enact an economic stimulus plan. The assumption is that market downturns are intolerable and can only be cured by political intervention. Yet, it is unclear whether stimulus packages like President Barack Obama’s American Recovery and Reinvestment Act of 2009 stimulate anything other than government spending.

The way to know for sure is to determine what, if anything, such plans do for entrepreneurs. John T. Reed, a Harvard MBA, points out that what actually needs stimulating is business profits, which supply the money for defense, Social Security payments, employee salaries/wages, business taxes and ultimately, the stimulus itself.

What Was Stimulated

The question of whether the stimulus is working, therefore, is really a question of whether it helps entrepreneurs be more profitable. Some aspects of the stimulus do appear to help. Roughly $15 billion in stimulus money was devoted to letting businesses use current losses to offset profits from the previous five years (instead of the previous limit of two years), which made such companies eligible for tax refunds.

Another $11 billion was allocated to help government contractors by no longer withholding 3% of contractor payments to ensure tax compliance. Additionally, $5 billion was spent allowing businesses to speed up depreciation on equipment purchases. Unfortunately, this and other tax relief to businesses totaled just $51 billion out of the entire $787 billion stimulus.

The rest of the bill, as the Wall Street Journal breaks down in chart form, is largely about funding public works projects and government-run social programs. $400 million, for instance, was provided to extend and increase state unemployment payments. Over $5 billion was set aside to modernize and repair federal office buildings. A whopping $29 billion was allocated to highway improvements, while another $26 billion went to extend jobless benefits for up to 33 weeks.

Laid-off workers in the aggregate received a $24 billion, 65% subsidy to continue paying premiums on their old employer’s health insurance plans for nine months. In total, roughly $736 billion of the $787 billion stimulus packages went to social programs, infrastructure improvements and tax relief for low and middle-income workers.

Stimulus or Sedative

Clearly, the bulk of the stimulus bill created incentives for activities other than profit making. Among the specific things rewarded in greater amounts were “core investments” (including over $1 billion to failed government-run enterprise Amtrak), miscellaneous energy projects, education and healthcare.

Regardless of the merits or demerits of these things individually, they are not about entrepreneurs or helping them in any demonstrable way. If it is kept in mind that business profits are the true source of prosperity, it seems that the stimulus has been downright antagonistic to entrepreneurship. Several prominent economists (including Edward C. Prescott, Robert Lucas, Jr. and Vernon L. Smith) said as much before the bill was passed. The Congressional Budget Office likewise concluded that for whatever short-term gains the stimulus produces, there would be a net decrease in GDP by 2019.

A Real Stimulus For Entrepreneurs

A stimulus plan that truly helped entrepreneurs prosper would contain vastly different provisions. Alex Tabarrok of MarginalRevolution.com writes that a real stimulus would be concerned first and foremost with boosting incentives to produce. To that end, Tabarrok proposes that the IRS cut the marginal tax rates of every citizen, not just low and middle-income earners. That would increase the ability of consumers to spend again and would not require any additional government debt.

Another deficit-friendly way to help entrepreneurs would be to reduce or eliminate corporate income taxes. According to the Tax Foundation, the United States taxes corporations at higher rates than any other country, including France and Germany. In an article on what a true stimulus plan would accomplish, John T. Reed proposes (among other things) the following:

• Abolishing the corporate income tax
• Ending all wage and price controls
• Eliminating all tariffs and restrictions on imports
• Limiting the Internal Revenue Code to ten pages in length
• Enacting a “producer-recruiting program” that biases U.S. immigration toward healthy, talented and ambitious foreigners while simultaneously encouraging a “parasite drain” away from the U.S.
• Establishing a Constitutional limit on what percentage of an individual’s income can be taxed

There are also ways for the government to actively help businesses, rather than simply leaving them alone. In The Gridlock Economy, Michael Heller explains that entrepreneurs are routinely thwarted by ownership gridlock, which delays progress on everything from developing blockbuster drugs to ending airport congestion to using more than just 10% of our broadcasting spectrum. Through smart policy, government could encourage the creation of patent pools and other mediums that make it easier for entrepreneurs to innovate.

The Opposite of the Stimulus

Regrettably, while all of these things would be of immense help to businesses, none of them are the focus of this or any foreseeable stimulus bill. As many have pointed out, the various government spending-based activities called for in the stimulus will ultimately come at the expense of entrepreneurs. To the extent the stimulus is funded by current taxes, the nation’s businesses are worse off by that amount. To the extent the stimulus is financed by debt, the same will be true albeit later rather than sooner (as reflected in the predicted net reduction in GDP by 2019.)

Taking all into account, the stimulus package has not only failed to help entrepreneurs, but also arguably made their jobs more difficult. A true stimulus would create lasting incentives to produce and hire rather than just temporary aid to those suffering hardships.

• Comments 7
• Date May 6, 2010
• CategoriesEntrepreneurship, Small Business, Startup