08 Oct 2008

More Anecdotal Evidence on the Bogus "Small Business Payroll" Justification for the Paulson Heist

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After the House wisely decided that a group of “representatives” probably shouldn’t vote for something that the public opposes 9-to-1, the Powers That Be made two important switches. First, they stopped calling it a “bailout” and started calling it a “rescue package.” Second, they emphasized how this was all about helping Main Street. In particular, we heard over and over–from not just Paulson but also President Bush himself–that frozen credit markets would prevent small businesses from making their payroll.

When I first heard that, it sounded fishy; did regular businesses really need to borrow money every month just to pay their employees? I couldn’t believe most businesses were so tight. Maybe some really capital intensive operations, sure, but was a short-term credit market really that important for small business in general?

No, it isn’t. Paulson is lying through his teeth. Bush is either doing the same, or has no idea and is still criminally liable for trusting these advisors.

The first confirmation of my hunch came from an LRC article written by a small business owner who said: “None of the small business owners I know depend upon easy credit to make their payroll. When things get to the point where you need to borrow to pay your employees, the end is near.”

A second chunk of evidence was the reporting of Alex Tabarrok over at Marginal Revolution. (I can’t dig up the actual posts now.) Alex was going over a bunch of different data showing that the “credit crunch” really only affected those large institutions directly tied to the “toxic” mortgage assets; regular people could still get new credit cards etc.

David Henderson reached similar conclusions, just asking around. People could still get financing for their car purchases, etc., so long as they were good credit risks. In other words, Henderson found that businesses in his local community were still extending credit to people, but that they had raised their standards back to what most people would consider rational levels.

Last anecdote: My neighbor runs a very successful chain of electronics stores. The guy is a workaholic, and even though I don’t know him all that well, I think he is very sharp and wise in worldly ways. (Also, he was surprised when I told him I was against the bailout; I think he thought it was necessary.) When I asked him if it was true that either he or other owners he knew needed credit to make their payroll, he said, “No, you don’t need to borrow money to pay your employees. You bring in enough every month to cover that.”

I pressed him and asked if maybe you needed it in certain industries like home building. “OK yeah, I could see something like that, where you need so much upfront. But the truth is,” he continued, “banks will still lend to you if you have a clean balance sheet.”

So there you have it folks. A few other economists and I were able to find out within a day that small businesses are not starved for short-term credit, at least not to make their payrolls. So Hank Paulson either (a) didn’t bother spending a day researching the problem or (b) is lying through his teeth. Take your pick.

P.S. In the comments, I would love to hear feedback from actual businesspeople, especially if you think, “OK Bob, they picked that argument because it would sway voters, but the real reason the bailout was necessary was…” I am trying to avoid the conclusion that any sharp financial person who endorsed this thing, is necessarily a crook.

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