9/14/2010

Small Business Bill

The Senate is likely to soon approve a bill to aid small business by providing easier access to loans and some tax breaks. This bill is intended to lower unemployment by stimulating hiring by small businesses and remove a potential barrier to new business start up. The question is will the bill accomplish its intended purpose and what might be the unintended consequences of such a bill. One such example might be an increase in supply in competitive industries with low barriers to entry. In such an industry the accessibility of cheap funding with govt backing might cause a number of new entrants to the market that shouldn't have been admitted. This could drive down prices and hurt all participants in that market until the market naturally returns to equilibrium and these companies will leave the market. In this example the intended purpose would also not occur as hiring might increase for a time but layoffs would follow in due course. The real question that should be considered by the Senate in determining to pass this bill is: is there a supply shortage caused by lack of available funds (likely as a result of recession paranoia) or is the market in equilibrium?

1 comment:

Dave said...

You wouldn't expect to get the drop in employment.

Yes, a subsidy would push some people to open new businesses. But, this isn't going to make them irrational. So, you wouldn't expect them to open businesses that are not going to be viable at a higher rate (unless the subsidy is so huge that it makes it costless to open a new business).

Now, of course, that story changes if they're going to offer the subsidy, and then eliminate the program sometime later.

But, a subsidy that is established to be permanent will act like a reduction in fixed costs: it will lead to more businesses that tend to be smaller (because some of their need for economies of scale has been reduced).