October 2009 Archives

I recently had a discussion with Miles Moffeit, a reporter for the Denver Post, about the recent announcement that about 8,100 jobs had been created or saved in Colorado through funding from the American Recovery and Reinvestment Act (ARRA). Some highlights from the discussion, which led to an article in the Post, follow in the subsequent paragraphs.

The federal government requires recipients to report the number of jobs saved or created. Based on our experience conducting federally-funded research, there are significant challenges associated with quantifying the impact of any public or private assistance funding efforts. One of the challenges is accurately attributing the impact for the assistance, relative to other internal or external funding. For example, a company may receive a total of $10 million in funding, with $1 million in funding coming from the ARRA program leveraged against $9 million from other sources. If 50 jobs are retained or created because of the total $10 million in funding, what portion of those jobs should be attributed to the investment from the ARRA program?

A Return on Investment (ROI) analysis of jobs created or retained should also account for the differences in worker type and their varied impact on the economy (salaried, hourly, commission, part-time, temporary, full-time, and contract workers). Because each type of worker impacts the company and economy in a different manner, they should be accounted for differently.

Job growth and retention are essential for economic expansion and stability. When final revisions are made to the 2009 employment data, it is likely that Colorado jobs losses will exceed 100,000 jobs. If the ARRA program has helped create or retain jobs, that is good for the state. This is the upside. (Based on recent trips to the mountains and Southwest Colorado, it seems apparent that a number of construction jobs have been created throughout the state as a result of the ARRA.)

The downside is that the ARRA program is an incredibly expensive tool for creating jobs. The expense for job creation is further heightened by the costs of administering the program and tracking the ROI. Time will tell whether or not the ARRA investments effectively deterred further erosion of the economy and a case can be made that the ARRA should not be measured based on the cost of a job created, but rather on impact the program had on preventing a major depression.

For further information on the ARRA reporting, click here.

BRD blog readers recently received a sneak preview of a report, IS! Phase I, Final Report, jointly released by our research team and Dr. Ron Rizzuto from the Reiman School of Finance. The plan would provide stimulus for successful companies that are having difficulty securing credit. The basic parameters of the concept is that the federal government would provide 80% loan guarantees to successful firms, with additional workforce training incentives to retrain workers and reduce unemployment rates. In a nutshell, the report indicated that over a five-year period, the process of providing assistance to firms with a proven track record would add about 1 million workers to the nation's payrolls.

This past week, the report was officially released to the media, which resulted in a variety of  inquiries about the general concept. One of the most frequently queried topics was the risks associated with the potential adoption of this concept.

Overall, the plan has much more upside potential than associated downside risk. Risk could increase if the following four items are not properly addressed:
• The program should be simple to understand and easy to implement.
• The program should be attractive to successful companies that have been unable to acquire funding for new product development, capital investment, expansion into new markets, or other growth opportunities.
• The program is intended to increase the availability of funds, not the number of government workers, thus it becomes essential to select a government agency with a proven track record to administer the program. Most likely that agency would be SBA (Small Business Administration). If immediate stimulus is to be felt, the loan review process must be thorough and timely.
• The total loan portfolio of the program must remain balanced to manage the anticipated default rate. If a disproportionate number of companies from high-risk industries are accepted, then it is likely that the program default rate would increase. 

In the weeks ahead additional research will be conducted to fine-tune the present analysis and evaluate various variations of the concept. At the same time, interested parties will further test the merits of the concept with members of Congress.

Economy Shows Signs of Recovery

Nationally, evidence continues to mount that the economy bottomed out during the second quarter and that lower than potential growth will occur through at least next year. Because the state economy is closely linked to the national and global economies, recent economic data point to a slow recovery for Colorado.

In late September, the BRD convened the estimating committees for the 2010 Colorado Business Economic Outlook.  Results from a straw poll of committee members predicted that Colorado would again experience negative employment growth next year, -0.1%. The more formal, in-depth forecast will be released by the BRD at the 45th annual Colorado Business Economic Outlook Forum on December 7 at 1:00 pm in Denver at the Grand Hyatt.

In early October, the BRD released the Q4 Leeds Business Confidence Index (LBCI). The results point to improved economic conditions in Colorado. The forward looking index increased for the third consecutive quarter, from 47.5 to 49.7. Moderate gains were recorded in five of the six index components, and three of the components are now above the neutral mark of 50. The only index component to register a decline was expectations for growth of the state economy.

While there is justifiable optimism because of the improvement of the overall index, the LBCI remains below 50. The fact that business leaders expressed continued concerns about profits, hiring, and capital expenditures suggests that the chances have increased that Colorado will lag the national economy in its recovery, much as it entered the recession later than the nation. This prognosis reflects decreased optimism in the strength of the state's recovery based on data from the construction and energy industries.

There are a slew of programs being backed by the federal government intended to stimulate economic recovery. Some of these will lead to short- and long-term economic growth and vitality (e.g., prime lending rate, bio research grants), and others will serve to merely slow the demise of a particular firm (e.g., GM, Citibank). Taxpayers are left asking, "What is in it for us?"

The IS! Plan is a proposed federal stimulus program that supports successful businesses by guaranteeing loans, discounting rates, and providing tax credits for retraining and upgrading America's workforce. The plan offers support to firms that are on a trajectory of growth. In ordinary times, these firms would be prime lending candidates; however, in this recession, they are subject to financial credit constraints that are inhibiting growth potential. The program builds primarily on the existing bank-client relationship, without new bureaucracy. This is intentionally designed to be university, and not politically, geographically or industry-bound.

Over the past 18 months,nearly every economic indicator posted swift and sharp declines, including employment, GDP, stock markets, bank failures, consumer confidence, manufacturing indices, retail sales, and commodity prices. Despite some of these measures of the economy showing signs of improvement, tight lending continues to inhibit economic growth. Commercial and industrial loans have fallen more than 10%, and rate spreads have increased, despite the Fed's actions to bring rates down to historic lows. In past recessions, banks were the economic foundation waiting on the sidelines to provide debt when the economy showed signs of recovery. The IS! Plan offers a way for banks to increase lending, and frees U.S. companies to grow with much-needed capital.

Basic parameters of the IS! Plan state that the federal government will provide 80% loan guarantees to successful firms (proven by financial statements), provide a 1% rate discount to firms, and incentivize workforce retraining to adapt the unemployed to new positions. For illustrative purposes, modeling a scenario in which the guaranty program increases lending by $15 billion, output increases by $35.9 billion in year 1, growing to $595.4 billion in year 5. Employment related to economic growth increases by 195,639 in year 1, growing to 978,196 in year five. Fiscally, this plan is revenue positive in year 2, given the income taxes and business taxes attributable to the economic growth. Importantly, the IS! Plan has a positive return on investment for taxpayers.

Given the current state of the economy, the last thing the U.S. needs is for banks to inhibit an economic recovery.

The Incentivize Successful Small Businesses (ISSB) Plan (formerly IS! Plan) bill is currently being drafted in Congress. The IS! Plan research study completed by the Leeds School of Business and Daniels College of Business can be found at leeds.colorado.edu/BRD. A second phase of the study is currently being conducted and will be made available when completed.