Why financial reform won’t hurt employment
Meredith Whitney is trying to make an updated case that we can’t pass financial reform because it would cost jobs. I don’t buy it, partly because I simply don’t believe her numbers, which kick off with two interlinked claims:
States will approach their June fiscal year-ends and, as a result of staggering budget gaps, soon announce austerity measures that by my estimates will cost between one million to two million jobs for state and local government workers over the next 12 months.
Typically, government hiring provides a nice tailwind at this point in an economic recovery. Governments have employed this tool through most downturns since 1955, so much so that state and local government jobs have ballooned to 15% of total U.S. employment.
First, there hasn’t been much ballooning going on. Let’s look at the numbers here: there were 17.3 million state and local government workers counted in the latest jobs report. That’s down from 17.6 million a year ago. In terms of percentages, state and local government now accounts for 13.3% of total nonfarm employment, unchanged from a year ago.
Does Whitney really believe that these very stable numbers are suddenly going to be upended over the next 12 months? Yes, many states have announced job cuts — but announcing job cuts is vastly easier than actually implementing them. To get a good idea of how difficult it is to shrink a mammoth bureaucracy, look at Citigroup, which has a storied history of announcing enormous job cuts only to see its total headcount rise: it took a good five or six attempts before it actually managed to shrink its total payroll. It’s simply not credible that state and local governments are going to reduce their total job count by between 6% and 11% over the next year.
Whitney then goes on to say, quite rightly, that small businesses are the best engine of job creation. But then her logic goes a bit skewy again:
Small businesses fund themselves exactly the way consumers do, with credit cards and home equity lines. Over the past two years, more than $1.5 trillion in credit-card lines have been cut, and those cuts are increasing by the day. Due to dramatic declines in home values, home-equity lines as a funding option are effectively off the table. Proposed regulatory reform—specifically interest-rate caps and interchange fees—will merely exacerbate the cycle of credit contraction plaguing small businesses.
If banks are not allowed to effectively price for risk, they will not take the risk. Right now we need banks, and particularly community banks, more than ever to step in and provide liquidity to small businesses. Interest-rate caps and interchange fees will more likely drive consumer credit out of the market and many community banks out of business.
Essentially, Whitney is saying that small businesses fund themselves with credit cards; that financial regulation will reduce the amount of credit-card credit; and that therefore financial regulation is bad for small businesses. What’s more, she applies this argument specifically to community banks.
It’s true that small businesses fund themselves with credit cards. But it’s not true that exorbitant interest rates of 30% or more are a result of “effectively pricing for risk” — instead, they’re a way of trying to extract as much profit as possible out of every cardholder. And it’s trivially true that a small business funding itself at an interest rate of something over 30%, where the proposed caps are going to kick in, is not going to be doing a lot of new hiring.
And while it’s also true that we need community banks to provide funding to small businesses, the fact is that the overwhelming majority of credit cards come from the giant too-big-to-fail banks. If a small business wants to get a loan from a community bank, it can and should do so the old-fashioned way, by getting a loan from its local community bank. Local banks have very little dependence on small-business credit-card revenue, and in fact if the big banks cut their credit card lines further, that might serve only to drive ever more small businesses to get loans from their local institutions. Community banks, in other words, have nothing to fear from financial reform: in fact, they have quite a lot to gain. And small businesses, too, should welcome anything which keeps their funding costs down and stops them being ripped off by their banks.