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Liberate ATMs and Credit Unions to Jumpstart Jobs
Liberate ATMs and Credit Unions to Jumpstart Jobs
June 21, 2011
Originally published in Big Government
“ATMs don’t destroy jobs,” tweeted Davd Burge of the Iowahawk blog in response to Obama’s now-infamous “Today Show” explanation of unemployment. “Politicians who treat the country like an ATM destroy jobs.”
But actually it wouldn’t be so bad if politicians merely treated the American economy like an ATM, even if they made fairly large withdraws. What’s really killing jobs is the red tape that causes a massive slowdown by jamming the gears of the advanced, multi-functional machine that is the free market.
The “Ten Thousand Commandments” of federal regulations, as my Competitive Enterprise Institute colleague Wayne Crews calls them in his annual study, costs the U.S. economy billions of dollars a year. And some regulations even put outright bans of the very activities politicians say they want businesses to engage in.
Since the financial implosion and banks bailouts, the Obama administration and other politicos have been hectoring lenders to make loans to small business. Yet some financial institutions that haven’t even asked for a bailout and are desperately seeking to make more small business loans are statutorily barred from doing so.
These are the credit unions.
Credit unions are cooperative financial institutions owned by member depositors who receive excess funds in the form of dividends. Members can also take out loans from the credit union for items such as cars and homes, often on better terms than at banks.
But if a credit union member wants to borrow money to start or expand a small business, he or she will likely run headlong into a decade-old rule that clipped credit unions’ wings and is holding back economic growth. In 1998, bank lobbyists looking to halt competition succeeded in getting Congress to put in place a rule limiting the amount of business lending a credit union may engage in to just 12.25 percent of its assets.
There is no credible research to show that the 12.25 percent cap does anything to contribute to credit unions’ safety and soundness, and in fact, this arbitrary cap actually creates lending risk for these institutions. The cap, which is separate and aside from reserve requirements, puts limits on business lending that don’t exist for other types of credit union lending, such as mortgages and car loans. There is nothing inherently safer about these types of loans over business lending. This rule not only discourages beneficial lending to small business; it may encourage a dangerous concentration in other types of loans such as mortgages, which we all know could often be anything but safe.
The good news is there is bipartisan legislation ease this barrier to small business growth. The Small Business Lending Enhancement Act – sponsored as S. 509 by Mark Udall (D-CO) and H.R. 1418 by Ed Royce (R-Calif.) — raises the government’s current cap on the amount of business loans credit unions can make from 12.25 percent to 27.5 percent of a credit union’s assets.
The Credit Union National Association has estimated that this measure would create billions in new loans and more than 100,000 jobs in its first year of enactment, and it has been endorsed by trade groups from the National Association of Manufacturers to the National Association of Realtors — as well as policy groups from free market stalwarts such as the Competitive Enterprise Institute, Heartland Institute, and Americans for Tax Reform to the left-leaning League of United Latin American Citizens (LULAC) – as a way to make credit more available for entrepreneurs.
But though both Senate Majority Leader Harry Reid (D-Nev.) and the Obama administration initially expressed support for a similar measure in the last Congress, they ended up preventing the measure from coming to a vote as an amendment to a larger bill, with the lame old excuse that there just wasn’t enough time to debate its merits. Yet the administration and last Congress always found plenty of time to rush through stimuluses and bailouts to “save the economy,” even though this cost-free step of simply lifting the barriers to business lending by credit unions will probably “save and create” more jobs and businesses than all those spending bills put together.
Bank lobbyists have been ferociously opposing any increase in the credit union business lending cap that would give more borrowing options to small businesses. They complain of “unfair subsidies” to the credit unions. An “action alert” of the American Bankers Association warns about “the expansion on unfair credit union competition in business lending.” The alert intones, “Credit unions were given a tax exemption to serve people of modest means, not to aggressively go after business loans.”
But it’s a bit rich for the banking industry, which has received more than $1 trillion from TARP and other measures, to complain about unfair subsidization. Yes, credit unions have an exemption from taxation at the corporate level because they are member-owned cooperatives that don’t have the many means that banks have to raise money such as the issuance of shares of stock.
Credit union members, however, are fully taxed on the dividends on their accounts, and are taxed at the “ordinary income” rate for interest and not the lower rate for dividends. Conservatives and libertarians have long argued that business income should only be taxed once, and credit unions provide a successful example of single taxation. They should also argue for expanding this structure, rather than for unduly restricting credit union activity simply because the tax system for all businesses hasn’t yet been reformed.
One free market-leaning politician who was a fan of credit unions was Ronald Reagan. In Presidential Proclamation 5211 in 1984, Reagan said: “Credit unions are uniquely democratic economic organizations, founded on the principle that persons of good character and modest means, joining together in cooperative spirit and action, can promote thrift, create a source of credit for productive purposes, and build a better standard of living for themselves. Because credit unions exemplify the traditional American values of thrift, self-help and voluntarism, they have carved a special place for themselves among the Nation’s financial institutions.”
Through his chairman of the National Credit Union Administration, Edgar Callahan, Reagan lifted barriers to credit union modernization, such as allowing credit unions with different fields of memberships to merge. Upon Reagan’s death in 2004, an article from the website CreditUnions.com stated that “the Reagan legacy means that individuals can choose a cooperative form of financial services in most communities today.”
Incidentally, it was in the Reagan era that ATMs had their biggest spurt of growth – the number in operation more than tripled during the 1980s. But this decade was also a booming time for jobs, and this included jobs in the financial sector too. As my colleague Iain Murray has written, “From 1985 to 2002, U.S. banks added some 300,000 ATMs around the country, but also added 42,000 bank teller jobs.”
The difference today is that credit unions, banks, and the economy as a whole face shackling red tape. In addition to the lending cap, credit unions, like community banks, are faced with devastating losses in revenue that will result from the Durbin Amendment’s price controls on debit card transaction fees to retailers from the Dodd-Frank monstrosity.
Ironically, the effect of these price controls will be to raise ATM fees for consumers to possibly as high as $5 per transaction, as well as (as I have noted previously in BigGovernment) eliminate free checking and card rewards, as the costs of processing debit cards are shifted from retailers to consumers. So because of the new fees, there may be less ATM usage and hence, fewer ATMs installed or maintained. Yet, for some reason, financial analysts aren’t predicting an influx of jobs from these costly mandates.
As the great libertarian writer Isabel Paterson put it in her classic book from 1943, freedom is the god of America’s economic machine. Remove from the red tape from the economy’s gears, and just watch the coinciding growth in jobs, ATMs, and other new marvelous machines!