The Entrepreneurial Mind

Each and every year during the twenty years leading up to this recession, small businesses generated 75-80% of all new jobs. This was a remarkable transition in our economy that created a fundamental shift in employment.

The Fortune 500 went from employing about 20% of all American workers in 1980 to less than 5% by around 2000.  Small businesses grew to make up 50% of the GDP and 50% of all employment during this same period.

But rather than enact tax cuts, which is the best single stimulus for entrepreneurial activity in an economy, we are now obsessed with propping up the large corporations that have already seen their best days, and to artificially try to stimulate new industries that cannot exist one their own in the market without massive government subsidies (i.e., almost every business with any "green" theme).  And we are going to pay for all of this through higher income taxes and a whole new class of taxes created by Cap and Trade.

Our inattention to what really benefits entrepreneurial economic development has had a devastating impact on jobs.

The ADP Small Business Report showed that 177,000 small business jobs were lost in June of 2009. According to Joel Prakken, who compiles the report:

 

"Despite a notable improvement over the first three months of the year, when monthly losses averaged 260,000, employment among small-size businesses is likely to decline for at least several more months. Since reaching peak employment in January 2008, small-size businesses have shed nearly 2.3 million jobs."

In about eighteen months, small business employers shed as many jobs as the Fortune 500 did during the entire decade of of the 1980s.

A small business bailout cannot succeed if it is an interventionist approach by Washington as we have seen in their approach to the auto industry, the banking industry, and who knows what next.  We should not infuse tax dollars into targeted industries or businesses if we want to restart the small business job engine that created so much of our prosperity of the past 20 years. 

The best small business "bailout" would be for Washington to do less -- much, much, much less -- than it is doing now.  But, alas, I just do not think that such an approach is found anywhere in the paradigm of either political party in Washington.

James Pethokoukis who writes for Reuters offers an interesting analysis on who gets credit or blame for the economy going forward, and why:

It's not so much that a more negative forecast would have prevented Obama from spending large amounts of money, it's that he would have been forced to tilt the stimulus more in favor of tax cuts which work a lot of faster  than government spending (though both are pretty inefficient as "stimulus").

And Obama wanted to spend billions on his "investment agenda (healthcare, education, infrastructure), not tax cuts.  (And if he had spent the $2 trillion that some liberals wanted on stimulus, it surely would have crowded out the rest of his agenda, plus rattled the bond markets.) So he gambled that monetary policy would keep the economy from getting as bad as it has. And he lost. Did Team Obama purposely give a bad forecast, or did its old fashioned Keynesian approach merely lead it astray? Good question. Either way, it's the Obamacrats' economy now.

When done correctly, I am a big fan of charter schools.  Some states, like Tennessee for example, stack the odds against charter schools.  But, when the laws are fair for charter schools that are an amazing catalyst for educational change.  I wrote my book From the Ground Up as a guide to help charter schools and other innovative education start-ups navigate the business side of running independent schools.

Belmont alumnus Andy Tabar sent along a link to an article at Cleveland.com about a charter school in his home town of Cleveland, Ohio that has chosen to have an entrepreneurship theme to their curriculum:

The first eighth-graders to graduate from Cleveland's Entrepreneurship Preparatory School are true survivors.

E Prep, as the charter school is known, opened three years ago with 124 sixth-graders, but only 46 students persevered to graduate on Friday. Getting to that point was not easy. The school's regimen sends the frivolous packing.

We already know that higher tax rates decrease the rate of entrepreneurial start-ups in an economy.  My friend and colleague John Wark passed along a post from TaxProf Blog that cites a recent study by Rafael Efrat, of California State University-Northridge suggesting that taxes are also a culprit in small business failures, as well. 

TaxProf Blog offers this quote from the conclusion of the study:

Consistent with the growing tax burden on small-business owners, as well as the growing body of evidence linking higher tax burden with limited entrepreneurial growth and higher closure rates, this study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, white, native-born, well-educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.

This week's topic for Forbes America's Most Promising Companies comes from Brett Nelson, Entrepreneurs Editor at Forbes.com:

A vast increase in productivity, care of staggeringly swift advances in computing technology, drove the U.S. economy to new heights in the last 20 years. Where might the next surge in productivity come from to propel us out of the economic rut we are in now? Which companies or universities are at the cutting edge?

This is an intriguing question, indeed.  Let's take a look at some possible candidates.

I know -- it has got to be something green.  Surely with all the hoopla going surrounding green energy, it must hold great economic promise for our economy.  Let's see what Jonathan Fahey discovered in an article at Forbes.com about one printer named Brian Driscoll from Connecticut who got some government help to put in a windmill:

A windmill doesn't make economic sense, even though this poor entrepreneur is gouged 19 cents per kilowatt-hour from his utility. A 121-foot, 100-kilowatt turbine from Northern Power runs $500,000, installed. The air at Driscoll's site on Long Island Sound is so still that the average output would come to only 18% of peak output, meaning that the juice would be worth $30,000 a year. It's hard to cover the interest on a $500,000 loan with a $30,000 annual payback. "If I had to borrow that kind of money for my business, it would be for printing equipment," says Driscoll.

Good thing Driscoll got most of the cost of the windmill paid for through federal and state grants. 

Well, I guess the next big thing won't come from anything that has to do with being green.  If green products were the answer to our energy problem, we would have seen them breaking through due to market demands.  Instead, the only success that we can anticipate from green companies is their ability to secure federal and state money from rent-seeking behavior like Mr. Driscoll's.

OK, health care must be the next big thing that will pull us out of this economic morass.  After all, the Obama administration is planning to spend $1 trillion just as a down payment on "fixing" healthcare. 

But wait a minute -- I don't see entrepreneurs lining up to dig into that pot of money.  Nope.  It is the likes of General Electric and others positioning themselves for some serious rent-seeking in the health care arena.  And don't forget that the goal in healthcare reform is to cut costs and ultimately ration care.  No economic leadership likely to be found in healthcare.

I know.  It must be transportation.  Darn!  I forgot about the new General Motors that is starting to look a lot like the old East German Trabant.

I guess the place not to look for the next big economic thing is with any of the rent-seeking companies in those industries lining up at the public trough.

The thing about economic breakthroughs is that we rarely see them coming, and they never come to us thanks to government policy makers picking the next economic "winner."

What is beginning to scare me is that we are doing everything wrong if we want to see our economy recover due to the good works of entrepreneurs: 

• We are increasing taxes.  Higher taxes kill people's motivation to take risk and launch ventures.  The evidence is overwhelming on this.  And not only are we increasing the marginal rates on income taxes, but we are coming closer to enacting Cap and Trade, which will add an even greater deterent to entrepreneurial activity.  The current 70,000 page federal tax code will probably soon look like the good old days in the not too distant future.
  
• We are increasing regulation.  Those in Washington who believe that capitalism has failed, or at least badly flawed, are eagerly adding new regulations that impact every aspect of commerce.  Bad news for entrepreneurs -- increased regulation also inhibits entrepreneurs.
• Property rights are eroding.  It is clear that we have evolved from our founding as an economy of private property protected by limited government to a system that views private property as something that the government bestows to us by its good graces.  Alas, not a good recipe for entrepreneurial fervor in an economy as business owners need to know that the property they hold and the wealth they create is actually theirs to keep.
  

Sadly, it may be that Mr. Nelson has asked us the wrong questions this week. 

Instead of "Where might the next surge in productivity come from..." , I think the question should have been "Will there actually be a surge in productivity any time soon?"  

And rather than "Which companies or universities are at the cutting edge?", maybe we should be asking "Will there be any companies or universities that will be able to lead us to a new cutting edge?"

The Cap and Trade train is still moving along (a.k.a. "American Clean Energy and Security Act of 2009"). 

I agree with the assessment of Susan Eckerly, senior vice president, public policy for the NFIB assessment of this bill:
 

"At a time when our nation faces near 10 percent unemployment and stalled economic growth, now is not the time to impose an $846 billion energy tax on small business. Instead of investing in their businesses and creating new jobs, this cap and trade proposal will force small business owners to pay higher energy prices.
 
"According to the NFIB 2008 Small Business Problems and Priorities data, the cost of natural gas, propane, gasoline, diesel, and fuel oil ranks as the second most severe problem small business owners face. Higher energy costs mean a higher cost of doing business, and small business is especially sensitive to increases in cost.
 
"Our members believe that the free market is best suited to develop new energy efficient technologies and renewable sources of fuel, and our nation's job creators stand ready to do so without the heavy hand of government mandates.
 
"Our data shows that small business owners are growing more optimistic about the economy. For that reason, a large, unfunded government mandate and a national energy tax are the last things small business and the overall economy needs. We are strongly urging the House to defeat this bill."

To see the impact this bill will have on you personally go the Tax Foundation's Household Cap-and-Trade Burden Calculator.  Or, for a more humorous take on Cap and Trade, see their YouTube video.

Back in 2007 I had a rather spirited debate with Dr. Robert Graboyes, an economist who is a healthcare advisor to the NFIB.  You can find this discussion here, here and here.

To summarize this debate, the NFIB took the position that we need to be pragmatic about healthcare reform.  Here is what they said at the time about keeping healthcare in the private sector:

To the greatest extent possible, Americans should receive their health insurance and health care through the private sector.

And my response:

"To the greatest extend possible"??? You can drive a freight train through that loop hole! Liberty is a foundational principle in our system. It is sad that we seem to be finding more and more convenient reasons to compromise on our freedoms, particularly our economic freedoms.

Their goal was to get a "seat at the table" to help shape healthcare reform.  And how does the meal of healthcare reform taste that is being served to them now that they have a seat at that table?  This is from their press release issued this week:

Brad Close, vice president of federal public policy for the National Federation of Independent Business...released the following statement in response to the House health reform discussion draft:
 
"As the U.S. House officially begins to discuss and develop its approach to addressing the healthcare crisis, one thing is clear - small business owners need meaningful reform that increases access to quality, affordable healthcare. Sadly, many of the provisions in this draft bill fall far short of achieving those goals. In its draft form, the bill will raise rather than lower costs, decrease rather than increase competition, and eliminate rather than expand choice."

There is a term for what has happened to those who thought that compromise and pragmatism are the wise path to take -- cooptation.  Sadly, this is a term from sociology and politial science that seems to have faded from use.  

Cooptation is a term that was used to describe the process used to get people to go along with the sweeping powers given to the TVA in the 1940s.  Here is a simple description from encyclopedia.com: 

A term devised by Philip Selznick to refer to a political process found especially in formally democratic or committee-governed organizations and systems, as a way of managing opposition and so preserving stability and the organization. Non-elected outsiders are 'co-opted' by being given formal or informal power on the grounds of their élite status, specialist knowledge, or potential ability to threaten essential commitments or goals.

Cooptation is a strategy to bring your opposition to the table, giving them the illusion of power, but with the intention of controlling them by making them feel like they are part of the process.

Market capitalism, free enterprise, property rights, and even our basic liberties have been consistently eroding for decades.  Those who have assumed that bi-partisansim, pragmatism, and compromise can slow down the freight train taking us to socialism need to wake up.  You are being coopted. 

I have not written about a golf metaphor for entrepreneurship in quite a while, but the US Open from this past weekend offered an important lesson.

No matter how good you are or how well you prepare, there are certain things that can happen that are totally outside of your control.  The golfers who got the bad end of the weather this past weekend at the US Open experienced this first hand.  Some of the golfers played their early rounds in constant rain and windy weather.  Others, due to their tee times, played with little or no rain -- just a soft and receptive course awaited them after the rains ended.

Was this fair?  That is not the point.  It is, as they say, what it is.

I tell my students that we can help them manage about 80% of the causes for failure in their businesses. 

About 40% of failure happens because the entrepreneur jumped into a business that was doomed from the start.  They did not properly assess the opportunity prior to launch.  Rather, they impulsively moved ahead with little forethought. 

About 40% of failure happens because the entrepreneur is not ready for success once it happens.  Growth is a dangerous time for a small business -- just ask any banker.  If you are not prepared to properly manage and develop your business as it grows, you will soon join the legions of entrepreneurs who failed due to their own success.  They did not create the systems, grow the team, or secure the resources necessary to deal with the growing pains that sink so many promising ventures.  We try to prepare our students with the skills and knowledge to manage their growing ventures successfully.

But then there is that other 20% of business failure.  This failure comes from what you cannot predict nor plan for.  Call it uncertainty, risk, or just bad luck.  Sometimes things happen to even the most skilled and prepared entrepreneurs that are totally outside of their ability to manage. 

My favorite example of this is an old diet supplement that used to be on the market -- it was called Ayds.  The product was growing nicely until a deadly disease with the same sounding name crept into our consciousness -- AIDS.  The sales of the product plummeted.  The spread of a deadly disease with a similar sounding name is nothing that could have been predicted, and there was very little they could do to adjust in time once people stopped buying the product.

This is why I put the Serenity Prayer, or as I call it the Entrepreneurs' Prayer at the end of most of my syllabi for my classes:

GOD, GRANT ME THE SERENITY
TO ACCEPT THOSE I CANNOT CHANGE,
THE COURAGE TO CHANGE THE THINGS I CAN,
AND THE WISDOM TO KNOW THE DIFFERENCE

I am participating in a multi-blogger forum through Forbes magazine as part of their America's Most Promising Companies project. They will be throwing out a topic each week to several bloggers to write about.