Politicians have been searching for a defining issue to crystallize the “us versus them” game that has been going on in Washington for the past several years.

The latest is the temporary $1,000 payroll tax cut that is set to expire at the end of this year.  Both sides have their scheme to keep the cut in place.  Those of the left want to “pay” for temporary renewal of the tax cut with a permanent tax increase on the wealthy. 

“Don’t be a Grinch,” says President Obama. “Don’t vote to raise taxes on working Americans during the holidays.”  If keeping taxes low is such a good thing, why did they make this payroll tax cut temporary?  But I digress…

Those on the right want to renew the tax cut, but not tie it to any other tax increase.  The right has raised concerns that many among the wealthy who would be paying higher taxes are actually the very entrepreneurs who everyone wants to get busier creating jobs and economic growth.

As always seems to happen, we now have a group of “moderates” suggesting a compromise.  They are suggesting the we have a tax increase on the wealthy to “pay” for renewal of the temporary tax cut, but exempt small business owners.  Sounds like a simple solution, and my guess is something like this compromise may actually pass.  The problem is that such moderate compromises, while they can sound nice and reasonable, often make the waters even muddier.

This compromise is lousy policy. 

Yes, tax cuts (or avoiding tax increases) help spur entrepreneurial activity according to most research on the topic.  The problem with the compromise is that any exemption for small business owners is surely going to require more tax code and more regulation.  We also know from research that increasing regulation and complexity of the tax code decreases entrepreneurial activity.

Let’s start with what the Federal Government uses to define a small business.  Under a certain number of employees?  Under a certain level of revenues?  Well, kind of, but years of lobbyists seeking favor for special interests for specific types of small businesses has resulted in an official definition of small business that is 45 pages long!!!  You can see the entire document here.

Certifying that you are actually a small business owner eligible for exemption from the tax increase will probably end up costing you more in staff time and CPA bills than any savings in taxes.

But appearance seems to always trump substance and wisdom these days.  Since in a sound bite the small business exemption will appear like a reasonable compromise it will likely play well in this never-ending election cycle.

But six months from now, when those who pass the laws have moved on to other issues, small business owners will be left scratching their heads, trying to sort out how they can avoid paying the latest “wealthy” tax.

Based on the history of previous economic downturns, America’s entrepreneurs will need to play a key role in helping to rebuild our economy.

So, just what is the current mindset and makeup of those in the entrepreneurial sector of the U.S. economy?

Even in a weak economy, or quite possibly because of it, there continues to be a strong interest among the millennial generation in pursuing an entrepreneurial career.

A recent survey of young Americans between the ages of 18 and 34 conducted by the Kauffman Foundation found that 54 percent of those surveyed have entrepreneurial aspirations, and about half of these have already launched a business.

An even higher percentage of young people of color — 64 percent of Latinos and 63 percent of African-Americans — expressed a desire to start their own companies. Although some previous studies have found an increased interest in business ownership among women, the Kauffman study found that women still lag in entrepreneurial intent (44 percent compared to 57 percent among men).

Given that there are an estimated 50 million millennials in the U.S., their interest in launching new businesses bodes well for the long-term health of the economy.

What we are finding is that not all of them are in it simply for the money.

The Global Entrepreneurship Monitor (GEM) 2010 National Entrepreneurial Assessment for the USA, conducted by Babson College and Baruch College, found that startup entrepreneurs are increasingly focused on both social and economic goals for their businesses.

Entrepreneurs no longer just want to do well financially with their ventures, but also want to use business as a means to support their commitment to their favorite social causes.

This shift in how small business owners measure their success is also evident in the results of The Hartford’s recent Small Business Success Study. This survey found that only 18 percent say that profitability is the most important factor in defining success. In fact, 82 percent say they place great importance on doing something they feel passionate about and enjoy.

A growing number of entrepreneurs are interested in keeping balance in their lives. The Hartford survey reported that for 79 percent of the entrepreneurs they surveyed, achieving a comfortable lifestyle from their business is most important to them.

There is a growing chorus of experts who are worried that entrepreneurs do not seem ready or willing to step forward and provide the economic push we need to begin a real economic recovery.

However, the good news is that the generation now coming into the workforce has a strong entrepreneurial spirit. That should help to eventually create long-term, sustainable growth for America.

While the official unemployment figures continue to hover around 9% in the U.S., the real unemployment is rate is closer to 16% when you factor in all those who are unemployed or significantly underemployed.

While I was in Spain last last week with my graduate students, we heard that the official unemployment rate there was 20%.   My immediate question was, “So how high is the actual unemployment rate?”

I was expecting to hear that it was 25% or even 30%.

“Oh, it is much lower than 20%,” was the answer we heard.

What? Lower?

“Yes.  We have a large black market that does not get factored in with our employment data.  Many who are officially unemployed as working in the underground economy for cash,” the economic expert we heard from explained to us.

The underground economy is, in fact, flourishing around the globe.

In a recent article in Foreign Policy, Robert Neuwirth investigates the $10 trillion global underground economy, which is also becoming known as System D.  Neuwirth writes:

“By 2020, the OECD projects, two-thirds of the workers of the world will
be employed in System D. There’s no multinational, no Daddy Warbucks or
Bill Gates, no government that can rival that level of job creation.
Given its size, it makes no sense to talk of development, growth,
sustainability, or globalization without reckoning with System D.”

So the fastest growing part of the world economy is that which is outside the reach of the measurement and the control of central governments.

We have been told time and time again that it will be entrepreneurs who will pull us out of this ongoing recession.  And many of us have argued that for them to succeed at this, we need government to get out of their way.

It seems that a growing number of entrepreneurs around the globe are not waiting for the government to enact some major policy to assist them, or even for the government to get out of their way.  They are building an economic force outside of the controlled economy that is fast becoming the economic super power, according to Neuwirth’s analysis.

Ben Cunningham, who sent the Foreign Policy article to me, reminded me that Milton Friedman always said the one saving grace of government is its incompetence at regulating.

So perhaps help is already on its way for our economy. 

Let’s just hope that as government tries to do more and more to “fix” the economy that their level of incompetence grows with each new economic initiative they throw at us.

The National Foundation for American Policy
released a policy brief this week that says international students who graduate
from U.S. universities with advanced degrees in science, technology,
engineering, or mathematics (STEM) should get a green card with their diplomas.
The paper also says such a policy would significantly benefit U.S.
competitiveness and the economy overall.

In “Keeping Talent in America,” the NFAP conducted research funded by the Ewing Marion Kauffman
Foundation that shows a highly skilled Indian national sponsored today for the
most common skilled employment-based immigrant visa could wait 70 years to
receive a green card. The report addresses the need for STEM graduate talent
and solutions to the backlog.

While I agree that our immigration system needs reform, this solution simply adds one more layer of complexity on a broken system.

And we don’t just need high growth entrepreneurs to pull our economy out of this morass, we need an army of entrepreneurs creating small, medium and high growth ventures.

The last great entrepreneurial revolution in our economy was in the late 1800s and early 1900s.  Those entrepreneurs created the businesses that were the foundation of the industries that dominated our economy for decades to come.  And they weren’t all a bunch of PhD scientists.  Many were hard working, blue color folks who developed innovations that changed how all of us lived our lives.  Some were sons and daughters of sharecroppers and others were just of the boat coming to a land they hoped would offer opportunity.

We need to find a way to open the doors wide open for those who want to come here and start new businesses.  We know that immigrants are 30% more likely than the rest of us to start a business.  We need their energy and drive.

I firmly believe that we need a structured system for immigration that is based in the law.  But, the one we have now was set up to staff our farms and our factories.

I know many want immigration to be a tool to preserve language and culture.  My goal is to have immigration be a tool for economic expansion.  We need a system that will turn immigrant entrepreneurs loose in this land of opportunity to help rebuild our economy.

Chief economist for the NFIB, William C. Dunkelberg, issued comments on the continued dismal job findings from the latest NFIB monthly economic survey that will be released on Tuesday, October 11, 2011:
 
“There is a reason that Washington is talking in circles when it comes to the economy: There is no good news to report. Until sales improve, until it becomes cost-effective to hire new workers, we cannot expect small-business owners to take advantage of new hiring tax credits and increase their employee rolls. And the numbers prove it.

“For the fourth month in a row, small-business owners reported an overall reduction in employment, posting an average reduction of 0.3 workers per firm.

“A snapshot at regional numbers reveals that job creation plans were quite negative among firms in New England, albeit less so in the Mid-Atlantic and South Atlantic, West South Central and Pacific states. It would seem that the need for additional workers for hurricane cleanup was not strong enough to overcome broader weak economic conditions on the East coast.

“What do we expect Friday’s DOL numbers to reveal? Our prediction is a weak payroll number and little change in the unemployment rate – certainly nothing positive.”

And so it goes…

I have been rebutting Scott Shane’s maligning of small business in the economy in this blog for some time.  Prof. Shane is an economist who teaches entrepreneurship at Case Western Reserve U.  (You can see those posts here, here, here, here, here and here).

Now we have a post at the Economist blog, Free Exchange, that examines the role of small business as an engine of jobs in the U.S. economy.  They start with this graph:

There are some recent reports suggesting that small businesses may be getting in a hiring mood.  Not so, says the latest survey of small business owners by the NFIB that is about to be released.

“We wish there was good news to report, says William C. Dunkelberg, chief economist for the NFIB.  “But sadly, we will give you more of the same: The prospects for a good jobs report are dim. In August, small-business owners reported job losses averaging .08 workers per firm over the last three months. This follows a loss of .23 workers per firm reported in June and .15 workers per firm in July.”

Dunkelberg tries to add a glimmer of hope by adding, “The good news is that the trend is moving in the right direction–losses appear to be decreasing.”

However, he goes on to point out that the change doesn’t seem to be moving fast enough to close the employment void we’ve been experiencing for the last several years.

“While the readings remain historically weak, we can find a grain of encouragement as we look at hiring prospects. Over the next three months, 11 percent plan to increase employment (up 1 point), and 12 percent plan to reduce their workforce (also up 1 point), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs, which is a 3 point improvement over July. But, let’s not get ahead of ourselves,” cautions Dunkelberg.

That is good advice, since we have seen small business owners appear hopeful of future hiring in previous months, only to be disappointed.

So the bottom line is that the employment picture is largely unchanged.

Small business owners on Main Street are joining investors on Wall Street in worrying where the economy is headed, according to the latest survey from the NFIB.

For the fifth consecutive month, NFIB’s monthly Small-Business Optimism Index fell, dropping 0.9 points in July–a larger decline than in each of the previous three months–and bringing the Index down to 89.9. This is below the average Index reading of 90.2 for the last two-year period. Put simply, they are losing what little optimism they had been building during what had been hyped as the beginning of a recovery.  They now fear that there really was no recovery after all and more bad times are likely ahead.

Expectations for future real sales growth and improved business conditions were the major contributors to the decline in optimism. Remember that this survey was completed before the events of the last two weeks. 

“Given the current political climate, the protracted debate over how to handle the nation’s debt and spending, and the now this latest development of the debt downgrade, expectations for growth are low and uncertainty is great,” said NFIB Chief Economist Bill Dunkelberg. “And considering the confidence-draining performance of policy makers, there is little hope that Washington will stop hemorrhaging money and put spending back on a sustainable course. Perhaps we might begin referring to the ‘Small-Business Pessimism Index’ from now on.”

Indeed.

I am hearing economists who had been hopeful for our economy to muddle along and grow ever so slightly changing their tune.  More and more are talking “double dip”.  Since I do not agree that a true recovery has ever really taken root, I prefer to call it a “second plunge.”

“And what should the government do now?” 

That is the wrong question to frame the debate.  It is what the government has done over the past two administrations that has magnified the problems in our economy. 

Governments cannot create a sustained economic expansion through spending and monetary policy. 

Businesses and their customers do that.  Stop bleeding them of their money and get out of their way.