Public Policy, Economics and Entrepreneurship: July 2007 Archives

Some of you may have seen this quote in the recent issue of Forbes, but it is worth repeating. It comes from a recent column by John Stossel in the New York Sun:

America became an economic power despite, not because of, Hamiltonian intervention. Hong Kong and much of East Asia went from abject poverty to affluence in a few decades not because their governments gave people "tools they need to compete" -- they didn't -- but because they exercised limited powers.

I wish Mr. [David] Brooks and other Hamiltonian conservatives understood that freedom and prosperity have nothing to do with bureaucrats managing society through schooling and tax manipulation.

Prosperity comes from leaving people free in a legal system that respects their persons and property so they can pursue their dreams while taking responsibility for their actions. Free people find their own tools if the state leaves them alone.

In the era of big government, the last thing we need are champions of the statist Hamilton.

What we need now are champions of the libertarian Jefferson, who said in a very un-Hamiltonian way: "I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it."

I was reminded of the difference between the more libertarian brand of conservatism and big government conservatism when Arthur Laffer came to campus. He stressed several times that one of the most important outcomes of the Reagan tax cuts was that they created more money for government. Hamilton would have been proud of that view.

To only advocate for lower taxes misses the most important part of the economic equation that American needs follow. To help foster our entrepreneurial economy we need to focus on creating less government and more freedom.

There is a growing resentment toward business, according to a survey conducted by the Financial Times and Harris. From the Financial Times:

A popular backlash against globalisation and the leaders of the world's largest companies is sweeping all rich countries, an FT/Harris poll shows.

Large majorities of people in the US and in Europe want higher taxation for the rich and even pay caps for corporate executives to counter what they believe are unjustified rewards and the negative effects of globalisation.

Viewing globalisation as an overwhelmingly negative force, citizens of rich countries are looking to governments to cushion the blows they perceive have come from the liberalisation of their economies to trade with emerging countries.

What is most chilling about these findings, if they prove to translate into policy, is that they won't just hit big corporations and their executives. It never seems to work that way. Punitive taxes and attempts to redistribute the wealth will also hit entrepreneurs hard.

Say what you will about corporate greed, a solution that includes higher taxes will make the pie they are trying to redistribute much smaller. Entrepreneurial activity is much more vulnerable and reacts much more quickly to significant increases in tax rates, and entrepreneurship is the engine of the current global economic expansion.

Thanks to Jim Stefansic for passing this along).

Ryan Healy has an article at Web Worker Daily that offers more insight into Generation Y (aka Entrepreneurial Generation). Trust and entrepreneurial culture seems to be what he sees as key to providing these folks with jobs that they will stay with over time.

(Thanks to Natalie Wozniak from Minne-so-cold for passing this along).

The National Dialogue on Entrepreneurship offers some interesting facts about the 20 million self-employed in the US recently reported by the Census Bureau:

- Each day, 2,356 Americans decide to go into business for themselves.

- Their companies account for 78% of all US businesses.

- They collectively obtain annual receipts of $951 billion.

- Georgia (up 7.6%) and Utah (up 7.2%) showed the highest annual increases. The national average increase was 4.4 percent.

- The fastest growing sector was Web search portals, where the number of self-employed jumped an astounding 41.2 percent in one year.

James Pethokoukis from US News & World Report offers more evidence of the global entrepreneurial economic boom that has been underway now for almost a decade.

"This is far and away the strongest global economy I've seen in my business lifetime," is how U.S. Treasury Secretary Henry Paulson recently described the current global boom. Hyperbole? Actually, that dramatic declaration probably under states things. Let's refer back to this piece of analysis from Paulson's old firm, Goldman Sachs: "If we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data [have] been collectible for much of the world."

Indeed, the global economy is growing at about a 5 percent annual pace, according to the International Monetary Fund, after growing 4.9 percent in 2005 and 5.4 percent last year. By contrast, the global economy grew at a 3 percent pace from 1980 to 2000 and at 4.7 percent from 1960 to 1980.

As support he links to an important and compelling report issued by the Federal Reserve Bank of Minneapolis and this "Fiscal Fact" from the Tax Foundation.

He rightly ties much of this growth to worldwide efforts to lower tax rates. There is a growing mountain of evidence for the impact that lowering marginal tax rates has on fueling entrepreneurial expansion in an economy.

This evidence only adds to my concern that many politicians in the US now want to return to higher marginal tax rates to pay for new government initiatives, such as universal health care.

Every day was Christmas for Michael Clark, but now the holiday's over.

From the attic of his condo in Woodbridge, Va., the 38-year-old Web developer ran an Internet radio station that spun his beloved Christmas carols all year long. Then in March, a panel of federal judges sharply increased the royalty charges for playing music online.

Since then, it's been one long, silent night for Clark and his hundreds of listeners at christmasmusic247.com. His site and hundreds of other free Internet radio stations already have shut down. (Jim Puzzanghera, latimes.com)

This Sunday night an entrepreneurial seedbed that was part of the digital revolution will go silent. A federal court decided in March that web-based radio stations would now have to pay a higher royalty (a 100% increase) -- and for those still broadcasting after Sunday July 15th there would be a retroactive payment due covering the time back through 2006. There was a late appeal to the decision, but it failed this past Wednesday. The US House held hearings -- what they always do when they know they can really do nothing about something -- and as expected, did nothing.

So the countdown continues.

During time of change, those in the status quo fight change, while entrepreneurs embrace it. In the music business we have seen them suing 15-year-old girls over downloading music, and now we see them going after obscure webcasters.

Rather that embracing change and finding ways to turn it to their advantage, the status quo fights change at every turn. Eventually change always wins, but in the short run the preservers of the status quo fight on in quixotic fashion.

The entertainment industry is in a period of what my friend Peter Vaill calls permanent white water. If you fight the currents, eventually you will drown. The only way to make it to the bottom of the river is to follow where it takes you and try to avoid the obstacles and challenges that inevitably will pop up along the way.

A better regulatory environment is ahead for Tennessee's 513,000 small businesses, thanks to a new law signed by Governor Phil Bredesen. Tennessee's Regulatory Flexibility Act of 2007 will set the stage for a more transparent regulatory environment for small businesses in the state and encourage entrepreneurial success.

The Act requires state agencies to analyze the economic impact of a proposed rule on small businesses and to consider less burdensome alternatives that will accomplish the regulatory goal.

Thanks to the key business groups supporting the legislation, which included the National Federation of Independent Business (NFIB) and the Tennessee Jobs Coalition, which includes a number of leading member organizations.

The latest survey from the NFIB finds small business owners losing confidence in the economy.

"Small-business owners have seen little to encourage them about growth," said NFIB Chief Economist William Dunkelberg, "but there are few signs that the economy is ready to slip into an actual recession."

Some highlights from this month's survey"

- Hiring plans among small firms faded some in June, but job openings are historically high and unemployment remains low. Seasonally adjusted, job growth was flat compared to May. However, unfilled positions were reported to actually be a bit higher in June and still a concern for business owners. Of concern for future growth is the finding that fewer small business owners have plans for new job creation.

- Capital spending and future plans for capital outlays have both weakened, indicating a more cautious stance. This seems to be tied to a view that conditions will likely not improve over the next six months.

- Small business owners are taking care to manage inventories, with only 5 percent of owners reporting a gain in inventory stocks.

- Sales seem to be flat, with about as many owners reporting increases in sales as those reporting decreases in sales. But inflation is still a worry as more report increasing prices (31%) than report decreasing prices (13%). Profits have also gotten weaker for most small businesses. Any increase in prices is being eaten up by increasing labor costs. Another factor that causes me concerns about inflation.

- Finally, borrowing is down, which is yet one more sign of caution among small business owners.

The Council on Economic Competitiveness has a new report on how our economy can be more resilient in the face of economic, natural, and political crises. While the report is a very interesting read, I can offer the short version for entrepreneurial enterprises: cash is king. If you have a war chest of cash, you can weather almost any economic storm.

(via the National Dialogue on Entrepreneurship).

James Pethokoukis at US News writes that a new report from Goldman Sachs says that China is now probably the most powerful global economic engine and we all might be singing "Blame China" when the next recession hits our economy:

"So, what constitutes a recession in modern times, and when do they occur?...We suspect it would almost certainly involve a major economic slowdown in China. On almost any criteria (and topic), it is impossible to underestimate China's positive impact on the buoyancy of world growth this decade. That said, our China proprietary indicators show no sign of an imminent slowdown. In addition, our various proprietary indices suggest that the underlying global macro environment remains favorable...Moreover, if we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data has been collectable for much of the world."

I would add the following to a list of countries to watch: Brazil, Russia and India.