Public Policy, Economics and Entrepreneurship: January 2008 Archives

I know that I may be an outlier on this, but I am worried about a possible unintended consequence of the proposed economic stimulus package now in the works in Washington.

The push behind the stimulus legislation is a fear that the economy is slowing. But, the cure may end up being worse than the ailment.

Throughout 2006 and 2007 there were signs that inflation might heat in our economy up for the first time in the past quarter century. We faced a continuing tight job market, with both low unemployment combined with a significant shortage of available skilled workers being reported by small employers. Add to this the significant inflationary pressures from both the energy and healthcare sectors and we have the potential of a witches brew of inflation.

Call me callous, but I felt some relief at the news of a slow down in the economy. Let me be clear -- I was not rooting for a recession (defined as two quarters of negative economic growth). But just like a growing business, our economy needed some time to "adjust" to the incredible sustained period of very robust growth.

The economic stimulus, if it works as hoped for by its proponents, might simply re-ignite the inflationary embers that are still glowing. The inflationary pressures from labor, energy and healthcare will again push prices higher. We could then see the economy enter into an inflationary cycle that will not break until we eventually enter a deep and painful recession.

With prudent attention to interest rates and a commitment to the use of cross-the-board tax cuts (or better yet, true tax reform to meet the needs of our entrepreneurial economy), we can minimize the slow down and ease the economy back into sustainable long-term growth.

The Tax Foundation has additional thoughts on the proposed stimulus at their website.

The New York Times -- that's right, the New York Times -- credits tax cuts for fueling the entrepreneurial economy in Ireland:

Government help for Irish entrepreneurs grew out of an overall economic policy devised in 1987 that reduced personal taxes, said Kevin Sherry, a director of Enterprise Ireland who specializes in start-up companies.

Sadly, we seem to have forgotten this lesson in the US. The Democrats have resurrected the politics of envy, harking any number of tax increase schemes. At the same time our Republican President offers us only a one time tax rebate as a feeble attempt to stimulate the economy.

(Thanks to Ben Cunningham for passing this story along).

I have taken issue quite frequently with the National Dialogue on Entrepreneurship and their pro-socialized entrepreneurship stances. This time their interpretation of tax policy just baffles me:

But, the effectiveness of government finance systems also matters. A new study from the Pew Center on the States raises some red flags about how some US states are performing on this front. Effective tax systems provide stable revenue, support efficient tax collection, provide transparent information about incentives, and give localities some say in how their tax dollars are used. Unfortunately, many state tax systems fail on these measures. As a result, these lagging states lack the ability to support new economic engines while continuing to provide outdated and unnecessary incentives to other economic sectors.

This report lists heavy tax states such as Minnesota and New Jersey as being effective tax collectors, while several low tax states are listed as being poor tax collectors.

The evidence is clear that tax rates are what matters in driving entrepreneurial activity -- and the lower the rates the better. We don't need government to be the engine of our economy. We need free enterprise to be the engine.

The notion that we need to redistribute wealth through the government to support entrepreneurs is, in a word, absurd. Leave the money in their pockets and see what really can happen!

So what's worrying small business owners? Inflation!

While the Federal Reserve is focused on the problems of the large banks, small-business owners are worried about inflation according to the National Federation of Independent Business December Small Business Economic Trends report released today. Plans to raise prices to respons to higher costs rose from 21 percent in September to 26 percent of all owners in December.

"The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted viability," said NFIB Chief Economist William Dunkelberg.

Unadjusted, 27 percent of small-business owners surveyed reported raising average selling prices, up three points from November, and 12 percent reported lower selling prices, unchanged. This price cutting phase has lasted well over a year.

In case you didn't believe me when I wrote my last post on my fear of renewed inflation, please take another look at it given this new development.

I am not guaranteeing that we will have a period of sustained inflation, but the risk is real enough to cause me great concern. My concerns have grown even stronger over the past few weeks with some of the talk in Washington about the need for an economic stimulus. If the politicians move in this direction, the odds of serious inflation and all of the pain it will create goes up considerably. Stimulating spending during potentially inflationary times like these is like throwing gasoline on the fires of inflation that are already burning due to oil prices, a tight labor market, and soaring grain prices.