Public Policy, Economics and Entrepreneurship: February 2008 Archives

The SBA Office of Advocacy's Regulatory Review and Reform Initiative, or r3, is designed to identify and address existing federal regulations that should be revised because they are ineffective, duplicative, or out of date. r3 is a tool for small business stakeholders to suggest needed reforms.

Out of the 82 suggestions they received, the ten rules and regulations that the Office of Advocacy has chosen to target for reform can be found here.

I completed my MBA degree in Finance from the University of Kentucky in 1980. While I was happy to be finished, in many ways it really didn't mean much for me in terms of job prospects. After all, people with twenty years of experience and an MBA were getting laid off all around. Those of us in the MBA program had contests to see who could get the most rejection letters from the resumes we sent out (one guy amassed over 150 letters).

This was a time of a very weak economy that was coupled with high inflation -- it became known as stagflation. And the more the Carter administration tried to do to fix it, the worse things got.

We were used to periods of inflation that were followed by mild recessions that cooled things off a bit. But not this time. This was a time that had a very different set of conditions. Consumer confidence was low, which fed the recession. But forces outside of our control (the Middle East to be exact) kept pushing energy prices higher. This plus strong unions that continued to fight for increases in pay and government meddling in what should have been free markets created run-away inflation.

I worry that the signs are there for a return to a similar mess.

Confidence is low. We saw it the last couple of weeks in surveys of investors that I blogged about. Now we see it in consumer confidence surveys. From the Wall Street Journal:

U.S. consumer confidence slumped in February, accelerating a decline that began in January, according to a report released Tuesday.

We also see signs that inflation is not easing in spite of the slowing economy. Also from the Wall Street Journal today:

Meanwhile, U.S. wholesale prices surged in January and core inflation also climbed above expectations, according to more data revealing price pressures amid the economic slowdown.

Once again, energy and wages are at least partly to blame for the inflationary pressures on our economy.

And what about the third ingredient for a potential economic disaster? Rather than following the course that took us out of the mess the last time -- cutting taxes and freeing the free market from governmental control -- we hear cries from Washington that they will fix problems we face in a different way. How?

The Democratic front runners both want to increase taxes, take profits from the oil companies (a sure way to push prices even higher), and put government in control of health care (another recipe for even more inflation in this sector). And McCain? Every bit of evidence is that he is a big government Republican and will likely follow a similar path as both of the Democrats.

Hang on to your cash! Keep your debt burden as low as possible! And get ready to hunker down for a rough couple of years!

James Pethokoukis at US News and World Report suggests that we may be nearing the end of a twenty five year economic boom -- and there seems to be plenty of blame to go around:

America's 25-year superboom has been driven by 1) reduced regulation/more competition, 2) lower taxes, and 3) the end of the Cold War, which allowed capitalism to spread across the globe....

Yet right now there are calls for 1) a "timeout" from free trade, 2) more industry regulation, 3) high-cost mega-spending projects for the environment, and 4) higher income, investment, and payroll taxes.

A newly released study from the Office of Advocacy of the SBA authored by Rafael Efrat documents the pervasiveness and the magnitude of the tax burden among small business owners in bankruptcy. The data suggest that the tax burden is more pervasive among small business owners in bankruptcy than among consumer petitioners. While less than one-quarter of all consumers in the bankruptcy sample reported tax debts, more than half of individual small business owners reported owing some tax debts.

This is more evidence that we need to tear up the current income tax code and replace it with a simple and less burdensome approach.

James Pethokoukis at US News and World Report writes that a President Obama would push for a global tax as a means for redistributing wealth. Wealth should not be viewed as a zero-sum game. If we really want to build wealth around the world let's help help them create free and open markets with strong property rights, low taxes and few barriers to business formation.

While government policies do play a roll in entrepreneurial activity, there is increasing evidence that culture plays a significant part in spurring entrepreneurial economic activity.

A newly released working paper from the Office of Advocacy of the U.S. Small Business Administration finds that American rural economies are as dynamic as their suburban and urban counterparts.

"America has an entrepreneurial culture and entrepreneurs are found in every setting. The lesson learned here is that rural America's resilience should not be underestimated," said Larry Plummer, assistant professor at Clemson University and co-author of the paper.

The authors' central finding is that the differences in the rate of establishment births and closures between rural, suburban, and urban areas, while statistically significant, is in fact quite small. That is, general business dynamics are not a function of geographic area.

So let's get government out of the way and let the American entrepreneurial spirit take wings.

The National Federation of Independent Business Index of Small Business Optimism fell 2.8 points in January to 91.8 (1986=100), the lowest reading since January 1991.

But some of the underlying numbers related to employment are not as weak as one would expect to see when optimism is so low.

"The Index is sending a recession signal," said NFIB Chief Economist William Dunkelberg, adding, "But by comparison, this January reading is more of a recession in expectations than in hard economic data. Hiring plans and job openings are much stronger today than in 1991" (emphasis added).

So why the long faces on American entrepreneurs? It may be that they have heard the negative drum beat from the media (and some politicians) and believe it must be true. Their condition is not so bad, but from what they hear everyone else is falling on hard times, so things must be bad. Don't underestimate the psychology that can drive economic conditions.

Matthew Bandyk at US News interviewed me for a column he wrote on how the Stimulus Package will impact small business in our economy. I told him that I doubted the package would work and that a recession was probably going to happen either way. On the other hand, I am more worried that it will work. The pressures for a large burst of inflation are still out there -- wage, healthcare and fuel price pressures and falling interest rates. If we over-stimulate the economy right now, we may end up in an even worse condition economically. Either way, be it a recession or a period of inflation, I see a tough period ahead for small business owners in America:

But Congress has chosen a different stimulus strategy, and while small-business owners will appreciate the extra cash, many are heading into uncharted territory. "There are a lot of young entrepreneurs who have never really experienced a deep recession," says Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University. "And almost none have experienced a period of inflation, so they're not really sure what those words mean in their day-to-day business." They may be about to find out.

Since the devastating Supreme Court decision on the Kelo case, there have been efforts across the US to help shore up property rights. The absence of strong property rights has been shown to be an inhibiting factor to entrepreneurial economic development. Entrepreneurs are not as willing to take a risk with their investment and capital if they do not believe that their property rights will be protected by the government.

An important victory in securing property rights has just occurred in New Jersey.

The Superior Court of New Jersey issued a critically important decision to private-property owners in a case dealing with the state's interpretation of how properties can be deemed "blighted" and consequently ripe for eminent domain takings. To the delight of property owners, the Superior Court overruled the trial court's decision and held that the law only allows a property to be deemed "blighted" in narrow circumstances.

The dispute involved a commercial property owned by BMIA, LLC in Belmar, New Jersey. BMIA had been fighting to keep its property, the Belmar Mall, from being condemned for a redevelopment project. The Belmar Mall is a commercial center that contains 20 mom-and-pop businesses, along with three major chain tenants.

Here is a picture of this so-called "blighted" property:

The trial court ruled that this property was located in an area in need of redevelopment. On appeal, the Superior Court of New Jersey determined that the trial court mistakenly relied on this finding in condemning the property for a redevelopment project. The Superior Court's decision reinforced that the New Jersey Constitution restricts government redevelopment to "blighted" areas. Further the Court said that finding an area in need of redevelopment does not show that the property reaches the "blight" standard. In New Jersey, a property is found to be a "blighted" area if it is detrimental to the safety, health, morals or welfare of the community. This was not the case with the Belmar Mall, and, therefore, the court reversed the lower court’s decision.

Hats off to the National Federation of Independent Legal Foundation for participating in this case.

Tax policy is a critical issue for entrepreneurial economic development. What we know is that lower taxes and a simple system are what can help entrepreneurship thrive.

The Tax Foundation has an interactive tool that allows you to compare the various candidates' tax policy positions.