Public Policy, Economics and Entrepreneurship: July 2008 Archives

When I was up in Cleveland conducting a workshop at John Carroll University I heard a word running throughout the city that I did not expect -- entrepreneurship. 

Cleveland and other rust belt cities are looking to bolster their entrepreneurial economies.

More and more are looking to non-profit incubators to help.  From Philanthropy News Digest:

One such nonprofit is five-year-old Jumpstart, Inc., which provides seed money to entrepreneurs with promising businesses in the Cleveland area. Like a venture capital firm, Jumpstart identifies companies to invest in and advises them on their next steps. But in a departure from the traditional venture capital model, Jumpstart relies on charitable donations, many of them from the private sector, for its financing and does not return a share of profits to those who provide the investment dollars. Instead, returns come in the form of satisfaction derived from boosting the region's economic standing and future.

This is a much more prudent strategy than throwing money at corporate relocations that rarely offer the economic return they promise.

(Thanks to Jose Gonzalez for passing this along).

The ADP National Employment Report and ADP Small Business Report released today show that small businesses are continuing to be the only reliable engine for new jobs in our economy.  During the month of July small businesses - defined as businesses with fewer than 50 workers - added 50,000.  During the same month, medium businesses (50-499 employees) lost 9,000 jobs and large businesses (500 employees and larger) lost 32,000 jobs.

As I said yesterday, we need to understand the changing nature of this economy and take steps to help support the real engine of job creation.  For the past twenty years small business has created about 78% of all new jobs every year.  And yet we still have not changed our approach to public policy to reflect the new economic reality.

For many years I have been the optimist.  The enthusiasm that I experienced in my daily interactions with entrepreneurs and aspiring entrepreneurs was contagious.  The data that was showing a shift to an entrepreneurial economy gave me so much hope for the future.

However, I have gotten a lot of questions lately about what caused the change from my formerly rosy outlook to what more than a few of you have termed my new personality of "Professor Doom."

I believe that things have gotten seriously off track.  Why?  My immediate concern is that the inflation genie is out of the bottle.  As a result, I believe that we will have at least a few years of difficult times ahead of us.  Once inflation takes root, as I believe it now has, there are no quick and easy solutions. 

On top of these short-term worries, I have several growing concerns rooted in more macro, fundamental changes
occurring in our society, culture and economy.

First, we never seized the opportunity to create a true shift in our tax policy in this country.  We know that lower taxes and a simple tax system help entrepreneurial economies grow.  Our tax policy in the US is rooted in the mid-1900s.  The role of taxes are to raise the funding needed to provide for the basic constitutional functions of government.  But over the past 60 to 70 years taxes have become a major tool used to shape culture and implement social policies.  More recently taxes have become a mechanism to direct economic behavior in directions decided upon by politicians and bureaucrats at all levels of government.  We now see this at work in the entrepreneurial economy. 

Second, for several decades entrepreneurship was growing below the radar in our economy.  But as entrepreneurship became more dominant in our economy, politicians and their minions just could not keep their hands off.  It grew and prospered so well when they left it alone.  But now they are convinced that entrepreneurs cannot possibly do their work without support from governmental agencies bloated with career bureaucrats who have never had to make a payroll.  We are quickly headed toward a policy of socialized entrepreneurship. 

Third, there are efforts around the globe that seek to change the current economic order.  Some of these are economic forces that want to replace the US role as economic leader.  If they could achieve this through the power of free markets I would say congratulations and job well done.  But many are using noble issues such as environmentalism and social justice as smoke screens to hide their true intentions, which include gaining economic advantage or even crippling capitalism.  Those countries that control much of our supply of oil manipulate us like a dealer controls a junkie.  They use the power of supply and demand as a means of keeping us dependent.

Lastly, our drift toward socialism over the past several decades has changed our culture from one based on self-reliance to one based on entitlement and dependence.  Given the momentum created by the policies of the past few Presidents, and given the platforms of the current two candidates, the growth of government's role in our lives will continue expand.  Sustaining our entrepreneurial culture will become increasingly difficult if this trend is not reversed.

I am optimistic that we can turn things around.  I just hope we have the wisdom and collective resolve to do so.

The inflation news released today is not good news.  We had a 1.1% increase in the CPI in just the past month, according to a report released today by the US Department of Labor.  This is the kind of double digit annual inflation that many of us have been worried about.  Mind you it was only for a month, but inflation can be infectious in an economy.  The ripple effects of energy will soon make their way through the rest of the economy if this persists.

And if you think I am the agent of doom (and I know at least a few of you do feel that way) read what Nouriel Roubini, Chairman of  RGE Monitor and Professor of Economics at the NYU Stern School of Business, has to say.  (Thanks to Andy Tabar for passing this along).

Once again Walmart has its finger on the pulse of American consumers.  Just when inflation is kicking in and the economy softens they are seeing strong growth.  How?  They are listening to the customer.

They are marketing aggressively and focusing on prices and values.  This is just what the consumer wants to here right now.

From the St. Paul Pioneer Press:

Sales in entertainment were strong at Wal-Mart, with flat-panel televisions continuing to run in the high double-digit same store sales increases. Some retail observers see Wal-Mart's aggressive marketing of inexpensive electronics as a threat to Richfield [MN]-based Best Buy.

The Pioneer Press article also reports on flat sales at Walmart challenger Target, which has not changed their strategy of shifting up in brand quality and to a more upscale approach to merchandising

We are seeing the same thing in the restaurant market.  Value sells.  McDonald's is showing strong performance with increases in same store sales.  At the same time, upscale restaurants are closing left and right.

Also, many entrepreneurs I know in the service sector are experiencing pressure from their customers to trim back pricing or risk losing customers to low cost competitors.

The advantage that entrepreneurs are supposed to have is our ability to be nimble.  Now is a time to be very nimble. 

Listen to your customers.  Think like your customers.  Your reality in should be built on their perceptions.   Inflation is scaring them.  Rational or not, it doesn't matter.  It is time to focus on pricing and value.

It should come as no surprise that inflation is the top concern in the most recent poll of small business owners conducted by the NFIB.  What surprises me is that it has taken so long for people to pay attention.

Since 1983, the average percent of owners in the monthly NFIB poll citing inflation as a top problem has been 3 percent.  As recently as February 2008, only 8 percent cited inflation as their top problem. By May, 17 percent said inflation was their top concern, and in June it shot up to 20 percent.  To be honest, I worry that it is not even higher right now.  The beast of inflation is on the loose and will likely be with us for quite a while.

Small business owners are planning to keep on spending -- a sign that any recession will be short and not very deep.  I have argued all along that Washington is paying attention to the wrong economic issue.  Plans for hiring and capital spending, as well as job openings, inventory investment plans and expected credit conditions, are all stronger than in past recessions.

Among those surveyed, expectations for real sales gains and improvements in business conditions are as bad as in 1980-82, the worst economic period in recent years.  But this time is is will be inflation induced, and not a true deep downturn in economic activity.  I see an economy that will be going nowhere faster and faster and faster.  That is what long term inflation can do an economy.  We will be busy, but will make little real progress due to the beast of inflation eating up any progress through a higher cost of doing business.

Americans celebrated Tax Freedom Day on April 23rd.  It is the mythical day when Americans stop working for the government and start working for themselves. 

The Spanish think tank Institución Futuro wrote me to let me know that they have started an initiative to celebrate Tax Freedom Day in Spain, which occurred on May 21st this year.

Since taxes have become so hidden to most citizens, it is important to get the word out about the real cost of taxation and government.  I hope more groups take on this initiative.