Public Policy, Economics and Entrepreneurship: October 2008 Archives

The Tax Foundation has issued an analysis of the impact of both Presidential candidates' tax proposals on pass-through entities (sole proprietors, partnerships, LLC, LLP, S-corp).  Their analysis finds that roughly one-half of the $30.1 billion in higher taxes from rolling back the top tax rates to higher levels would likely fall directly on the backs of small business owners.

You can read their entire analysis here. 

Why we are even considering adding tax disincentives to the only sector in our economy generating significant growth and new jobs (i.e., small business) is chilling.

Carl Schramm of the Kauffman Foundation has a great commentary on the importance of "Joe the Plumber":

What appeals to me most about Joe Wurzelbacher of Ohio -- better known today as "Joe the plumber" -- is his dream. He speaks for men and women we all know, who want to own their own business, who want to make a job, not take a job.

Joe wants to join the nearly 600,000 other Americans who launch their own companies each year. The proposed solutions to our current economic crisis (and it seems there's a new one almost every day) inevitably tilt toward the government as the answer.

Yet, today, more than ever, government is not the answer, and a recent telephone survey of 816 registered voters, sponsored by the Kauffman Foundation, shows that a majority of Americans agree.

In that survey, 60 percent said they had the most faith and confidence in the American people and the small business owner to guide the U.S. economy.

(Thanks to Andy Tabar for passing this along)..

I am beginning to believe that the shock of the bank failures will play out a lot like post 9-11, but in slow motion.

Instead of a sudden event that brought us all to an immediate standstill, the current situation played out over several days and even weeks.

The outcome was the same:  economic paralysis.  After 9-11 everything came to a standstill.  Everyone wanted to wait and see what would happen next before they re-engaged in normal economic activity. 

We have the same outcome today, but it happened more slowly.  Wave after wave of bad news from Wall Street and panic laden communications from Washington eventually put us into that same paralysis, that same "wait and see what is next" mentality.

Seth Godin commented about this tendency of human nature recently in his blog post "Do You Have 16 Boxes?":

When something is going wrong, when the economy is out of sync, we panic....We talk ourselves into hysteria about how, "none of our customers have any money," or, "in this bleak economy, we'll never make a sale." Instead of using the relative downtime to build...we just sit in the corner, keening, worrying....

I heard a consistent mantra out there from entrepreneurs I talked with over the past few weeks -- "We just want to wait and see what is going to happen." 

We are beginning to understand that although we have a mess; it is a mess we can all make it through.  As a result, economic activity is beginning to perk up a bit. 

Soon we will see both confidence and economic activity heat up.  We will have a slowdown for quite a while, but we should see improvement over the next few quarters.

Fortunately, panic is giving way to strategizing.  Hopelessness is giving way to planning.  Paralysis is giving way to prudent decision making. 

My friend Chad Moutray with the SBA Office of Advocacy offers his top five challenges and opportunities facing small businesses over the coming years.  His working paper offers important insights about long-term issues and is well worth a careful read.

The Challenges:

• Strengthening the Overall Economy -  entrepreneur is the engine of the economy -- particularly job creation.  Economic recovery decisions and actions must also focus on our entrepreneurs.

• Taxes and Regulation -- these impact entrepreneurs and entrepreneurial activity, so must be considered in future policy decisions.

• Cost and Availability of Health Insurance -- this issue has no easy answers.  Let's hope the cure chosen is not worse than the disease.

• Attracting and Retaining a Quality Workforce -- not only are we facing compensation issues, but the demographic trends must also be considered over the coming years. 

• Global Competition -- small business must be able to compete fairly in the global arena.

The Opportunities:

• Increased Investments in Technology and Innovation -- this is a proven indicator of future growth so must continue to be a priority for small businesses.

• "Economic Gardening" and Grooming Local Entrepreneurs -- many communities are shifting economic development dollars from attracting corporate headquarters to attracting and keeping smaller enterprises.

• Pursuing New Markets Overseas -- these opportunities should continue to expand. 

• Promoting Business Ownership among Selected Demographic Groups -- Dr. Moutray believes in economic empowerment through business ownership. 

• Advancing Education and Training -- this is a key competitive variable over the coming years.

With all of the love for small business coming out of the last debate, it has made a few people ask me: Just what is a small business?  Am I going to get some of these breaks Obama and McCain are planning to offer to all of us "Joe the Plumbers" our here on Main Street?

I have my own definition of small business, but that really does not matter when it comes to tax breaks.

I wish I could give you a simple official definition.  The lobbyists from K Street in Washington have been busy over the years pushing for special breaks for certain kinds of small businesses.

If you are a soybean farmer you have to be under $750,000 in sales.  But if you produce chicken eggs, the definition is $12.5 million in sales.

If you have a business that provides support for forestry you can be as big as $7 million and still be a small business, unless you are in forest fire suppression in which case you can be as big as $15.5 million in sales.

Other businesses are defined as small by their employment.  If your business is involved with soybean oil processing you are small up to 500 employees.  But, any other kind of oilseed processing you are small all the way up to 1,000 employees.

Plastics Plumbing Fixture Manufacturing? 500 employees.  Resilient Floor Covering Manufacturing? 1,000 employees.  Glass Container Manufacturing? 750 employees.  Ammunition (except Small Arms) Manufacturing? 1,500 employees.  Confectionery Merchant Wholesalers? 100 employees.

And so it goes....  Line after line after line, page after page of definitions (click here as scroll all the way down to see the summary table). 

And just wait until we start targeting "small business" for more tax breaks and incentives.  The lobbyists will really get down to work....

Bruce Schierstedt sent along a link to a poll that was conducted at a website that attracts a more techie kind of entrepreneur crowd called Webware: 

In and quick and admittedly unscientific poll on Webware, I asked entrepreneurs to answer two questions. The practical question: "How long will your cash last?" The state of mind question: "How freaked out are you?"

The results were kind of interesting.  The author, Rafe Needleman, sounded concerned that only half of the respondents to his web poll had enough cash to last at least a year.  He clearly must hang out with a different crowd of entrepreneurs than I tend to!

About two-thirds are feeling pretty good about their future and are not "freaking out." 

Although not a valid survey (no web poll ever is), it is interesting to hear what this group of entrepreneurs is thinking right now.

My own read from entrepreneurs I talk to is that they are still optimistic when they look at things over the long-run.  But, they are concerned about the next year or so.  In short, if they can hang in there for the next several months they believe that good times will return.

One of the sad outcomes of our current economic mess is that more and more people seem ready to blame capitalism and discredit free markets. 

Judy Shelton offers a brilliant essay today at the Wall Street Journal that lays out her vision of a "Capitalist Manifesto."  Her take?  Let's create public policy that supports the real capitalists who have to prove themselves in truly free markets every day -- the entrepreneurs.  From her opinion piece:

When the owner of a small retail outlet or medium-sized service firm gets into financial trouble -- who steps in to help? Why are the rules to start a business so onerous, why is the bureaucratic process so lengthy, why are the requirements for hiring employees so burdensome? When does the entrepreneur receive the respect and cooperation he deserves for making a genuine contribution to the productive capacity of the economy? Equal access to credit is sacrificed to the overwhelming appetite of big business -- especially when government skews the terms in favor of its friends. It is time to pay deference to the real economic heroes of capitalism: the self-made entrepreneurs who have the courage to start a business from scratch, the fidelity to pay their taxes, and the dedication to provide real goods and services to their fellow man.

A friend sent along this slide show that was leaked from a meeting held by the VC giant Sequoia Capital.  It gives an objective analysis of how we got into our current economic mess (greed and living beyond our means), what lies ahead (slow recovery is probably best case), and what start-ups of all types and sizes can do to survive (get back to basics).  I

f you have not seen this I urge you to view it, study it, and learn from it....  as we say in my business, "This WILL be on the final exam!"

Although both candidates talked about their intent to support small business last night at the debate here at Belmont, neither candidate is putting forward a platform that addresses what is really needed to rev up the entrepreneurial economy.

Sen. Obama's distrust of free markets was made very clear to all last evening.  And Sen. McCain showed himself to be another big government Republican.

Entrepreneurs need lower taxes and a government that gets out of their way.  We don't need the active help of government to find opportunity and build successful ventures.

There is a good chance that successful entrepreneurs will feel the pinch of higher federal taxes in the US over the coming years. 

In the US, many entrepreneurs also have the added burden of high state and local taxes.  But many businesses are not as tied to a specific place as they used to be.

"The modern market is characterized by mobile capital and labor. Therefore, companies will locate where they have the greatest competitive advantage," said Tax Foundation Staff Economist Josh Barro, the study's author. "States with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth."

The Tax Foundation has issued their 2009 State Business Tax Climate Tax Index.  The 10 best states (i.e., lowest tax burden) are: 

Need a little inspiration in these uncertain times?  Brett Nelson has written a great piece at Forbes titled "The Greatest Risks They Ever Took." 

Here is one of my favorite quotes that hits entrepreneurial risk taking at its most personal level:

"The biggest risk was telling my fiancé one month before our wedding that I was going to quit my high-paying job to gamble on a 'big idea' with my old college roommate,"

So said Michael Chasen, co-founder of Blackboard.  The outcome of this risk?  Their business is now listed on NASDAQ and his fiancé agreed to tie the knot.

Here is what Nelson took away from his interviews he conducted while writing this story:

The best results come to those willing to take a chance--an important reminder for entrepreneurs, financiers and political leaders as the global economy braces for even rougher weather.

Indeed. 

My hat is off to those financiers who did not pursue the short-cuts created by greed.  Our economic system will need their strength more than ever over the coming months.

My hats off to the politicians who did not panic and vote for the soon-to-be ill-fated bailout.  History will show their courage to be well-founded.  I am proud to count my own Representative Marsha Blackburn among this group.

My hat is off to those entrepreneurs who continue to forge ahead in uncertain times -- buying new buildings, adding new staff, investing in increased inventory -- because they are confident in their ventures.  They are the ones who we will rely on to rebuild a strong economy.

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement on September job numbers based on NFIB's monthly economic survey that will be released on Tuesday, October 14:

"Seasonally adjusted, small business owners reported basically no new job creation over the past few months. The September NFIB survey showed an average loss of -0.34 workers per firm, a decline in private sector employment. Eight percent of the owners increased employment by an average of 3.4 workers per firm, but 18 percent reduced employment at average of 3.1 workers per firm. Not a great performance, unfortunately. 

 

"Forty-nine percent of the owners hired or tried to hire, and 78 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Seasonally adjusted 18 percent reported unfilled job openings, a 3 point gain (but still below the thirty-four year average of 22), suggesting that the unemployment rate won't change much, if at all. Nine percent of the owners reported that the availability of qualified labor was their top business problem, well below last September's reading of 17 percent.

 

"Over the next three months, 12 percent plan to create new jobs, and 10 percent plan workforce reductions yielding a seasonally adjusted net 7 percent of owners planning to create new jobs, down two points from August, historically weak but not a real recession number. The September survey shows that small business owners are still muddling along in this economy."

These findings indicate a gloomier picture than the ADP survey issued earlier this week.

Two surveys released this week paint a very interesting economic picture.

Entrepreneurs are still creating new jobs.  ADP's Small Business Report for September shows that small businesses (fewer than 50 workers) created 28,000 new jobs last month while corporate America is hemorrhaging jobs, losing more than 170,000 over the past six months.

However, a new survey of 500 US small business owners conducted by Harris Interactive for ING DIRECT found that entrepreneurs are very worried about their current situation and about the future.  Specifically the survey found that:

• 63 percent say are either very- or extremely-concerned about the future of the economy

• 57 percent see developing new business as their number-one challenge through the remainder of the year and "access to cash" ranked number-two at 18 percent

• 56 percent are now saving less money for personal and 53 percent are saving less for retirement savings compared to a year ago

• 40 percent see the current financial state of their business as worse than a year ago

I will not be at the Presidential Debate next week when it is held at Belmont University.  We have no better chance of getting a ticket than anyone else.  It is a random selection of undecided voters.

But if I was there, I would ask the following question:  "Which of your policies will help entrepreneurs revive the American economy?"

It is not that I would expect an answer that would sway my vote.  Neither candidate has a platform that supports what is really needed to spur entrepreneurial activity.  They both are in favor of an activist government that lays a heavy hand on the economy.  Both favor big government solutions to any and every problem.  That is the last thing we need to spur entrepreneurial economic development.

The voters clearly understand that entrepreneurs are the best hope for our economy, as seen in a recent survey by the Kauffman Foundation.

"Americans in big numbers are looking to entrepreneurs to rally the economy," said Carl Schramm, president and chief executive officer of the Kauffman Foundation. "More than 70 percent of voters say the health of the economy depends on the success of entrepreneurs, and a full 80 percent want to see the government use its resources to actively encourage entrepreneurship in America."

Unfortunately, Americans don't seem to vote in favor of candidates who would act in ways to support our emerging entrepreneurial economy.  They continue to vote for candidates that expand the tax code, expand regulation, and expand government intervention.

I hope that sometime soon, very soon, they will begin to understand what entrepreneurs really need and vote accordingly.  Let's vote in people who will get government out of our way.