Public Policy, Economics and Entrepreneurship: January 2009 Archives

The $825 billion "Stimulus Package" seems to be moving even more quickly than the Homeland Security Bill did after 9/11.

So what does the massive spending bill offer entrepreneurs, who make up over half of the economy they seek to "stimulate"?

The NFIB, who got co-opted into the drive toward socializing healthcare, is concerned.  Dan Danner, NFIB executive vice president, made the following comments on the "Stimulus" bill:

"America's small businesses created 60-80 percent of the net new jobs over the last decade, yet they see almost no relief in this massive spending bill. 

 

"NFIB fears this legislation will do very little to help small business owners and their employees. We continue to advocate for a six-month payroll tax holiday to be included in the stimulus bill. A payroll tax holiday would immediately put money back into the hands of both employers and employees - providing real relief to consumers and employers during these difficult economic times."

James Pethokoukis of US News digs into the economics behind the bill and finds little evidence of any "stimulus" effect.  "When you look at the economic evidence, it sure seems like an economic recovery package that's heavy on government spending and light on tax cuts is just the opposite of what we should be doing right now."  Pethokoukis offers links to a variety to support his concern.  Read this stuff - it is eye opening, to say the least.

So what are we to do?

First, let's all make a promise to each other to stop watching the 24 hour news outlets all day long.  Turn your attention to what you can do. 

If you are already an entrepreneur, put your head down and focus on what you can control.  Be prudent, for cash is king, but find your place in this new economic reality.  There is opportunity out there, but it may require changing your business model. Remember, successful entrepreneurs learn to dance with the market. 

My friend Chad Moutray predicts that you will soon have more company in the entrepreneurial community:

Looking forward, though, we would expect for there to be more entrepreneurship taking place as a result of this economic downturn.  Much of that will be out of necessity; the talent pool of those who are being laid off is such that they are capable of selling those talents as their own boss, if they so choose.  Moreover, many of these individuals might have contemplated becoming self-employed for some time, but they were not willing to strike out on their own and forego the benefits of their existing jobs.  Unemployment changes that, providing an opportunity to pursue those dreams.  Looking back at past recessions, it is definitely true that smaller businesses were able to recover sooner than their larger counterparts.

My intrepid grad assistant Joe found an article with some great advice for all of you new, "accidental" entrepreneurs from the Eastside Business:

How does someone get over the fears and perceived barriers to self employment?  To find your passion you must first begin with developing your primary aim by clarify your goals, needs and expectations.  There are some great workshops and on line programs designed to help with this.  Secondly, you must create the mindset of already being an entrepreneur - you have financial assets and management skills - you just have not discovered how to apply these valuable resources to your own benefit. Certainly consider a coach to help you over the bumps and barriers.

 

Next is to get your husband, wife, partner or significant other to support your efforts.  There is nothing sadder than a spouse pouring cold water over your dream.  Engagement and exploring options together is often times the key to being able to accomplish your first entrepreneurial venture.

Stop your worrying about the mad dash in Washington toward socialism.  We can't stop this freight train.  It is time to get back to business, back to pursuing opportunity.  That is what we can control.  That is what will truly stimulate the economy.

Let me close this post with what I like to call the Entrepreneurs' Prayer (a.k.a. the Serenity Prayer):

GOD, GRANT ME THE SERENITY

TO ACCEPT THOSE I CANNOT CHANGE,

THE COURAGE TO CHANGE THE THINGS I CAN,

AND THE WISDOM TO KNOW THE DIFFERENCE

When raising children one must put rules and controls in place to keep them heading in the right direction and keep them safe. 

At the same time, if they are ever to mature and become self-reliant, children must internalize right versus wrong, good versus bad into their own values that will over time help to shape their character. Values and character create a counter-balance to help channel free will into a constructive and positive path in life.

I have become convinced that, to a large degree, the same is true for markets.

We had a wonderful discussion last night in my MBA seminar about the inherent need for a counter-balance for free markets.  The class read the Templeton Essays on free markets and moral character that I linked to a couple of weeks ago.

As we reflected on the current state of public policy and our economy through the lens of these essays, we saw that over history free markets have always needed a counter-balance.

The counter balance that has proven most effective over time -- our common morality that is disseminated through society and culture -- has waned in its influence over commerce during the past decades.  The result has been markets run amuck scarred by ethical crisis after ethical crisis.

In its place the heavy hand of the governmental "parent" is stepping back in to restore order.

History also shows that government control and direction of economies never works very well over the long-term.

So here is our charge.

Entrepreneurs must not only focus on rebuilding our economy, but rebuilding our culture and moral fabric.  Both must be in place for free markets to flourish over the long-term.

If we work on both of these pillars, we will be able to have the foundation in place for a new entrepreneurial renaissance.  If we don't, the odds are than we will muddle under a socialistic burden on our economy for decades to come.

Do not focus your energy on fighting what is now being put in place.  Be patient.  If we rebuild our entrepreneurial economy and create truly good companies, society will once again look to us for leadership. 

We have to restore their trust and confidence in us -- ee have to earn it back.  Words will not make this happen -- only our actions.

Stephen Moore in his essay at the Wall Street Journal offers a reading assigment for the new administration before they take office tomorrow:

Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.

Read the rest of his essay...it is well worth the time.

Unfortunately, we have now turned 180 degrees from the direction of the Reagan revolution.  The new view in Washington is that government is not the problem, it is the solution.

(Thanks to Kate Singleton for passing this along).

For small business owners, 2008 ended with a whimper.  The National Federation of Independent Business Small Business Optimism Index fell 2.6 points to 85.2, the second lowest reading in the 35-year history of the survey. 

Owners were hoping consumers would ride to the rescue, but that did not happen.  "Unless there is a solid turnaround in January, we are in for a longer-than-usual recession," said NFIB Chief Economist William Dunkelberg.

Here are some of the highlights (or should I say low-lights) of the last survey of small business owners for 2008:

Employment -- Average employment per firm declined 0.86 workers (seasonally adjusted), the largest monthly decline in survey history.  On the bright side, forty percent of owners hired or tried to hire (down three points from November), and 75 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill.  Now the bad news - over the next three months, only 8 percent plan to create new jobs. However, this is still not the worst recession since the Great Depression, as so many in the media are claiming.  There were lower employment readings in both the 1974-75 and the 1980-82 recession periods. 

Capital Spending -- Small business owners are deferring any project not essential to the survival of the firm.

 "In this uncertain environment," said Dunkelberg, "owners are postponing any capital projects that are not essential to the operation of the firm - or that they can't afford or can't finance."  

Inventories and Sales -- Small business owners continued to liquidate inventories.  The net percent of owners expecting gains in real sales volumes fell to a net-negative 18 points (down four points) seasonally adjusted. 

Earnings -- Profit gains deteriorated another four points to a negative 42 percent, a record low.  A year ago, reports of positive profit trends were 22 points better! 

According to today's ADP Small Business Report small-size businesses lost 281,000 jobs in December, the largest decline in small-size business employment recorded by the ADP Small Business Report since the beginning of the ADP National Employment Report dataset in December 2000.

The ADP Small Business Report is a subset of the ADP National Employment Report:

• Total small business employment: -281,000
• Goods-producing sector: -80,000 small business jobs
• Service-providing sector: -201,000 small business jobs

Ben Cunningham passed along a great post by a Nashville small business owner named John Arra who also blogs.  He echoes my recent comments about the bailout plans:

We millions of small business people don't want to serve any master, least of all a bunch of special interests and politicians.We don't want a bailout. We just want the government to back off and let us produce. If Obama were inclined to turn the tide on this recession, he would do nothing more than clearing the way for small business to succeed. Then, as Milton Friedman told us decades ago when we were faced with the similarly unfriendly Carter years, our businesses will be able to fulfill their true social responsibility: profit.

Go to his post to read his complete essay on this topic.

In my column for the Tennessean this week looks at my thoughts on the coming year and what will be us out of the recession.  (Hint:  It is nothing being talked about in Washington this week):

The economic recovery -- when it occurs -- will be driven by entrepreneurs.

According to the Small Business Administration, 78 percent of all new jobs in the U.S. created over the past 20 years were generated by small businesses.  Entrepreneurial ventures now make up more than 50 percent of the American economy.

The mountains of money being given to banks, automobile companies, and so forth will not get this economy moving. It will be the entrepreneurs who have been quietly transforming our economy since the 1980s who will lead the economic recovery.

We have learned from studies from around the world that what stimulates entrepreneurial activity is not government spending or centralized economic planning, but lower taxes, less government regulation and free markets.

It is time to prepare the next generations of entrepreneurs. Now is not the time to put fear in the minds of today's youth about their economic futures. Nurturing the next generation of entrepreneurs is critical to building a large number of new, higher-paying jobs for the 21st century.

Small-business owners are critical for solving our social problems, as well. Small businesses give generously to charity, with three-quarters of small-business owners in a recent American Express survey saying they donate a percentage of their profits to charities.

While this is a bad recession, for entrepreneurs there is no indication that it is any worse than the last two deep recessions experienced over the past 50 years.

Most small-business owners are approaching these tough times with a prudent hand. Entrepreneurs realize they must get back to their roots and become boot-strappers again. They are focusing on their cash flow, cutting overhead expenses and tightening their inventories. Through these efforts, entrepreneurs are positioning their businesses to survive the short-term economic challenges and to be ready to grow when the recovery arrives.

Funding available

While funding from banks and venture capitalists is tight, or even in some cases non-existent, those who work with angel investors (private individuals who invest directly in entrepreneurial ventures) tell me that deals are still being funding.

A recent survey by the Angel Capital Association reports that angel investors have increased their investments this year and believe they will make additional investments in 2009, which will help fuel growth in the economy.

Although we can expect small-business failure rates to increase over the coming months, the entrepreneurial spirit is still alive and well.

The entrepreneurial core of our economy should keep us from falling into a deeper recession. And new business startups will help lead us into the recovery that we can expect by early 2010.

A study by John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau offers support to those of us who have been preaching that bailouts to floundering corporations and huge public works projects will not create sustainable job growth.

Take a look at this graph from their study that shows net job creation by company size:

See that really tall column in the corner?  That is new companies under 50 employees.  What these small companies need is lower taxes, less regulation and strong property rights.

Thanks to Ben Cunningham for passing this along.