Public Policy, Economics and Entrepreneurship: May 2009 Archives

After the Flood

on May 27, 2009 12:59 AM | Permalink | Comments (1) | TrackBacks (0)

Blogging from Prague again this morning.

I have been reflecting on the aftermath of communism while here in eastern Europe. In listening to people here -- entrepreneurs, workers, managers -- I am struck by the lingering issues from their socialist past.

Although I am now worried about our move toward socialism in the US, I have become more worried about the aftermath.

Economic decisions have a major impact on a culture. Although the communist economic system is officially gone, its effects remain everywhere. People here have become innately dependent upon the state. It is become so much a part of the culture that it is difficult if not impossible for most citizens to break free of that dependence. They are like a 47 year old man who never left home and still lives in his parents basement. He hates his lot in life, but is stuck in a dysfunctional, dependent relationship from which he cannot escape.

It reminds me of a flood. Although the flood itself is devastating, the aftermath can be even worse. The stinking sludge that remains after the waters subside can take months to clean up. And the rebuilding can take years. But, nothing is ever the same when all is said and done.

We visited a small crystal factory outside of Prague yesterday that was privatized after the fall of communism. While they are surviving as a business, their ability to compete and their ability to become truly a productive free enterprise seems to have been washed away. They are just hanging on, not really understanding how to really break free and prosper.

We are facing the flood of socialism right now. But the aftermath when it fails -- and it will fail -- might be even worse than the initial waves of socialization. Even when that day comes when we are able to begin to try to unravel all that is being put in place right now, the damage will remain for years to come.

Entrepreneurship Does Not Take Place in a Vacuum

Jeff Cornwall

on May 13, 2009 6:03 AM | Permalink | Comments (0) | TrackBacks (0)

"Anyone serious about promoting wealth-creating entrepreneurship must at some point direct attention toward how the moral, legal and political environment aligns incentives. Entrepreneurship -- like everything else -- doesn't exist in a vacuum. It's long past the time we stopped pretending it does."

So says Samuel Gregg, research director at the Acton Institute, in an editorial in the Detroit News about a recent initiative to stimulate entrepreneurship up in Michigan.

It seems that the Kauffman Foundation folks are trying to lure venture capital up to Michigan.

As Mr. Gregg rightly points out -- the answer to spurring entrepreneurship is not throwing money or support bureaucracies at the problem. From Gregg's editorial:

But in the midst of this enthusiasm about entrepreneurship, we risk forgetting that entrepreneurship's capacity to create wealth is heavily determined by the environments in which we live. In many business schools, it's possible to study entrepreneurship without any reference being made to the role played by factors such as rule of law, property rights and low taxes in stimulating wealth-creating entrepreneurship.

I could not agree more! We need to educate entrepreneurs not only to be technically good at what they do, but informed citizens who can speak up about the issues that effect their business ventures.

Entrepreneurs' Spirits are Up

Jeff Cornwall

on May 12, 2009 5:08 AM | Permalink | Comments (0) | TrackBacks (0)

My read of the entrepreneurs here in the Nashville area is that they are feeling a bit more optimistic. Those who have weathered the storm seem to feel that the worst may soon be over.

The latest national survey from the NFIB seems to support my anecdotal observations, as their Index of Small Business Optimism rebounded in April.

This rebound was not due to hard evidence of economic improvement, but is tied to "soft indicators" -- the "feel good" portion of the survey. Expectations for gains in real sales increased.

While small business owners think future prospects are brighter, the daily realities show deep problems remain. Actual employment, capital outlays, inventories, sales and earnings languish at historically low levels.

"At least we seem to be headed in the right direction," said NFIB Chief Economist William Dunkelberg. "Typically, optimism first returns, then spending follows as confidence builds. But there are a lot of difficult days ahead, even if April's data represents a turnabout."

Sorry, Canada!

Jeff Cornwall

on May 12, 2009 4:42 AM | Permalink | Comments (1) | TrackBacks (0)

The American government's takeover of the economy seems to be inspiring officials north of our border. Listen to this rant from the blog Wolfville Watch:

Government as entrepreneur. Isn't that an oxymoron? But that's next because the recession is giving government the excuse -- as if they needed it -- to take more and more control .
They aren't keeping it a secret. Take for example the Liberal Minister of Economic Development for Ontario, Michael Bryant. His speech to a business audience at the Canadian Club was titled "Reverse Reaganism" . [You will remember that Reagan said "Government is not the solution to our problem. Government is the problem." It seems Mr. Bryant doesn't agree.]
He calls the economic policy he promotes "Obamanomics", a" Supra-ideological approach," "post Boomerism" with a focus "less on individual rights" , finding a "place between idealism and realism" [ Yet, elsewhere he says it is highly idealistic. Go figure]. He says it is not partisan, but pragmatic. Then he says it is about "individuals more sharing in the wealth of an economy." [sic]

From those of us south of your border let me say, "Sorry, Canada!"

Entrepreneurs in Scotland Struggle

Jeff Cornwall

on May 12, 2009 4:25 AM | Permalink | Comments (0) | TrackBacks (0)

Want to know what it will be like to be an entrepreneur in the U.S, once the government's economic power grab is complete? Listen to the challenges now facing entrepreneurs in places like Scotland where higher taxes rates have already been put in place. From the Sunday Herald:

Entrepreneurs are not known for their negativity, but even those of the most upbeat disposition must be struggling to find a positive angle to the chancellor Alistair Darling's latest wheeze - bringing in a 50% tax rate for those earning more than £150,000 a year. Although taxation is reserved to Westminster, the move is supported in principle by the Scottish government.
Like last year's changes to the capital gains tax rules, the Brown government's move seems to be yet another signal that although it claims to be pro-business, it is systematically dismantling all of its entrepreneur-friendly policies.
This is surely a backward step when it comes to pulling out of a recession, as it is then that the spirit of entrepreneurship comes into its own, with risk-takers leading the way back to a healthier economy.

The tax policies now stifling Scottish entrepreneurs are similar to those the Obama administration proposes to impose to pay for healthcare "reform."

Small Business Lending Working without SBA Interventions

Jeff Cornwall

on May 7, 2009 5:31 AM | Permalink | Comments (1) | TrackBacks (0)

Are markets getting out ahead of government intervention when it comes to small business lending? It seems that small business lending is starting to heat up, but the SBA is mired in the complexity of trying implement their part of the "stimulus."

From the Wall Street Journal:

The increased activity comes despite the fact that the SBA has been slow to implement some measures aimed at stimulating lending and loan sales on the secondary market. The agency missed a March 4 deadline to create a secondary market specifically for 504 loans, capped at $3 billion. The government hopes this will facilitate the buying of bundled 504 loans....
The SBA had said it plans to finalize the regulations by June, but an announcement may come this month. The agency says the delay is the result of sophisticated financial modeling and complicated legal-documentation changes that need to be made in order for these new programs to work.

I see two possible outcomes once the SBA gets its act together. Neither are particularly encouraging and they are not mutually exclusive.

One outcome would be the flood of small business lending that the administration wants. That will inevitably lead to a small business loan bubble that will surely pop sometime in the not too distant future. Too many small businesses will be given loans that they cannot afford. The SBA programs often put social agendas ahead of economic ones, just as we saw with the home loan disaster fueled by government meddling in those markets.

The other possible outcome is that the bureaucratic complexity will bog down SBA programs,adding nonproductive costs to the lending process.

Since the markets are working on their own, why not step out of the way? After all, as blogger Matthew Bandyk from US News points out, 58% of small business owners have no interest in SBA loans.

Business Start-up Rates Slow in 2008

Jeff Cornwall

on May 6, 2009 4:39 AM | Permalink | Comments (0) | TrackBacks (0)

According to the latest annual Kauffman Index of Entrepreneurial Activity, although entrepreneurial activity was slightly up in 2008 when compared to their 2007 report, there were some worrisome signs about the economic engine of the US economy.

While low and moderate income potential businesses were up, high income potenial businesses decreased from 2007 to 2008.

Specific increases in entrepreneurial activity were identified among the following groups:

People between the ages 55 to 64
Immigrants
Latinos
Asian Americans

People in the Midwest had a decrease in entrepreneurial activity.

Specific states with the highest entrepreneurial activity were Georgia, New Mexico, Montana, Arizona, Alaska and California. While states with the lowest entrepreneurial activity rates were Pennsylvania, Missouri, Wisconsin, West Virginia, Iowa and Ohio.

Among the fifteen largest metropolitan statistical areas, Atlanta had the highest entrepreneurial rate, while Philadelphia had the lowest rate.

Unlike other studies that capture young businesses that are more than a year old, the Kauffman Index captures all adults ages 20 to 64 when they first create their businesses, including both incorporated and unincorporated businesses, and those who are employers and non-employers. The Kauffman Index defines entrepreneurial activity as the percent of the adult population who start a business as their main job each month.

Financing Reform is not the Cure

Jeff Cornwall

on May 5, 2009 4:35 AM | Permalink | Comments (0) | TrackBacks (0)

There is a discussion going on regarding how to fix the so-called venture capital "crisis."

The National Venture Capital Association (NVCA) is advocating a four pillar approach:

The VC industry should support the use of smaller investment banks and accounting firms as partners with the traditional players in the equity distribution system to facilitate smaller IPOs that are now not being adequately served.
Create a new market for exits through public offerings for small companies seeking IPOs.
Lower capital gains taxes for small IPO investors and certain technologies.
Ease Sarbanes-Oxley requirements as they relate to smaller IPOs.

You can find their full report through a link at their website).

Claire Miller at the New York Times summarizes additional recommendtions from a couple of Harvard professors who advocate reform of patent and immigration law and giving bail-out money to certain start-ups to stimulate venture capital markets.

While some of these ideas may offer some limited help, we need to stop thinking about this economic crisis as being one that can be cured simply by financing reform, or worse, financing stimulation.

VC financing is in a mess because the economy is in a mess. Fix the entrepreneurial economy and deals will again begin to look attractive enough to secure venture capital financing. We do not have a supply of capital problem, we have a supply of attractive deals problem.

Putting Things in Perspective

Jeff Cornwall

on May 4, 2009 4:54 AM | Permalink | Comments (5) | TrackBacks (0)

Ken Leiser of CB Richard Ellis made a presentation before a seminar I taught this past Friday. He presented two graphs using data from the Bureau of Labor Statistics that really put this recession in its proper perspective.

The first shows employment change during the last four recessions.

The red line with red squares is the current recession. It is closely tracking the purple line, which is the 1981 recession. Recent data not on this graph suggests that the current recession may not go as deep as 1981. There are some indications that it may last longer than 1981, but we still do not know if it will last as long as the 2001 recession. History shows us that deep recessions tend to be shorter (1981) and shallow ones longer (2001).

The graph that really puts things in perspective is the one he showed that compared these recessions to the Great Depression.

depression and recessions.gif

The little squiggles in the upper left are the lines from the first graph. The long, deep line is the Great Depression.

What is different between the 1981 recession and this one is our focus has changed. In 1981 we looked to the private sector to pull us out through tax cuts that stimulated economic growth -- much of it entrepreneurial. The current focus of public policy is to use the current recession as a tool for social and economic change.

That is why it is in the best interests of those advocating radical change to make this recession sound as ominous as possible. First they told us this was the worst recession since the Great Depression. They told us it may, too, become a depression if it is not one already. Now that it is becoming clear to all of us that the economy is bad, but no where near a depression, the spin begins.

We now hear this being called "The Great Recession" by more and more in Washington and the media, led by Paul Volcker who is head of the President's Economic Recovery Advisory Board. See examples of this from the New York Times (here and here).

If we let entrepreneurs actually do their part to lead us out of the current downturn, unfettered by stifling tax increases and mounting government regulation, this recession would probably end up looking a lot like 1981 -- deep and painful, but not as long and dragged out as 2001.

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