Public Policy, Economics and Entrepreneurship: August 2009 Archives

I participated a while back in an economics blogger forum at the Kauffman Foundation.  They have published a documentary about this one day event, which you can view here.

Although I am not an economist, I was invited as someone who looks at economics from an entrepreneur's eye.

This week's question for Forbes magazine's America's Most Promising Companies initiative comes from Brett Nelson, Entrepreneurs Editor at Forbes:

The fear of Big Government is in the air. What are some of the most deleterious regulations hampering small business today? What would be a better approach?

I offer a modest and simple proposal to this question -- repeal a single act passed almost one hundred years ago.  It reads as follows:

ARTICLE XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

If we did away with the federal income tax by repealing the 16th amendment to the constitution, we would do away with the Internal Revenue Code as we now know it -- all 70,000 pages of it.  No set of regulations hampers small business more than the red tape, cost, and complexity created by our income tax system.

How to replace it?  I still favor some form of consumption tax.

It now appears that the folks in Washington can't even manage a tax increase.  From the Tax Foundation:

The actual economic costs of the proposed health care surtax and the expiration of the 2001 and 2003 tax cuts will be twice the amount of revenue the government intends to collect. According to a new analysis from the Tax Foundation, the higher tax rates are estimated to raise $88 billion in 2011, but the economy will incur an additional burden of $76 billion--or "deadweight loss"--as a result, which raises the total cost of the tax increases to $164 billion, roughly double what lawmakers intend to raise.

Tax Foundation Special Report No. 170, "The Excess Burden of Taxes and the Economic Cost of High Tax Rates," attempts to put a price tag on the cost of pending rollbacks of the Bush tax cuts (which would raise the top tax rate to 39.6%) as well as the proposed health care surtax (ranging from 1% to 5.4%). This loss in economic efficiency is also known as the "excess burden" or "deadweight loss" of taxes--the income that would need to be given to people to compensate them for the resources that are lost due to the distorting effect of taxes.

The outcome of this will be an even greater drag on entrepreneurial activity over the years to come.

"Overall lending to small businesses is down 33%, the unemployment rate is nearly 10% and today we mark the six month anniversary since the President signed the so-called "stimulus" package into law. All of the signs are clear that the wasteful spending of the stimulus is not helping our economy.  Speaker Pelosi and President Obama gave us a stimulus package allocating less than one percent to small businesses, the job creators of our nation.  This simply does not make sense."  (House Small Business Committee Ranking Member Sam Graves (R-MO))

First, let me say that I agree with at least part of the premise being used to rationalize nationalization of healthcare.  The current system of employer-based, income tax driven, highly regulated, government-mandated health insurance system is a mess.

I also agree with the progressive-liberal founder of Whole Foods John Mackey when he said in the Wall Street Journal:

Health-care reform is very important. Whatever reforms are enacted it is essential that they be financially responsible, and that we have the freedom to choose doctors and the health-care services that best suit our own unique set of lifestyle choices. We are all responsible for our own lives and our own health. We should take that responsibility very seriously and use our freedom to make wise lifestyle choices that will protect our health. Doing so will enrich our lives and will help create a vibrant and sustainable American society.

Mackey proposed market solutions, not a government take-over of healthcare.  (Note to Mr. Mackey -- you may be losing your progressive customers, but you are going to gain all sorts of libertarian customers). 

Finally, I agree with former Carter administration adviser and Democrat Patrick Caddell when he raises alarm bells about the power grab taking place in Washington right now that is driven by money and not by sound policy making to say nothing about respect for the Constitution.  It certainly explains the level of lobbying as all sides of the healthcare industry enter the frenzy of rent seeking going on in the halls of Congress right now.  From the LA Times:

Every one of those 534 members of Congress now has six (6!) lobbyists working on them -- and that's just for healthcare.

A total of 3,300 lobbyists have registered to drive the sizzling healthcare issue in Washington -- three times the brigade of lobbyists representing the entire defense industry.

And three more healthcare lobbyists join the ongoing fray every day.

They reported spending more than $234 million massaging and informing and persuading those legislators during the first six months of this year, way more than a million bucks a day, seven days a week.

No wonder the public is turning sour on this whole greedy mess.

My goodness, these are interesting times.  I guess I better get back to my time off and play some more golf.....

Chambers Williams of the Tennessean gathered a variety of perspectives on the employment outlook:

The worst recession since the Great Depression may be easing, and that gives most small-business owners in Middle Tennessee a little optimism. But most say they're still reluctant to add to payrolls until an upswing takes even deeper hold.

"Very few are hiring, and the mood with our membership is still damp," said Jim Brown, Tennessee president of the http://www.nfib.com/">National Federation of Independent Business, a small-business trade group. "In some areas, the balloon is slowly refilling, but in others there remains significant softness."

In many past recessions, entrepreneurs and small businesses have played a major role in taking risks and hiring new employees to fuel recovery. Don't count on it this time, says Jeff Cornwall, a professor of entrepreneurship at the Belmont University business school.

"Most of the small-business folks are being very cautious about creating jobs," he said. "They are uncertain about the government increasing taxes and about where this economy is heading, and they are taking a very prudent course."

You can read the entire column here.

My blogging will be a bit spotty this week and next.  I am taking a few days off here and there before the fall semester kicks off.  

Just thought I should pass along the National Federation of Independent Business monthly Small Business Economic Trends survey that came out this week.  

This month's survey reports small business owner optimism fell 1.3 points to 86.5, producing the second monthly decline in a row (but still above the March reading of 81.0, the lowest reading of this recession).  

The main cause was a decline in expectations that business conditions during this prolonged recession would improve any time soon.  The percent of owners expecting business conditions to deteriorate lost 10 percentage points from June, 15 points from May.

Lethargic expectations, not much faith in a future dominated by lawmakers in Washington, D.C. and trillion-dollar deficits all contribute to small business owners' deteriorating expectations.

"It's not enough that small business produce half the private GDP, employ the bulk of the private sector workforce and generate most of the new jobs created, now they are expected to finance the new experiments of Congress and the president such as healthcare reform, auto industry bailouts and union pension fund bailouts," said Bill Dunkelberg, NFIB's chief economist.

Indeed!  It is time to stop punishing entrepreneurs for their success by confiscating more and more of the fruits of their risk-taking to fund bailouts and growing entitlements.

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement on July job numbers based on NFIB's monthly economic survey that will be released on Tuesday, August 11:
 

"Seasonally adjusted, there was a decline in average employment per firm of 0.81 workers reported during the last three months among small business owners in July. Seven percent of owners increased employment by an average of 3.4 workers per firm, but 24 percent reduced employment an average of 4.1 workers per firm, seasonally adjusted.  
 
"What's more, over the next three months, 14 percent plan to reduce employment (up four points), and 8 percent plan to create new jobs--down two points--yielding a seasonally adjusted net negative 3 percent of owners planning to create new jobs, a two-point deterioration. Not seasonally adjusted, net job creation plans were zero or negative in all industry groups and negative in all nine Census regions.
 
"Clearly, the employment picture being painted by small business owners is not pretty. The little that was in the stimulus package for small businesses is not having the intended effect--creating jobs. This is just more evidence that now is not the time to be slapping new taxes or expensive mandates on small businesses, which is exactly what H.R. 3200, the House healthcare reform bill, would do."

 

Today, the ADP Small Business Report showed that 138,000 small business jobs were lost in July - 80,000 jobs in the service sector and 58,000 in goods-producing firms. 

According the July report:

This month's employment decline was the smallest in eight months continuing the notable improvement between the first and second quarters of 2009.  Employment among small-size businesses is likely to decline for at least several more months, albeit at a diminishing rate.

These findings echo the overall job statistics, which seem to show a slowing of the decline in jobs.

We still don't know where the bottom of this will be.  I believe the most likely scenario is a long period of sluggishness in the economy, maintaining current unemployment levels with a  lack of economic growth.  This may become our norm, certainly for several quarters and mavbe even for several years.  I believe this is the most likely scenario because we are not doing what we need to if we want to spur entrepreneurial growth -- cut taxes and preserve property rights.

The other scenarios I see cause me even greater concern. 

One is that we will experience another steep drop in jobs and highly negative growth.  This will most likely be the case if we have some unforeseen economic or political shock.

The other worst case is that we will begin to rebound, which given how we have stacked the deck with deficits, will lead to very high inflation -- potentially hyper-inflation.  The long term outlook if this happens would be quite bleak. 

My post from yesterday has created some great discussion at the blog, via e-mail and among business owners I have talked with.

Several folks told me that the high cost of healthcare is keeping them, or people they know of, from starting a business.  Let me offer a couple of things to think about on this.

First, when I advise entrepreneurs I tell them that they need to build a business that takes care of their needs.  This includes income needs, wealth needs and lifestyle needs. Income needs includes the cost of your total lifestyle.  If your business model is unable to give you adequate income to cover your expenses -- including healthcare -- then the model is not right for you to pursue.  And for goodness sake make sure you can cover these expenses until your business is profitable through other income and personal savings.

Second, there is no such thing as free healthcare.  Socialized healthcare is going to cost money.  We will need to raise this money as a country through either increasing taxes or borrowing more money.  If we increase taxes that will decrease your income as an entrepreneur.  If we run up the federal deficit even further to pay for healthcare, we will at some point very soon stoke the flames of inflation.  That will squeeze your operating profits as a small business owner.  Entrepreneurs get hit hardest during inflation due to their lack of market power -- their costs go up faster than they can increase prices.

So, once again I have to be the dream-killer for those who want to assume that if they could only get "free" healthcare they could start their businesses.  It sounds to me like these aspiring business owners need to get a better business model before they take the entrepreneurial plunge.

Now that corporate America is down and out and venture capital seems to be dormant, the free market critics have turned their focus to discrediting the impact small business in our economy.

The latest comes from the progressives at the Center for Economic and Policy Research.  They cite biased statistics to claim that US small business is not what we think it is.  They say the US has a low percentage of self-employed compared to the rest of the world.  The problem is that due to differences in legal requirements and tax law countries count "self-employed" quite differently -- they are comparing apples to liver sausage.  Then they say that we have a small base of employment in small business, but only look at our manufacturing companies under 20 employees, and not at the overall employment in small firms -- statistical cherry picking at its finest.  Finally, they say that we are weak in small business technology firms, but again cite only selected statistics that support their attempt to conclude that America is not small business friendly.

And why do they argue all of this?  It is because we don't have socialized healthcare, of course.  From a news release they sent out this week:

"In the rest of the world, entrepreneurs who want to start a new business don't have to think twice about where they and their employees will get health insurance," said Schmitt. "In the United States, talented people thinking about starting a new business often have to choose between following their dream or going without health insurance."

First of all, their statistics are biased.  In addition, survey after survey, study after study, show that tax rates, regulation and property rights are what predict overall entrepreneurial activity.

What I fear most is that this will become part of an attempt to discredit the overall importance of small business.  After all, it is small business that now offers the only hope of escape from encroaching socialism and progressivism.