Public Policy, Economics and Entrepreneurship: September 2009 Archives

Here is the latest from the NFIB Research Foundation and their monthly 411 Small Business Facts summary of results from past polls, including their commentary:

One of the more interesting, if often less pleasant, aspects of working in Washington is a front-row seat watching government dream-up and subsequently blow-up well-intentioned ideas that could become practical nightmares for small-business owners.  In fact, if it were not for the entertainment value, the state of affairs could get downright depressing because some of these brainchilds fail to self-destruct and actually become law. This brings us to report on a real doozie, now in the works.
 
The latest entertainment is innocuously called "corporate reporting."  The good intention is to raise an estimated $1.73 billion a year in revenue, peanuts by Federal Government standards, through reducing the amount of unreported corporate taxable income.  So far, so good!   But then reality strikes?  Under the proposal, businesses would be required to send every business from which they purchase more than $600 a year worth of goods and/or services, the corporate equivalent of a 1099.  Currently, business only reports their transactions for services from unincorporated businesses.  But the proposal expands the requirement to incorporated businesses and transactions involving property (property has not been defined yet and that is probably pretty important).  Copies must also be filed with the IRS.  To paraphrase one manufacturer upon hearing of the proposal, "Oh, my gosh, I have 13,000 suppliers.'
 
So, let's see how it works.  Small Business A, an office supplies company, sends employees to two different trade shows. The employees stay at Holiday Inns and hotel bills are $1,500. Small Business A pays by credit card. At year's end, the business adds up all purchases from Holiday Inn, sends a 1099 to Holiday Inn for $1,800 and a copy to the IRS.  But wait!  One Holiday Inn was company-owned and the other was owned by a franchisee.  Holiday Inn discovers the error.  So, Small Business A must refile with the Holiday Inn (franchisor), the Holiday Inn (franchisee) and the IRS.   (How this would be handled if the employees were simply reimbursed is open to speculation.)  Of course, the purchase of gasoline for the firm's two delivery trucks would be considerably trickier considering the number and location of purchases.  A similar filing must be produced for every supplier that has sold the firm more than $600 worth of stuff, whether in increments of 600 $1 purchases or one $600 purchase.  But Small Business A also has customers, lots of them.  At the end of the year, it is inundated with 1099s from its customers which must be checked.  The IRS is inundated, too.  What happens to those 1099s?  Presumably they are stored.
 
The National Small Business Poll issue, Paperwork, offers an insight into the current paperwork problem facing smaller firms.  Should corporate reporting not implode, new Poll data on paperwork may have to be collected!

1. SUPPLIERS - Do suppliers have a relatively strong or a relatively weak influence on their customers' introduction of innovative products and services?  (Vol. 6, Iss. 8, Q#33.)
 
2. CREDIT CARDS - What is the approximate average percent of total sales volume that is paid by credit or debit cards among the one-half of small businesses that accept cards?  (Vol. 8, Iss. 3, Q#2.)   
 
3. HOMES AS COLLATERAL - How many small-business owners have collateralized their homes to finance the business?  (Vol. 8, Iss. 7, Q#18d.)
 
4. H2B VISAS - Would small businesses directly benefit a lot, directly benefit a little, be damaged a little, or be damaged a lot by increasing the number of immigrant work visas available for seasonal workers, known as H2B visas? Or, would small businesses not be affected by a change in the number of H2B visas?  (Vol. 8, Iss. 2, Q#13.)
 
5. CRIME & PUNISHMENT - Do small business-owners and managers have very much, much, some, little, or very little confidence in their local police authority? (Vol. 8, Iss, 5, Q#8.)
 
6. DEPRECIATION FOR TAX PURPOSES - Do small-business owners and managers have a good understanding of depreciation, a moderate understanding, little understanding, or do they rely on your tax preparer to understand the depreciation provisions for them?.  (Vol. 6, Iss., 6, Q#4B.)
  
7. SUCCESSION - Do employee-managers of small businesses think that is it highly likely, possible, doubtful, or highly unlikely that some day they will own and operate the business they now manage?  (Vol. 8, Iss. 8, Q#17.)   
 
8. BUSINESS INCOME -What is the median total income small-business owners take from their businesses, including any salary, dividends, draw or profit taken out?  (Vol. 7, Iss. 7, Q# 10.)
 
9. PAPERWORK - After an employee leaves, how long do small businesses keep personnel records before getting rid of them? Vol. 3, Iss. 5, Q#2c.)

In my column this week at the Tennessean, I offer my take on what we need to do to unlock the optimism of entrepreneurs:

Each month the National Federation of Independent Business conducts a survey of small business owners to gauge key economic trends.

The September survey shows a slight improvement in owners' optimism. Granted, the index is still very near its all-time low, but small-business owners see some hope over the longer term.

"The gain in the index clearly signals that the worst is likely over, but so far there has been no surge in sentiment as many components still remain at historically low levels," said William Dunkelberg, NFIB's chief economist.

"The small-business sector has taken a real beating over the last year, but owners are seeing some upward movement in both sales and earnings."

The anecdotal evidence I can add to this from my own interactions with small-business people is that since they have "made it through the worst and survived," they see hope for the future.

One thing that should give us pause when we read surveys like this, though, is that entrepreneurs are by their very nature an optimistic lot. My father always told me, "When you look at an entrepreneur's forecast, double the costs and triple the time, and you will probably be closer to the truth."

And remember the old story of how we can spot a budding young entrepreneur -- he is the one who on Christmas morning can be found digging in a pile of manure in his backyard exclaiming, "I just know that pony I asked Santa for is in here, if I just dig deep enough."

So, how can policymakers help entrepreneurs realize their goals?

Here is a three-part plan that would help turn the optimism of American entrepreneurs into real economic growth and create jobs:

Cut tax rates. Entrepreneurs need to see that their risk-taking can lead to the opportunity for income and wealth down the road. But with talk of higher marginal tax rates, entrepreneurs are growing concerned that they will keep much less of the fruits of their labors and personal investments in their businesses. Increasing income tax rates has been shown in studies around the globe to put a damper on new business formation and growth.

Decrease regulation. The Small Business Administration estimates that when compared with large businesses, small operations must spend four and a half times more per employee to comply with environmental regulations and 67 percent more to comply with tax regulations. Governments all around the world are cutting the red tape that affects small businesses to help spur entrepreneurial activity. But in the U.S., small employers are beginning to feel the effects of expanding government regulations. This increases costs, making earning a profit that much more of a challenge.

Stop trying to steer the economy. Markets have proven to be pretty good at picking economic winners. Rather than trying to use tax policy and other forms of government incentives to support one industry over another, now is the time to let markets work. For example, there is evidence that investors are not sold on the prospects of green technology as a true growth sector in our economy even with strong government support. Instead, angel investors and venture capitalists are steering more of their investments toward other technology sectors that they believe show greater long-term promise.

Taking these three steps would help turn the entrepreneurial optimism still abundant in America into more entrepreneurial economic activity at a time when the nation needs it most.

When it comes to spurring entrepreneurial activity, taxes matter.  The Tax Foundation has released its latest ranking of states by tax burden.  

The top 10 for lowest taxes in this year's ranking has changed a bit from last year:

1. South Dakota
2. Wyoming
3. Alaska
4. Nevada
5. Florida
6. Montana
7. New Hampshire
8. Delaware
9. Washington
10. Utah

For more information on this year's ranking you can read the Executive Summary, the full report, or you can view a narrated slide show that offers specific explanation of some of the changes in state's rankings this year.

Think you know what a small business is?

Thanks to years of rent seeking by advocates and lobbyists for various industries and trade organizations, the SBA needs a table that runs 37 pages plus footnotes just to define small business.

Take a look.

This is just one small example why we don't need government steering our economy and making decisions about economic winners and losers.

I wrote a couple of posts yesterday on the resiliency of entrepreneurs and their ability to start new ventures even if venture capital is not flowing freely.  In a post by Jonathan Ortmans at Policy Forum on Entrepreneurship Blog based on what he heard during a recent discussion among investors, he offers the following observation:

There was a universal agreement, bar one person, that now is an excellent time for investors in new start-ups and that entrepreneurs should be cautious about accepting too much outside capital.  In fact, ironically, all three serious start-ups I met last week had not accepted any outside funding at all.
 
Let's hope that scarce capital means more smarts and better success rates for the entrepreneurs.

Arthur Laffer offers traces the impact that tax increases had in deepening the great depression in an op-ed in today's Wall Street Journal:

The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.

It seems that we do not learn our history lessons very well these days....

Thought I'd share a little smile on a rainy Monday here in Nashville.
 

The American economy has been, and will continue to be, built by entrepreneurs. If you believe that entrepreneurs' voices need to be heard and want to help to educate government officials about the important role entrepreneurs play in our economy, I encourage you to connect with the Build A Stronger America initiative supported by the Kauffman Foundation.  All you have to do is click on  the link above and join the Entrepreneurs' Movement.  I did!

I quick follow-up on my post from yesterday about small business employment trends....

Denny Dennis with the NFIB Research Foundation pointed out to me that the data from the Bureau of Labor's Business Employment Dynamics (BED) report adds additional worrisome clues into the state of job creation among entrepreneurial firms.

Typically, small business creates modest employment growth during recessions, while big businesses have massive job losses.  However, the BED data indicates that this recession is seeing small business is creating fewer jobs than large businesses.

The SBA Office of Advocacy has issued an update of their Small Business FAQ.  There are some worrisome changes in some of the statistics.

The small business job engine is sputtering.  For several years the SBA has estimated that about 78% of new jobs in the U.S. have been created by small businesses over the past several years.  They now estimate this figure to be about 64%.  I would predict an even further plummet over the next two years.  These are running averages, so it takes time for the numbers to shift.  However, I must admit that this sudden drop took my breath away when I read it.

The small business foundation of the economy is weakening.  The SBA estimates that in 2007 the small business birth rate is about 627,200, which is the lowest level in the past five years.  I am worried what the 2009 figures will show, although this number includes self-employed.  That number may be up due to the high unemployment rate.  But, for the first time in the past several years, business closure rates and business bankruptcy rates exceed the business birth rate.  This is alarming.  We also need to keep our eye on the Census estimate of the number of small business that have employees.  It was at 6.0 million as of 2007 estimates (if the future estimates really will have any credibility with the new policy that is moving the Census Bureau directly under the control of the White House).

And what about survival rates?  The jury is out on this.  We will have to wait until 2011 to have any meaningful data on business survival rates.  The baseline going into this economic downturn -- that may be turning into a full fledged small business collapse thanks to the policies of the current President and his predecessor -- is 69% survival rate two years out and 51% survival rate five years out.  Again, we have to rely on the Census for these estimates, so not sure how they will spin the future statistics.

This month's NFIB survey of small business owners shows a slight improvement in their overall optimism.  Granted, the index is still very near its all time low, but small business owners see some hope for their businesses over the longer term.

"The gain in the Index clearly signals that the worst is likely over, but so far there has been no 'surge' in sentiment as many components still remain at historically low levels," said William Dunkelberg, NFIB's chief economist.  "The small business sector has taken a real beating over the last year, but owners are seeing some upward movement in both sales and earnings."

The anecdotal evidence I can add to this from my own interactions with small business owners is that since they have "made it through the worst and survived", they see hope for the future. 

Let's hope their optimism and that voiced by Dunkelberg is correct. 

One thing that should give us pause when we read surveys like this is that entrepreneurs are by their very nature an optimistic lot.

My father always told me, "When you look at an entrepreneur's forecast, double the costs and triple the time and you will probably be closer to the truth."

And remember how we can spot a budding young entrepreneur -- he is the one who on Christmas morning can be found digging in a pile of manure in his back yard exclaiming, I just know there is a pony in here if I just dig deep enough."

When I try to interpret surveys like this the entrepreneur in me is ready to assume that we are on the road to recovery.  But, the realist in me knows that we won't see any real improvement anytime soon unless we wake up and reverse course on a myriad of policies enacted over the past several decades that have expanded role of government, weakened the free enterprise system, and led to a steady increase in the tax burden.  These are all policies that have been proven to stifle entrepreneurial activity.

I fear that the situation facing small business owners is only getting worse.  Hear is how Sam Graves (R-MO) of the House Small Business Committee put it:

"It is abundantly clear that the Obama Administration has no understanding of small business owners or what they need.  Last week the SBA fell short of the mandatory allocation of government contracts to small businesses, and only 1% of the "economic stimulus" package was provided to small companies.  This Administration continues to push record spending and proposes paying for it on the backs of small businesses.  Congress should focus on helping our job creators, not treating them as enemies."

If we want to turn this budding optimism among entrepreneurs to work for us to start our economic recovery, we need to turn them lose -- and quickly.

Sadly, only the entrepreneur in me thinks that might happen.  But I'll keep digging, looking for that pony..... 

If I hear one more report about a jobless economic recovery I think my head will explode.  There is not real economic recovery without job creation.  Talking about a "jobless recovery" is a classic spin that politicians from both parties use when the economy gets stuck in a long-term slump.

The latest from William Dunkelberg, chief economist for the National Federation of Independent Business, indicates that the slump is, indeed, going to be with us for quite a while:

"Small business owners in August reported a decline in average employment per firm of 0.8 workers (seasonally adjusted) during the last three months.  August's figure was unchanged from July, but a big improvement from the record loss of 1.26 workers posted in May. 

"Six percent of the owners increased employment by an average of 2.5 workers per firm while 22 percent reduced employment an average of 3.9 workers per firm (seasonally adjusted).  The job generating machine is still in reverse.  The BLS recently reported unusually high job losses in the small business sector, due in part to terminations and failures.  As can be seen in the chart below, the reduction in labor costs (e.g., jobs) has been huge.  This explains the recently announced impressive productivity numbers; if employees are fired faster than sales fall, output (sales) per hour will rise.  Hopefully, this job cutting has been overdone and will produce a faster than expected recovery in employment (once consumers start spending - retailers and restaurants are in tough shape).  Manufacturing is improving, but that will not budge the employment numbers."

"Eight percent (seasonally adjusted) of small business owners reported unfilled job openings, down 1 point from July.  Over the next three months, 13 percent plan to reduce employment (down 1 point), and 7 percent plan to create new jobs (down 1 point), yielding a seasonally adjusted net 0 percent of owners planning to create new jobs, a 3 point improvement over July.  Not seasonally adjusted, net job creation plans were negative in all industry groups except the professional services and the wholesale trades."