Public Policy, Economics and Entrepreneurship: October 2009 Archives

As we begin to peel back the onion and look at what the latest economic numbers are really telling us, the numbers are concerning.

Although the GDP grew 3.5 percent in the third quarter, this may not be a harbinger of good things to come.  From James Pethokoukis with Reuters:

While the new report showed the economy shifting into recovery mode, it looks like a pretty anemic expansion. As the economics team at IHS Global Insight see things, temporary factors such as cash for clunkers (accounting for nearly half of the past quarter's growth) and the homebuyers tax credit artificially inflated growth during the past three months. The firm puts underlying growth in the economy at closer to 2 percent than the 3.5 percent.

So how does 2 percent real growth compare to growth coming out of previous recessions?  Not so good, according to Pethokoukis:

Indeed, during the first quarter of the last 10 economic recoveries, real GDP rose a far more impressive 5.8 percent on average. For instance, the first five quarters of the Reagan Boom coming out of the 1981-82 recession showed GDP growth of 8.1 percent, 9.3 percent, 8.1 percent, 8.5 percent,  and 8.0 percent.

Artificially induced growth by massive government spending is not the road to recovery and certainly not the way to create a sustained economic expansion.

SurePayroll surveyed small business owners to find out their reaction to President Obama's announcement last week regarding government action to provide cash to small business owners. Here is a summary of Obama's plans from Reuters:

Under one program, the government would provide low-cost capital to the banks, contingent on the banks submitting a plan on how the capital will allow them to increase lending to small businesses.

The other program would increase the maximum Small Business Administration loan size to $5 million from $2 million and would provide partial guarantees on the loans.

Small business owners' response?  Basically, it is to cut out the middle man.  Rather than over-tax entrepreneurs in the first place and then create a government program to loan or invest tax money back to the entrepreneur, why not just cut taxes?  The majority of respondents believe tax cuts would do more to stimulate the economy and help save their businesses faster.

Some key findings:

• More than 50% of respondents think the Obama initiative will not work
• 60% of respondents believe it will take over 8 months to have any effect, though they need cash now.  
• 67% of people believe that small business tax cuts would do more to stimulate the economy (and in a shorter time frame)
• Only 21% of small business owners think the Obama plan will have a positive effect on their business. Almost 60% think it will have no effect on them, with the rest of respondents answering that they didn't know what effect the new initiatives would have on their small businesses.

We know why this plan will not fly.  Washington is in a mood to take more control over our lives and create dependencies.  Tax cuts, while more effective and much more efficient, take away government power.

Those entrepreneurs who have survived the recession continue to show glimmers of optimism.  A new Intuit Payroll survey found that 44% are planning to hire in the next 12 months. The survey, which polled more than 1,000 small business owners, also revealed that 60% of small business owners expect their business to grow over the period. 

My fear is that what we are seeing are mere embers of optimism left over from the blazing fires of our economic boom times of the past twenty years, rather than a spark heralding a period of renewed growth.

Washington seems to only have one solution for any economic problem -- debt.  Want to stimulate housing? Pump in debt.  Want to rescue banks and big business? Pump in debt.  Want to stimulate consumer spending?  Manipulate credit card rules to encourage more debt. 

And now their solution to helping small business?  Pump in more money for SBA loans.

Susan Eckerly, senior vice president of the National Federation of Independent Business, hit the nail on the head regarding this strategy. 

"...[I] is not the silver bullet that is going to propel small business owners to start hiring again. The primary problem facing small business owners right now in terms of job creation is not access to credit, it's a lack of sales, customers and confidence. Small business owners are unlikely to invest in hiring or expanding their businesses when sales and profits are so weak.
 
"Following in the weak economy, small business owners are worried about the threat of increased taxes, new healthcare mandates, higher energy costs and more regulations from Washington. Small businesses don't need more programs from Washington; they need lower taxes and fewer intrusions from government so they can take the calculated risks to expand their business."

I could not agree more.  Debt is not the answer.  Certainly access to credit is important over the long-term, but we have structural problems in our entrepreneurial economy that are tied to high and complex taxes and over regulation.  But easy access to credit right now will make matters worse for many of these small firms by adding debt load to their overhead and doing nothing to improve their sales or their long-term cash flow. 

Worse yet, the SBA Loan program has a long history of being as much about social engineering as it is about helping small businesses.

I have been arguing for some time that our immigration policy needs to be completely rethought given the fundamental changes in our economy.  Our current policy might have made sense in the 1900s, but no longer fits with our increasing dependence on entrepreneurial economic development.

Chile has an innovative approach to luring entrepreneurs to their country.  It is an approach that other countries should be paying attention to if they want to emerge from the recession as an economic leader.

So how does it work?  From TechCrunch:

• You need to have $500,000 to invest in a new technology business that you want to start in Chile.
  
• You will get a permanent visa if your deal is approved
• If you want to conduct due diligence in advance, the government will pay 60% of the costs up to $30,000
• You can get free rent for 5 years in one of their tech centers, or they will help cover the cost of rent if you set up somewhere else in Chile
• You get $25,000 per local worker you hire to help cover training costs
• Labor is cheap, with a typical engineer earning about $15-30K

Vivek Wadhwa who wrote the post at TechCrunch sums it up this way:

Chile is a thriving democracy with one of the most open economies in South America. In fact, if I was starting a new tech company and didn't need to be in any particular area, I'd start it in Chile in a heartbeat. What really struck me was how many Chileans I met who boasted of their country being a "land of immigrants." Everyone told stories about how Chile was built by immigrants and welcomed the world's most skilled and most oppressed. This reminded me of how America used to be before the xenophobes started blaming immigrants for all their own shortcomings and misery.

(Thanks to Ben Cunningham for passing this information along).

Economists never seem too bothered by the realities of what they study.

To most of us, the purpose of an economy is to facilitate commerce and create jobs.  So it follows that a recovery should include increases in employment.

However, we continue to hear that this may be a "jobless recovery."

The latest poll from the NFIB suggests that any recovery including jobs is still not in sight.

In September, small business owners reported a decline in average employment of 0.83 workers per firm during the prior three months, a substantial improvement from May but virtually no change from July and August and historically the sixth largest loss per firm in the 35 year survey history (the record is negative 1.26 in May, 2009).

Only seven percent of the owners increased employment and 23 percent reduced employment, yielding a seasonally adjusted net negative 16 percent of owners decreasing employment in the last three months, unchanged from August.  The job generating machine is still in reverse.  Sales are not picking up, so survival requires continuous attention to costs, and labor costs loom large.
 
This is not a recovery to those of us who care about small businesses on main street.

There is a new group trying to focus the discontent of the Millennial Generation -- it is called the Year of Youth.  Their focus:

The message of liberty, localism, and the decentralization of power are ideas whose time has come.

I have sensed a strong libertarianism in this generation.  It will be interesting to see if this group can gain traction and achieve their goal of mobilizing the Millennials into political activism and fundamentally redefining policy beginning with the election of 2012.

The current notion that we are in a recovery, but that unemployment may not improve for many months (most predict it will be over 10% for some time) is preposterous.  There is no real recovery until people are able to find jobs and get back to work.

So just where are these jobs going to come from?

Even the New York Times seems to understand that there is no recovery without jobs.  However, as seen in an editorial from Sunday's NYT, they really don't understand what history and economics teach us about how job creation really happens in a recovering economy.  From the 10/4/2009 NYT:

If successful, ambitious goals like health care reform and energy legislation may generate jobs, but officials have not persuasively linked them to job growth. Congress and the administration also have not done enough to directly create jobs. That could be done with more stimulus to spur job creation, or a large federal jobs program, or tax credits for hiring, or all three. Or surprise us. Just don't pretend that the deteriorating jobs picture will self-correct, or act as if it is tolerable.

So all we need is government to do more, and we will be OK?  Sorry, neither big government nor big corporations feeding at the government trough have ever brought us out of a recession and into a sustainable recovery.

Carl from Chicago at the blog Chicago Boyz has written a well reasoned excellent counterpoint to the editorial at the Times in a blog post yesterday (it is well worth your time to read his entire post):

A parallel item is that most job creation doesn't come from large enterprises, it comes from smaller companies. These companies have been hammered by the recession, and find it difficult to raise capital. These companies are also very likely to be impacted by items like the probably rise in estate taxes, and the continued increase in marginal tax rates, which reduce the payoff to match the significant risks taken by entrepreneurs. Minimum wages are higher, and any sort of employer mandate on health insurance will be a body blow that has to color any sort of hiring decision on the horizon.

The overall summary isn't that I have the answers to the "job creation" conundrum; the summary is that at least I understand that jobs don't "exist" independent of a need for labor by profitable enterprises that overcomes all the uncertainty, other options, and hurdles involved in this sort of decision in the current difficult business climate.

Creating jobs -- sustainable jobs -- will take a long time, a lot of hard work, and some significant risk taking from entrepreneurs around the globe.  Asking the government to "do more" will not create any jobs.  An activist governmental policy toward the economy will only inhibit these entrepreneurs from doing their work.

(Thanks to James Shewmaker for passing along the Chicago Boyz post this morning).

Though overall unemployment has reached 9.8%, hiring by small businesses is up almost 2% year to date according to SurePayroll's Small Business Scorecard monthly survey.  It is important that we clarify this glimmer of good news by clarifying that the increase is largely due to the fact that independent contractor hiring is up 14% year to date. But we will take any good news right now. 

Click here to view the full SurePayroll Small Business Scorecard.  

The job news today is not good.  What is most concerning to me is that the data shows a real permanence in job loss.  It will take time to rebuild the economy and create new jobs.  Traditionally this is the realm of entrepreneurs, but nothing going on in Washington seems to reflect this.  Every day brings news of higher taxes, new taxes, new fees, and new regulation.  All of this is going to inhibit the entrepreneurial job machine.

Here is the analysis of William C. Dunkelberg, chief economist for the National Federation of Independent Business, take on today's news in light of the results of the NFIB's monthly economic survey that will be released on Tuesday, October 13:

"Small business owners in September reported a slight decline in average employment per firm of 0.83 workers (seasonally adjusted) during the last three months, virtually unchanged from July and August but better than the record loss of 1.26 workers posted in May. Seven percent of the owners increased employment by an average of 2.3 workers per firm while 23 percent reduced employment an average of 4.3 workers per firm (seasonally adjusted). 

"The 'job generating machine' is still in reverse. The BLS and ADP reports agree with the NFIB surveys - job losses are unusually heavy among the smallest employers, who are struggling to reduce costs and survive the longest recession since the 1930s (21 months now compared to an average of about 9 months in recent decades). The reduction in labor costs (e.g., jobs) has been huge. Retail sales are rising (even excluding cash for clunkers) but not enough to trigger the hiring of additional employees. If there are any job gains, credit the usual sectors:  education, healthcare and government (all government-driven of course)."

There is increasing evidence that a VAT (Value Added Tax) tax could be in our future. 

A VAT tax is one that is added and each step of the production and distribution of a product.  It is calculated by estimating the market value added at each stage of its manufacture or distribution.  Although much of this tax is hidden from the consumer's view (there goes transparency once again....), it is of course ultimately passed on to the consumer in higher prices.

This is not the same as a simple and very transparent sales tax, which is my tax of choice.  VAT is not just added at final point of sale, it accumulates along the way.

What does this mean for small business?  Much more complicated tax compliance.  If you want to see how complicated it can get, look here at how the VAT works in the UK.

James Pethokoukis of Reuters wrote yesterday that there is growing enthusiasm for a VAT tax in Washington:

Liberals love the idea of a VAT because it's, well, so European -- also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.

This is not being floated as an alternative to income taxes, which will soon be soaring much higher at the state and national level, but in addition to this system.

So in addition to the 70,000 pages (and growing) of income tax code to follow, entrepreneurs will now be burdened with another complex system of taxes to report on and pay.  The worst part is that tax compliance is already much more of a cost burden for smaller businesses -- this will only compound that cost.

Under the Senate plan to overhaul our healthcare payment system, small businesses may end up with no choice but to adopt a public "option." 

Beginning in 2013, all plans that cost more than $8,000 for individuals and $21,000 for families would be subject to the high cost plans tax of 40%. Since small employers face higher premiums due to their smaller risk pool and weaker bargaining position, this tax would hit them particularly hard. 

In addition to adding new taxes to the cost of health insurance premiums, the Senate Finance Committee's current version of the bill would place a $2,500 cap on FSA plans, beginning in 2011.

Senator Sam Brownback describes an additional feature to this plan in a report issued yesterday:

"The FSA cap would not be indexed, so the value would quickly diminish over time. Within just the first ten years, the value of a $2,500 contribution would fall to less than $1,700, meaning a greater percentage of families' out-of-pocket costs would be subject to taxation.  And for individuals who currently contribute more than $2,500, the cap would translate to an immediate tax increase. For a family with taxable income of $66,000 that had contributed $5,000 to a health care FSA, the $2,500 limit would result in a federal income tax increase of $625 and a payroll tax increase of $191 - a total tax increase of $816."

Using hidden tax traps like these are clearly meant to force employers and their employees into a federal healthcare payment system by driving up the cost and limiting the benefit of private plans.

So much for a new age of transparency in government.