Public Policy, Economics and Entrepreneurship: November 2009 Archives

What is Thanksgiving?  It has become a day to be with family, overeat just a bit on turkey, watch football, and plan strategies for Black Friday shopping. 

Each year I share the original proclamation for our American Thanksgiving holiday to remind us of the original intent for this national holiday -- to give thanks to God for our many blessings.  It is my own contribution to helping us remember the original intents of our founding fathers.

Even in difficult times we have so much to be thankful for.  But, we should never take for granted the blessings that have been handed down to us through the generations. 

"Whereas it is the duty of all nations to acknowledge the providence of Almighty God, to obey His will, to be grateful for His benefits, and humbly to implore His protection and favor; and Whereas both Houses of Congress have, by their joint committee, requested me to recommend to the people of the United States a day of public thanksgiving and prayer, to be observed by acknowledging with grateful hearts the many and signal favors of Almighty God, especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness:

"Now, therefore, I do recommend and assign Thursday, the 26th day of November next, to be devoted by the people of these States to the service of that great and glorious Being who is the beneficent author of all the good that was, that is, or that will be; that we may then all unite in rendering unto Him our sincere and humble thanks for His kind care and protection of the people of this country previous to their becoming a nation; for the signal and manifold mercies and the favorable interpositions of His providence in the course and conclusion of the late war; for the great degree of tranquility, union, and plenty which we have since enjoyed; for the peaceable and rational manner in which we have been enable to establish constitutions of government for our safety and happiness, and particularly the national one now lately instituted for the civil and religious liberty with which we are blessed, and the means we have of acquiring and diffusing useful knowledge; and, in general, for all the great and various favors which He has been pleased to confer upon us.

"And also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech Him to pardon our national and other transgressions; to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually; to render our National Government a blessing to all the people by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed; to protect and guide all sovereigns and nations (especially such as have shown kindness to us), and to bless them with good governments, peace, and concord; to promote the knowledge and practice of true religion and virtue, and the increase of science among them and us; and, generally to grant unto all mankind such a degree of temporal prosperity as He alone knows to be best.

"Given under my hand, at the city of New York, the 3rd day of October, A.D. 1789."

George Washington

A couple of interesting studies came out this week that help us better understand the direction of entrepreneurship in our economy.

A study by Microsoft suggests the most of the new entrepreneurs today are either accidental entrepreneurs or at least not folks who had aspired to become an entrepreneur before the recession.  The study found that about 70 percent of the respondents left their jobs to start their own businesses in the midst of the current recession.

The latest Global Entrepreneurship Monitor (GEM) report that looks specifically at the U.S. was just released by Babson College.  It gives a very interesting snapshot of the real face of today's American entrepreneurs.

The GEM study found that the total entrepreneurial activity actually increased in the US to 10.8% in 2008 from 9.6% in 2007.

Even though we know many of today's entrepreneurs came to starting their ventures due to the economy, they are still seeking ventures out of opportunities they have observed rather than just starting something to make ends meet.  The study found that 87% of US entrepreneurs started their businesses because of a business opportunity while only 13% started their businesses simply out of necessity.

However, even though these entrepreneurs see opportunity, they also see an increased risk of failure, which increased in 2008. 

A finding that caught me somewhat by surprise was that the typical entrepreneur is getting older.  The GEM study found that boomers are become more entrepreneurial, while the Millennials and the Gen X-ers are becoming less likely to start a venture. The results indicate a marked reduction (around 8% to 9%) in entrepreneurial activity for individuals in the 18-44 age group and an increase of a similar amount in the 45-98 age group.

The study did not differentiate the Millennials from the Gen X-ers.  My anecdotal observations from our program and others is that the Millennials seem to be holding their own, and show signs of increasing their entrepreneurial activities over the coming years, while the Gen X-ers seem to be hunkering down trying to make ends meet through employment.

In a finding that sent chills down my spine, the study found that the size of the ventures entrepreneurs are thinking about is changing.  From 2007 to 2008, the number of jobs entrepreneurs expected to create from their start-ups decreased among the smaller firms.  Not a good sign of long term employment growth.

The GEM results indicate a continuation of the trend toward a business service- and away from a manufacturing-economy. Looking at particular sectors of entrepreneurial activity, U.S. activity is more concentrated in the business services sector and less concentrated in the transforming sector than the activities of other countries in the innovation-economy group, for both early-stage and established firms.  Another bad sign for the long-term economic outlook in the US.

Finally, in terms of financing, the number of adults reporting that they had invested in someone else's business increased (to 5%), as did the amount they financed ($17,500); yet those numbers are countered by the precipitous decline in SBA lending.  It is the private sector, not the government, that is keeping the entrepreneurial engine running in our economy.

My colleague Joe Alexander passed along a map developed by Latoya Egwuekwe that gives a very stark visual display of the spread of unemployment.  Go to this site, press the play button and watch employment spread across the country over the past three years.  You may want to watch it a few times.

The driver of the old economy from the twentieth century was the auto industry.  The old saying was that if General Motors sneezes, the rest of the economy caught a cold.

The driver of the economy in this century has been entrepreneurs.  From the sounds of the latest survey from the Kauffman Foundation and the OECD, entrepreneurs seem to have caught swine flu, so the rest of the economy is probably about to go on life support.

In all 23 countries and regions surveyed, firm formation declined and exits increased.  This should be viewed as a leading indicator of job creation -- or should I say the lack of it -- as 75-80% of all new jobs came from small business over the past twenty years.  The only parts of the world that show even a glimmer of hope are Eastern European countries and Brazil, where they have seen higher rates of firm births and growth.  These are parts of the world that began to restructure to foster entrepreneurial activity even before the downturn.  However, these regions have also seen an increase in firm closures.

The U.S. (also the U.K. and to a lesser extent Spain) observed a decrease in firm entries already in 2007, when most other countries were still reporting a steady rise.

It looks like the Obama administration is considering a move to increase taxes to deal with the exploding federal deficits caused by their massive give-aways and bailouts.  Their plan would be like throwing a bucket of cold water on the embers of entrepreneurial growth in this struggling economy. 

From James Pethokoukis:

Since Obama already wants to get rid of the income and capital gains tax cuts for wealthier Americans that expire at the end of 2010, clearly what Romer is referring to is the rest of the 2001 and 2003 Bush tax cuts. Letting all the 2001 cuts -- rate reductions, child tax credit marriage penalty relief -- expire would raise tax revenues by $2.5 trillion through 2019. (These CBO numbers assume no negative economic feedback impact from higher taxes.) And letting the 2003 tax cuts on capital gains and dividends expire would be tantamount to a $350 billion tax increase through 2019. And none of this includes possible plans for a VAT that could raise $400 billion a year more to close the huge projected gap -- maybe 7 percentage points -- between spending as a percentage of GDP and revenues as a percentage of GDP.

SmartBrief conducted a survey to find out what stresses entrepreneurs most these days.  Here is what entrepreneurs told SmartBrief causes them the most stress:

Complying with government regulations   28.76% 
Staying ahead of the competition   20.80% 
Managing employees/contractors   19.47% 
Making payroll   15.49% 
Dealing with customer issues   15.49%

Here is their take on these findings:

Employees, customers and payroll worries may keep you up at night, but they lagged far behind the biggest stress factor of all: government regulations. Even the competition (which, theoretically, is trying to put you out of business), causes less stress than the government (which, theoretically, is trying to help your business). In other words, government loans and educational programs may be nice, but if Washington really wants to encourage entrepreneurial risk-taking, it needs to get out of the way so you can get a decent night's sleep.

The results are quite revealing, especially given the study I cited earlier this week that shows the real state of regulation in the U.S.

I wish we'd follow Europe's lead when it comes to business regulation (rather than socialized healthcare) -- they are slashing small business regulations to help spur new business formation all over the continent.

James Pethokoukis, a Reuters blogger, has a post based on an analysis by economist David Rosenberg suggesting that official unemployment may go well above 12% -- this means that real unemployment that includes those who have given up looking for work and those severely underemployed may hit 20%.  Here is part of Pethokoukis' take on this forecast:

Optimists, Rosenberg explains, underestimate the incredible damage done to the labor market during this downturn. And even before this downturn, the economy was not generating jobs in huge numbers. If he is right, all political bets are off. I think the Democrats could lose the House and effective control of the Senate.  I think you would also be talking about  the rise of third party and perhaps a challenger to Obama in 2012.

Read the entire post by Pethokoukis.  The implications of this, if it is true, will go way beyond simple politics.

John Wark over at his blog Old Dog New Trick discusses the new Kauffman study about job creation in America.  One of the interesting points from the Kauffman study is the importance of "churn."  From Old Dog New Trick:

Churn means we have to keep starting new companies every year. Any public policy decisions that suppress the rate of new company formation inevitably reduce potential for new job growth.

Some study questions for the reader - what public policy decisions would result in higher rates of company formation and job growth? Higher taxes in the new new government takeover of the healthcare industry or from carbon taxes in the climate bill or cuts in capital gains rates, marginal income tax rates, and corporate tax rates? Economic policies favoring or protecting large incumbent firms (say, for example, General Motors, Chrysler, big banks, and other firms that the government now owns a piece of) vs. economic policies favoring entrepreneurs and young companies?

Well said!  Read John's post for further discussion and a link to the Kauffman study.

With all the talk about taxes and healthcare, don't take your eyes off the push for increased regulation.

One of the consistent talking points in Washington is that much of our economic woes stem from under-regulation of business. 

The 31st annual Regulators' Budget Report published by Washington University in St. Louis and George Mason University analyzes the U.S. budget for fiscal year 2009 and 2010 and focuses on the growth in federal regulatory spending and staffing as it continues in the new administration. The authors, Veronique de Rugy and Melinda Warren, also focus on trends from the Bush Administration, concluding that there was a 26 percent increase in regulatory spending during this period, and debunking the myth that lack of regulation caused the financial crisis.

The push to add even more regulation on top of the dramatic increase in regulation under Bush will be yet another inhibiting factor working against entrepreneurial growth in the U.S.

Each passing month, each passing quarter, the news gets no better.  The economy is going nowhere.

The National Federation of Independent Business Index of Small Business Optimism remains wallowing near its lowest levels since the NFIB first began this survey decades ago.  In the 1980-82 recession the Index was below 90 in only one quarter.  In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn. The October index was 89.1.  The baseline for this index is 100, which is based on 1986 responses.

The latest NFIB survey found that the employment outlook is still anemic.  The "job generating machine" of our economy, small businesses, is still in reverse.  In addition to weak hiring, small business owners continued to reduce compensation at a record pace, with 11 percent reporting reduced worker compensation.  The latest survey from American Express OPEN also found that employers are cutting back on Holiday presents and bonuses to employees.   
 
Some other highlights, or should I say "low-lights", form the latest survey:

• Capital spending is weak.  Plans to make capital expenditures over the next few months fell 1 point to 17 percent, just 1 point above the record low last reached in August.  Only seven percent characterized the current period as a good time to expand facilities, down 2 points from September.
• Only a net 11 percent expect business conditions to improve over the next six months.
• The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months remained low at negative 31 percent, down 5 points and only 3 points above the record low last set in July. 
  
• Small business owners continued to liquidate inventories, and weak sales trends gave little reason to order new stocks.  A net-negative 26 percent of all owners reported gains in inventory stocks (more firms cut stocks than added to them, seasonally adjusted),
• Earnings continue very weak, which is cited as a contributor to the reported difficulties in obtaining credit. 

"The recession is now 22 months old, straining the financial resources of more and more small firms.  The economy may have turned, but it's a slow turn so far," said William Dunkelberg, Chief Economist of the NFIB.

Even though I tend to be a glass half full kind of guy, I do not share Dunkelberg's guarded optimism.  Why?  Washington continues to assume that government spending is the answer to our woes.  Until they understand that small business needs tax and regulatory relief, I see no turnaround in our near future.

The official unemployment numbers are just out for October, and the data reinforces all of the worrisome surveys that have been coming out all week:

• The unemployment rate rose to 10.2% in October, from 9.8% in September.
• The unemployment rate was 4.9% at the start of the recession in December, 2007.
• There were 15.7 million unemployed persons in October.  The number of unemployed persons has risen by 8.2 million since the start of the recession.

Government stimuli will not fix the problem in this economy.  We need to stimulate real growth, and do so quickly.  Even with a massive tax cut and other reductions to barriers for entrepreneurial activity it will take a long time to rebuild sustainable growth.  But the longer we wait, the more entrenched this high level of unemployment will become.

The NFIB has just released their employment report for October.  It is consistent with other reports we are seeing this week.

William C. Dunkelberg, chief economist for the NFIB, issued the following statement:
 
"Once again, the 'good news' is less bad news. Small business owners in October reported a decline in average employment per firm of 0.5 workers (seasonally adjusted) during the third quarter (prior three months to the survey), a marked improvement from the losses of about 0.8 employees reported in the prior three months and much better than the record loss of 1.26 workers posted in May.  

"Eight percent of the owners increased employment by an average of 3.5 workers per firm, but 19 percent reduced employment an average of 4.2 workers per firm (seasonally adjusted); both statistics are better than September readings.  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.  An increase in the minimum wage of more than 10 percent was hardly helpful, as teen unemployment has surged (over 440,000 jobs lost since April, the teen unemployment rate rose to 25.9 percent).  Still, job reductions are fading and job creation will cross the zero line by the end of the year. Eight percent (seasonally adjusted) reported unfilled job openings, unchanged from August and September.  

"Over the next three months, 16 percent plan to reduce employment (unchanged), and 9 percent plan to create new jobs (up 2 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, a 3 point improvement, but still more firms are planning to cut jobs than planning to add."

Cooptation continues to be a primary strategy in Washington these days.  We saw it in the early stages of their move to socialize healthcare.  Cooptation is a strategy to bring your opposition to the table, giving them the illusion of power, but with the intention of controlling them by making them feel like they are part of the process.

We are now seeing evidence that those who work with and finance high growth ventures might have been duped into believing that they were going to be part of the Obama administration's in-crowd.  Early on many of these folks were almost giddy as a result of the attention that the administration was paying to them.  They were promised that high growth entrepreneurs were at the cornerstone of the administration's economic policies.

Be careful what you pray for.

Higher taxes, potentially even much higher taxes, more regulation, and potentially even tighter regulation are beginning to have a significant impact on the center of the technology universe -- Silicon Valley.

In a recent post from at PajamasMedia, Michael Malone chronicles that while on the surface it may seem that good times are right around the corner, in truth all is not well in the entrepreneurial heart of the west coast:

The crucial center of the tech world - new and fast-moving companies - the meat in the technology sandwich - is gone.  Under the press of an economic slowdown, government regulations that have handcuffed entrepreneurs and venture capitalists - and perhaps most of all, an Administration that increasingly seems actively hostile to entrepreneurship and small business - high tech is hollowing out.

And this is before the impact of federalizing healthcare and the anti-capitalism death penalty known as Cap and Trade have even been passed.

But in another recent post, Malone tells us not to lose heart:

And why keep working past the point when the government takes it all away?   Why not use the remaining time - and a good network on some place like LinkedIn - to try your hand at entrepreneurship and build a virtual start-up company?    And when inflation hits, you may find you make more money sitting at home at your computer arbitraging and investing the wealth you have than actually working for an ever-less valuable paycheck.

In other words, even if Washington no longer believes you can make intelligent decisions for yourself, it doesn't mean you can't make them anyway.  And even if our leaders have chosen to be foolish, it doesn't mean that you can't choose to be wise.

But what will we do when they finish taxing and regulating the Internet?

Cooptation always leads to the same outcome.  Those who thought they had a seat at the table are pushed to the floor to fend for crumbs with the rest of us.

(Thanks John Wark who writes Old Dog New Trick for suggesting the content for this post).