Public Policy, Economics and Entrepreneurship: March 2010 Archives

In recent posts I have shared my growing concerns that we may be entering a prolonged recession that could drag on for the next decade.

Well, I may have been too optimistic.

James Pethokoukis pointed to a paper in his blog today by economist Robert Gordon that makes the following economic forecast for the next two decades:

"The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington."

If Gordon's forecast is correct, America could become the latest economic powerhouse to lapse into a prolonged period of stagnation.  We may be faced with our own lost decades, just like Japan faced in the 1990s and beyond.

However, all is not lost.  A twenty year economic funk is not inevitable.  Remember that economists generally forecast forward from the current state as it now exists.

As Pethokoukis points out, we can change direction to hopefully head off what is now being forecast:

"America faced a similar turning point a generation ago. During the Jimmy Carter years, the Malthusian, Limits to Growth crowd argued that natural-resource constraints meant Americans would have to lower their economic expectations and accept economic stagnation -- or worse. Carter more or less accepted an end to American Exceptionalism, but the 1980 presidential election showed few of his countrymen did. They chose growth economics and the economy grew.

"Now they face another choice. Preserve wealth, redistribute wealth or create wealth.  Hopefully, President Barack Obama will choose door #3. Investing more in basic research (not just healthcare) would be a start, as would slashing the corporate tax rate. A new consumption tax would be better for growth, but only if it replaced the current wage and investment income taxes. Real entitlement reform would help avoid the Reinhart-Rogoff scenario. The choices made during the next few years could the difference between America in Decline or the American (21st) Century."

Part of door #3 needs to be a shift in policy to help entrepreneurs.  We cannot burden them by expecting them to pay for an ever expanding government with higher tax rates.  And we should not regulate them into oblivion because of the past sins of corporate America.

A post by Jonathan Ortmans, president of the Public Forum Institute, at Entrepreneurship.org led me to reflect on the changes we are seeing being ushered in America.  Ortmans made the following observation:

"We have long been aware that American education is struggling to stay competitive. We also know that the development of entrepreneurial skills, such as opportunity recognition and prudent risk taking, are not prioritized in most U.S. educational institutions. Developing tomorrow's talented, capable innovators is a challenge that will require entrepreneurially-driven improvements in education at all levels.

"Programs that introduce students to the possibilities of business creation are few, but they have proven that they can open up new horizons for talented kids and unleash an entrepreneurial drive would otherwise lay dormant."

But just where does the American entrepreneurial drive that we take for granted come from?  What is the source of the entrepreneurial flame that burns so brightly in the students who come to programs like ours at Belmont?  The answer is our culture.

Since our founding, our culture was fostered by our freedoms.  We created an economy based on economic freedom that rewarded self-reliance and ingenuity, rather than family power and birthrights as had been so common in the histories of our founding fathers and mothers. 

Ours was this economic system that shaped our values over the generations.  We celebrated those who succeeded, holding them up as icons of what was possible for all of our citizens.

We have added the likes of Hewlett and Packard starting an industrial empire out of their garage into the stories that informed our culture.  Even more recently, the stories of technology companies like Dell that started in college dormitories have become part of our folklore.

But now our public policy is moving toward the next stage of a fundamental shift that threatens this part of our culture.  We are seeing self-reliance being replaced by entitlement.  We are seeing the creation of wealth and economic success being vilified.  Property and wealth are no longer things created out of nothing by entrepreneurial individuals seeking opportunity in the market, but public goods to be doled out by government and its armies of bureaucrats.

I fear that the current generation coming into the workforce -- the so-called Entrepreneurial Generation -- may be the beginning of the end. 

The children being born today will know an America where society and government are expected to provide for them and to solve their every problem.

I truly fear that the entrepreneurial flame that has burned so brightly in this country will begin to dim.

Those of us who teach entrepreneurship cannot ever teach the entrepreneurial drive and the spirit of free enterprise.  I am only successful because those who come to our program have that drive deep in their core values.

I can teach how to evaluate opportunities in the market, but I cannot instill the drive to do so.  I can teach how to assess and manage risk, but I cannot build a class to train students to have the entrepreneurial spirit that seeks the rewards that come from risk-taking.

Entrepreneurship will not go away, but it will not be the fundamental part of our culture and our economy that it has been in the past. 

There is still time to protect the entrepreneurial flame, but it is already beginning to flicker.

Business Insider presents a good summary of the taxes that just got added to our burden due to the passage of the healthcare bill.  They also offer a summary of the major things wrong with this bill here. 

Here is my final thought from the Economics Blogger Forum....

One of the economists in attendance here today said that while he respected the enthusiasm of people sounding their voices through the Tea Parties, "populists rarely have ideas for effective economic policy."

After hearing the bickering about economic policy nuance throughout the day today, it is clear that economists have little understanding about the day-to-day hardships being faced by small business owners on Main Street. 

It it is time to listen to the economic wisdom of the populist entrepreneurs across America when they tell the government, "Let us keep our money and get out of our way!"

We had a rather spirited discussion in a small group breakout late this morning session here at the Economics Bloggers Forum here in KC.  It centered on what really caused the recession.  The argument was made by Michael Mandel (formerly of Business Week) that we had very few real technological innovations introduced into our economy since 1998.  What is interesting to me is that this may partially explain why we are seeing no entrepreneurial job growth pulling us out of the recession.  In all past recessions it has been entrepreneurs who have kindled new growth.  The argument may be that there is no real base of new technology to build from to jump start a recovery.

The good news is that Bob Cringely asserts that there is a technology seedbed out there that may yet spur long-term growth.

I am blogging from the Economics Bloggers Forum today at the Kauffman Foundation in Kansas City.  As a non-economist what I have taken away from the discussion so far this morning is that the long term economic forecast is pretty bleak, and that few of the economists can agree on what has happened to us and what we need to do.....

A new survey of small business owners by Brother International Corporation found that small business owners are still hunkering down. 

The survey revealed that more than half (53 percent) of small business owners believe stockpiling cash is the best strategy for surviving the current economic climate, as opposed to investing in their business. This is a wise and prudent strategy right now.  The economy is a long way from recovery and more shocks could be in our future.  Cash is the best cushion against uncertainty.

The same survey showed that the majority of small business owners (79 percent) will strive to make their company more efficient this year.  Bootstrapping is back in and is a great path to higher cash reserves.

Additional results from the survey include:

• 15 percent say they would give up 10 percent of their company in exchange for a guarantee that they'd be protected from negative economic effects in 2010.
• 51 percent of small business owners find that their stress level is at the highest it's ever been, or higher than usual, as a result of the economic climate. In fact, close to half (48 percent) of small business owners think about their business while trying to fall asleep.
• 65 percent of small business owners believe they put in more hours than if they worked for someone else.
• 50 percent of small business owners enjoy the flexibility that comes with "being your own boss"
  
• 35 percent enjoy being able to pursue their passion.

The "kinder and gentler" IRS that came out of the restructuring the agency over a decade ago may be about to pass.  From a commentary by Robert Teuber in the Wisconsin Law Journal:

"Most veteran IRS agents, particularly in the collection division, will tell you that the 1998 Restructuring Act emasculated the IRS and was perceived to have stripped its agents of both their power and autonomy. At the time, it was said that a kinder, gentler IRS emerged.

"The trend is now a return to the type of behaviors that preceded the restructuring. Do not misunderstand me -- I am not suggesting that the IRS is acting inappropriately. But I will say that agents have overcome the fear of acting aggressively and the sense of impotence that existed in the years following the Restructuring Act."

Entrepreneurs need to vigilant when it comes to tax compliance, as the flood of new agents has business owners in their cross-hairs.

One area that is getting close attention is the status of independent contractors.  Over the years the IRS has tightened up their definition of employee versus independent contractor.  Now they going to do 6,000 audits over the next three years specifically looking at this issue.

There are twenty triggers that can lead the IRS to disallow independent contractor status.  Here is a link to the IRS website definitions.  Do not take chances with this issue.  If you have any doubts, check with your CPA.

This is not the only targeted area for audits that will impact entrepreneurs. Small business owners will definitely be under the IRS microscope for several years to come.

In almost every previous recession it has been small businesses that created the job growth that pulled us out of high unemployment.

According to the latest poll of small business owners taken by the NFIB, small businesses are not yet moving into job creation mode.

Over the next three months, 8 percent of small business owners surveyed plan to reduce employment (down 2 points), and 13 percent plan to create new jobs (up 3 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, unchanged and still more firms planning to cut jobs than planning to add.

"Net job creation will appear in the coming months, but the gains will be painfully slow with timid consumer spending, especially in the service sector," said William Dunkelberg, NFIB's chief economist.

Owners complained that poor sales are their top problem, and there is no need to hire with no new customers. In this sales environment, it is hard for workers to earn their pay. Owners cannot pay workers more than the value they add to the firm.  This is why a jobs tax credit will do little to increase employment.  No one can pay $40,000 for a worker to get a $5,000 tax credit unless that worker can add at least $35,000 in revenue to cover the cost of hiring.  And as long as the tax credit issue is alive in Congress and not passed, employers that were ready to hire (13 percent plan to hire) will wait until they can qualify for the credit, delaying much needed gains in employment.

More evidence that those shaping our current economic policy are completely out of touch with the realities of owning a growing a small business.

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement this morning on February job numbers based on NFIB's monthly economic survey that will be released on Tuesday, March 9. The survey was conducted through February 28 and reflects 799 small business owner respondents:

"In February, small business owners reported a seasonally adjusted decline in average employment per firm of negative 0.13 workers during the prior three months, an improvement from the January reading of negative .52 workers per firm.  Ten percent of the owners increased employment by an average of 5.0 workers per firm, but 19 percent reduced employment an average of 3.2 workers per firm (seasonally adjusted).  Lower layoffs and jobs from new firms should produce a better jobs number, but it won't be great.  There still isn't any energy in hiring."

The importance small businesses for both job creation and job loss in our economy is highlighted in a new study from the SBA Office of Advocacy.  Through much of the 1990s and and into the 2000s, small businesses accounted for 65% of new jobs created in the economy. But since the recession took hold, small business has accounted for 60% of job losses.

Over the 15-year period from 1993 to 2008, small businesses created some 65 percent of the net new jobs in the private sector, according to conservative estimates cited in a new report from the SBA Office of Advocacy.

Advocacy economist Brian Headd notes that many of the new jobs were in new business startups, but an even larger share were in expanding firms of all sizes--particularly mid-sized firms with 20-499 employees.

"More and more, we're finding that both new startups and ongoing high-growth firms have important roles to play in the labor market," said Acting Chief Counsel for Advocacy Susan M. Walthall. "Fast-growing firms scattered across the economy create a large share of jobs--and because no one can predict which idea will be the next to catch on, it's important to create an environment in which a wide spectrum can start up and expand."

Advocacy's analysis of the quarterly Bureau of Labor Statistics data show that over the 15 years from 1993 to mid-2008, 31 percent of net job gains (jobs created minus jobs lost) came from the opening of new establishments. An even larger share--the remaining 69 percent--were from ongoing firms of all sizes that expanded. (These net figures are based on establishment openings minus closings and establishment expansions minus contractions.)  

But then came the recession.

In the current recession, firms with fewer than 20 employees began losing jobs as early as the second quarter of 2007. Small business have accounted for 60% of all job losses.  From 2008 to the second quarter of 2009, these smallest firms accounted for 24 percent of the net job losses.  Businesses with 20-499 employees accounted for 36 percent of job losses. The remaining 40 percent of job losses were in large firms with more than 500 employees.

Keep in mind that up until 2007, small businesses under 500 employees and larger firms each made up about 50% of the workforce.

In every past recession it has been small businesses that have kick-started job creation.  We don't see evidence of that happening right now, and federal policy is doing everything wrong to help entrepreneurs play the vital role of job creation in our dire economic situation.