Public Policy, Economics and Entrepreneurship: June 2010 Archives

The debate over what to do about the economic mess we are in is raging among the parties in the G20 economic summit.

In one corner is the US.  The world view from this camp is to move forward with expansion of a socialistic agenda with reckless abandon.  To those now in power, the ends of transforming America from free market capitalism to government planned socialism justifies the means that, at best, will put us into years of economic doldrums and at worst could lead to economic ruin. 

In the other corner are countries for which the bloom is off the rose when it comes to socialists policies.  Much of Europe seems to be concerned that massive government spending to stimulate their economies has not worked.  They are ready to cut costs to get their budgets under control to prevent economic collapse due to massive debt.

The American administration's side of this debate is centered around the premise that without continued massive government spending, a double-dip recession is sure to follow.  The Europeans are not really disputing this, but fear a worse outcome will result from out-of-control deficits and government debt. 

Both sides are clearly rooted in the neo-Keynesian assumption that only government spending can create real economic growth.

Even many of the entrepreneurship scholars from around the globe, who I spent the past few days with at the World Meeting of the International Council for Small Business meetings in Cincinnati, seemed to part of the Keynesian renewal. 

There was scant discussion on what needs to happen to allow entrepreneurs to begin the process of stimulating long-term economic growth.  Instead, many at the World Meeting were anxiously awaiting the next stop in Turkey for the Obama entrepreneurship world tour.  Others were wringing their hands about the doom that would surely follow if the Europeans do take their foot off of the deficit spending accelerator.

As much of the world debates two neo-Keynesian world views, both based on the assumption that government is the engine of economic growth, I sit here on my back porch holding firm to a third world view.

Expansion of government will never lead to long-term economic prosperity -- only freeing entrepreneurs from the burdens of excessive government will lead us to sustainable growth.  As Milton Friedman reminded us, "The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy."

You may recall that when challenged about the health insurance mandate that was at the cornerstone of Obamacare, the President said that this mandate "is absolutely not a tax increase."

Well guess what... now it seems they say it is a tax.

In their request to dismiss the lawsuit filed by 20 states and the National Federation of Independent Business challenging Obamacare, the Justice Department today reversed course on just exactly what the nature of the insurance mandate really is.

From a statement by Karen Harned, executive director of NFIB Small Business Legal Center:

"In their court document filed today, the government brazenly seeks to hide behind a 200-year-old law - the so-called 'Anti-Injunction Act' - that prevents courts from determining the constitutionality of taxes. 

"This is an about face from what is laid out in the law. In the text of the healthcare law, the findings for passing an individual mandate specifically rely on the effects of individuals on the national economy and interstate commerce. Nowhere in the findings is the mandate referred to as a tax.  The Justice Department is now calling it a tax to try and convince the court not to rule on whether or not Congress exceeded their authority under the Commerce Clause by legislating that all citizens must purchase private health insurance or face a penalty."

Whenever I talk to groups of entrepreneurs these days I have noticed that their anger and frustration is growing.

They are angry that their taxes will going up even higher to pay for growing social programs when they are barely able to make ends meet.  Many are actually favor government help when needed, but see the direction we are headed as being beyond creating a social safety net to one that is now creating socialism on a broad scale.  They do not see how it will make sense to own a business when income tax rates go up 10-15% to pay for healthcare and new taxes such as the VAT tax and energy tax created by Cap and Trade are layered on top.

They are angry that regulation is back in style and its broad brush is beginning to hit them hard.  Many fear their thin profit margins will vanish under the weight of regulatory costs.

They are frustrated that corporate welfare has a new name -- bailouts for those too big to fail.

They are frustrated that nobody seems to listen to what they need to get their businesses back on track.  They see corporations march their armies of lobbyists to D.C. to curry favor with politicians to ensure their economic stability, while they have to make it alone in the free market.

It is amazing how apolitical many of these audiences really are.  Many in the room voted for Obama, but almost none of them are happy where things are headed.

The Tea Party movement seems to be capturing the attention of small business owners who want a voice.  Again, these include those we would traditionally call liberal and those who have traditionally been labeled conservative. 

A new poll by from SmartBrief seems to affirm the fit between the Tea Party agenda and the needs of small business.  Of those surveyed, 57% see the Tea Party platform as being good for small business, while only 23% see it as bad for small business.

A post at the blog Prost Productions interprets the results this way:

Why are so many entrepreneurs drinking from this particular cup of tea? I think it's largely a loss of faith in the current leadership of both parties, who are falling all over themselves to "help" their core constituencies with lavish, expensive government programs....

Government is about strings; entrepreneurs are about bootstraps. If they really want to help us, they need cut the strings and get out of the way so we can do our thing.

In its rhetoric, at least, the Tea Party movement seems to get it. Tea Party candidates promise to restore fiscal discipline, and entrepreneurs listen. Washington promises to help us, and entrepreneurs shrug.

 

In their rush to control everything they can get their arms around in our economy, legislators in Washington may be moving toward a banking overhaul bill that will throw even more cold water on an entrepreneurial recovery for the economy.

The bill paints with a broad legislative brush, punishing small community banks for the sins of a few of the biggest national banks.  At the point when small businesses would be starting to grow in a recovery, provisions in this bill would render community banks would be much less able to help with financing.  Since community banks are the lifeline of small businesses, this does not bode well for any possible recovery anytime soon. 

From the Seattle Times:

Although small banks would be exempt from much of the overhaul, the provisions that would apply would make it harder for community bankers to serve their customers and to expand lending, financial-industry groups say.

The proposed rules could overload many community and independent banks, said Nancy Sheppard, chief executive of Western Independent Bankers, a trade group in San Francisco.

As a result, she said, the massive overhaul would create difficulties for two segments of the banking industry: the "too big to fail" and the "too small to comply."

The Fort Worth Business Press offers one example:

For example, the legislation will impose unlimited assessments on all financial companies, including home and auto insurers and property and casualty and life insurers. Even dentists and other healthcare providers, could fall under the bill because they often allow their patients to pay in installments. Rep. Nydia Velazquez, D - N.Y., chairwoman of the House Small Business Committee, has gone on record as saying that it is "more than likely" that small health care practices, such as dentists and physicians, would fall under the scope of the new regulator. She quoted from a recent Federal Trade Commission decision that said dental and law practices are considered creditors.

So, then, are plumbers, butchers, grocers, to name a few. And, one of the industries hardest hit in the economic downturn--construction--is very concerned about the bill. The Associated Builders and Contractors believes that another federal bureaucracy will lead to additional paperwork and record-keeping requirements for small businesses.

Here is an ABA summary of all of the potential detrimental impacts on community banks from this bill.