California's Recession, and the Rest of Us

The October 9 Wall Street Journal featured a front-page story titled “First Into Recession, California Shows Possible Future for U.S.”

The article is a grim, sober account of what’s gone on in California – how it’s once-juiced up housing market came unwound before the rest of the nation; how the state’s economy has been suffering; and how it might signal woes for the overall U.S. economy.

For example:

• With its export businesses, manufacturing sector, professional services and big retail employers, California looks like many other U.S. states, only more so. California's $1.8 trillion economy -- twice the size of India's and accounting for about 15% of the U.S. gross domestic product -- is powerful enough to have ripple effects nationally.

• California was also at the leading edge of the nation's recent housing bubble, which is where its current problems started. Home prices in California rose higher and faster than in most of the U.S., and started weakening earlier, in 2005. Some mortgage-holders defaulted. Others struggle along under a mountain of debt. The problems spread to the state's financial sector, which was heavily exposed to local real estate. As Californians cut their spending, job losses spread from the housing sector to retail stores and auto dealers. Now the state's unemployment rate is 7.7%, among the highest in the nation.

The article closes by mentioning the impact on California’s governments. It is mistakenly asserted that government “spending can offer a buffer during times of economic weakness.” And the report mentions tax revenue shortfalls and budget deficits.

The article missed the fact that government spending sucks resources away from more productive private sector undertakings, and ignored the important point that California’s tax and regulatory structure are downright hostile to entrepreneurship, investment and economic growth. In fact, California’s tax rates on personal income and individual capital gains rank highest among the states, along with very high corporate tax rates. That’s not a positive combination for the state’s economy.

In order to revive the California’s economy in the short term and boost it over the long run, the state needs a dramatic change in policy direction – away from spend-tax-and-regulate and toward providing relief form the burdens of big government.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Obama's Health Plan and Small Business

We learned something new watching Republican John McCain and Democrat Barack Obama in the debate Tuesday evening. When I heard Senator Obama proclaim that there was no employer mandate for small businesses in his health care plan, my radar certainly went off. After all, SBE Council has carefully read and followed both candidates' plans on a range of issues impacting small business. And, we regularly update those positions on our popular "Where the Candidates' Stand on Key Small Business Issues" grid at www.sbecouncil.org. The Obama health care plan certainly included a mandate on all businesses, a "play or pay" style scheme.

Naturally, I went right to the Obama for President website and re-read his plan. Now, included in that proposal, is an exemption for "some small businesses" with respect to the "play or pay" component. Certainly, this is an interesting development, but it would be nice to know what type or size businesses will be exempt from the mandate.

As far as I can tell (and I have scoured his plans thoroughly and regularly), the "exemption" has to be a relatively new addition. In a Q&A feature on the campaign website highlighting the Obama health care plan, it reads: "Employers who do not offer meaningful coverage to their employees will have to contribute a percentage of their payroll to help offset the cost of providing coverage to all Americans." It adds, "Some small employers will be exempt from this requirement."


Again, it would be useful to know what types or sizes of small businesses will be exempt from the payroll tax penalty if they do not provide health coverage.


In addition, how small firms can qualify for the tax credit still requires more information. After all, there are strings attached to the refundable tax credit, which is a central feature of the Obama plan.

In order to qualify for the refundable tax credit of up to 50 percent on premiums paid "small businesses will have to offer a quality health plan to all of their employees and cover a meaningful share of the cost of employee health premiums," according to the plan.

What is the definition of a "quality health plan," and how much is a "meaningful share" of costs that employers must cover in order to qualify for the tax credit?

Of course, for most small businesses, high costs remain an issue. If, by definition, a quality plan means expensive gold-plated coverage, the tax credit may not help all that much.

Such details will allow entrepreneurs to conduct their own cost-benefit analysis of whether the Obama plan is a health care plan that produces the type of "change they can believe in," or one that merely imposes more costs -- the ladder scenerio is most definitely a continuation of the status quo.

Karen Kerrigan
President & CEO

SBE Council Chief Economist Statement on Coordinated Rate Cuts

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement regarding the coordinated interest rate cuts by major central banks:

“The most one can say about these coordinated half-point cuts by the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada, the Swiss National Bank and the Swedish Riksbank is that they are better than nothing.

“Monetary policy measures have run their course. In fact, when it comes to getting the economy moving, monetary policy is simply the wrong tool. What the economy clearly needs is action in terms of fiscal policy.

“But government doling out more tax rebate checks or spending more money on infrastructure are not the answers. Instead, we desperately need pro-investment, pro-entrepreneurship tax and regulatory relief. For example, slashing or killing off capital gains taxes, and large reductions in corporate and personal income tax rates would boost pro-growth incentives and revive confidence.

“Unfortunately, many of our policy leaders in Washington seem intent on going in the opposite direction of more taxes and more regulation. If that’s the policy path we take, the economy – that is, consumers, workers, investors and business owners – will pay a dear price for the foreseeable future.”

Entrepreneurs and Small Businesses Key to Boosting the Economy

Are policymakers and our elected officials focusing on the wrong measures and the wrong targets in their efforts to get our economy moving once again?

As SBE Council Chief Economist Raymond J. Keating noted today in a media release, a survey unveiled by the Kauffman Foundation on October 1 found that 56 percent of voters trust small business owners to guide the economy, as compared to only 14 percent trusting members of Congress.

The American people get it. They know that it's entrepreneurs and small businesses that are going to get the economy back on a solid growth track. Government efforts aimed at juicing up or bailing out the economy are generally ineffective. There are a range of "cheaper" alternatives that will help the economy create jobs, and spur innovation and entrepreneurship. Politicians need to focus on removing barriers that drive high costs, and hurt the profitability of small businesses.

In reflecting on the current state of the economy, Keating said today: "All of the talk and action regarding Wall Street bailouts, whether one agrees or disagrees with such measures, are at best temporary band aids. In addition, talk of another so-called stimulus plan featuring more tax rebate checks or increased government spending makes no sense. Instead, the current need is to enhance incentives for investment and entrepreneurship."

SBE Council continues to highlight a series of pro-growth policy steps for lawmakers to implement. For example, lowering or eliminating capital gains taxes on both individuals and corporations would boost the returns on starting up, expanding and investing in businesses. The U.S. would attract more business and capital by reducing its sky-high corporate income tax rate. Expensing capital investment expenditures should be a permanent option for all businesses.

Keating's plea to Congress is an urgent one: "The economy faces a crisis of capital right now. Small businesses certainly understand the need for capital to grow, and how tough it can be sometimes to find that capital. We need policy changes that alter the capital investment equation dramatically in favor of investment and growth in the U.S."

Indeed, focusing on the right target (entrepreneurs) with the correct set of policy solutions and measures will help restore confidence and economic growth.

Karen Kerrigan, President & CEO
Raymond J. Keating, Chief Economist

Hawaii or Not?

Tourism is getting socked in Hawaii. That’s right, even the island paradise is feeling the credit crunch and the tough economy.

An October 6 report in the Honolulu Star Bulletin:

Hotel revenue dropped $156 million year over year during the five-month period beginning in April, with the greatest losses -- $136 million -- occurring during the industry's peak summer months, said Joseph Toy, president and chief executive of Hospitality Advisors LLC.

"At times like these, I count the number of lights that are on at Waikiki hotels," Toy said. "It's really dim. Most of the hotels have cut their lighting to curb expenses."

The most recent hotel losses reflect a sharp 10.5 percent decline in room nights sold and a 14.9 percent drop in visitor arrivals during this year's busy summer season as compared with last year, Toy said in an analysis released today. Average room rates statewide have increased slightly to $209.55 for the summer, but substantial renovation and improvement costs and other discounting have offset most of the gains, he said.

As reported, one answer for some is to have the Hawaii Tourism Authority spend more tax dollars on marketing. But the HTA says that since its budget depends on hotel room tax revenues, there might not be enough revenues to spend more.

Hmmm, here’s a thought. Reduce or eliminate the hotel tax, which would reduce hotel room rates and boost visitors, and then let hotel owners pay for their own marketing efforts.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Entrepreneurs Need to Stay Informed, Be Proactive

Now, more than ever, business owners and entrepreneurs need to stay updated and look for opportunities to learn new and effective strategies for succeeding in these very uncertain times.

BE PROACTIVE!

The most productive thing you can do right now is to focus on ways to help your enterprise operate more efficiently, productively and competitively. Taking full control and responsibility over the things you can actually control will give you more confidence, and a clear edge in the marketplace.

More than ever, the U.S. economy and our local communities will need the innovative and job-creating output of smaller businesses -- the proactive, successful entrepreneur is always on the prowl for information, resources, networking opportunities, events, trends and other information that can help their business move forward, even during periods of economic and financial system upheaval.

Here is an important conference that I am very involved with. Individuals in and around central Florida (or from anywhere in the U.S. as this is a NATIONAL conference) are encouraged to attend this FREE and exciting event:

2008 Opportunity Conference, October 23, 2008 Orlando, FL, Shingle Creek Hotel

The Annual 2008 Opportunity Conference will be an informative full-day event, hosted by the U.S. Department of Labor under the leadership of Secretary Elaine L Chao. The 6th annual conference celebrates the contributions of the nation's Asian Pacific, Hispanic, and African American communities, and will feature a series of plenary sessions and workshops all aimed toward enabling individuals and helping small business owners succeed, and operate more effectively. Of course, there will be time to network!

This full day event offers networking opportunities, as well as sessions focused on:

• Best Practices for Pursuing Supplier Diversity Programs
• Accessing Capital: Market Trends, Creative Strategies and Time-Tested Principles
• Practical Ideas for Improving Cash Flow, Trimming Expenses and Managing Costs
• Entrepreneur Success Stories: Hear from the Orlando area’s most successful entrepreneurs
• Market Trends in the Current Economy: Responding to Consumer Needs
• How to Find and Apply for a Federal Job
• Affordable and Effective Ways to Find, Attract, and Keep Skilled Employees
• Government Procurement for Beginners: What Your Business Needs to Do to Prepare for Government Contracting Work
• Procurement Opportunities: Next Steps --Using SBA Resources to Identify and Secure Federal Contracts
• The Flexible Workplace: How to Offer and Enhance Flexibility for Employees
• How to Apply for Federal Government Grants
• The WIRED Initiative and Regional Economic Development
• SBA Resources to Start, Develop and Grow Your Business

Keynotes and Featured Guests include:

• Secretary of Labor, Elaine L. Chao
• U.S. Senator Mel Martinez
• Sandy K. Baruah, Acting Administrator, U.S. Small Business Administration
• Marilyn Carlson Nelson, Chairman, Carlson Corporate, and author, "How We Lead Matters"
• Ybeth Bruzual and Eugene Ramirez, anchors, Central Florida News 13, Masters of Ceremony

There is still time to register for this FREE conference! Please share information about the conference with friends, colleagues and others who may want to take advantage of this unique and informative, one-day event. To register, and for additional information, please visit this link: www.OpportunityConference.gov.

Unhappy Business Economists

Very little can be found of late to stoke the fires of economic optimism. Indeed, given the latest developments, it’s hard to figure out how an already-underperforming economy can possibly avoid recession.

A survey released on Monday form the National Association for Business Economics confirms this grim outlook among many economists.

As noted in an AP report, “Close to 69 percent of the economists think the economy has started or will enter a recession this year. That's up from 56 percent in a survey in May.”

The report added: “‘The general view is .... that this recession will be longer than the last two — lasting roughly one year, but relatively mild,’ the survey concluded.”

Keep in mind, however, that the survey was taken between September 8 and September 19, with supplemental questions answered on October 1-2. So, these economist might be even gloomier today.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council