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Tuesday, January 10, 2012

2012 Outlook for Small Business and the Economy

American entrepreneurs, investors, businesses and workers are a hearty, resilient bunch. Despite government derailing the economy, and keeping it derailed for more than four years now, the private sector nonetheless continues to push ahead.

Assorted political supporters of and media apologists for big government activism have asserted that government has saved the private market from corruption and excess, not to mention unexplainable and/or unexpected shocks. If not for government action, they assert, the entire economy would have gone off a cliff. This is the same spin served up for more than three-quarters of a century regarding the Great Depression, so why not replay the fiction now?

In reality, of course, the economy of the 1930s plummeted off a cliff to great depths, and over the past four years, we fell into a deep recession followed by a grossly under-performing recovery. These were not cases of the private market failure, nor unforeseen shocks. Instead, these were unmistakable instances where misguided government policies caused great harm.

During the Great Depression, protectionism, high taxes, large increases in government spending, and unprecedented regulation wreaked havoc on private investment and business. In similar fashion in recent years, government subsidies, bailouts, so-called stimulus spending, regulatory activism, misguided monetary policy, and higher taxes, along with the threat of further tax increases, have raised costs and created uncertainties that have done real and considerable economic damage.

And even when considering the recent and potential effects of troubles in Europe, it must be recognized that Europe suffers from slow growth (and looming recession) and debt woes specifically because of government sucking up more than half of GDP, with commensurate and burdensome tax and regulatory structures.

Given the direction of public policy, it's a salute to entrepreneurs, businesses and investors that things have not been far worse over the last few years.

Keeping all of this in mind, as we look ahead, the key question is: Will policymaking change so as to unleash the private sector in 2012?

Given the political breakdown between the White House, Senate and House of Representatives, it's hard to visualize any significant changes for the positive.

Federal Spending. Some negatives could be avoided if, for example, spending is reined in during the current fiscal year. Unfortunately, though, federal outlays not only climbed to new heights in FY2011 - after unprecedented growth during FY2008 and FY2009, and a small, one-year breather in FY2010 - but are expected to increase once more in FY2012.

Tax Uncertainty. Will various temporary tax measures affecting entrepreneurs and businesses be extended for at least 2012? Unfortunately, tax uncertainty will continue to weigh on small business confidence and their general outlook in 2012.

In 2011, for example, Section 179 expensing allowed businesses to write off up to $500,000 in capital expenditures, including on new and used equipment, and new software, beginning to phase out dollar-for-dollar when total capital spending exceeds $2 million. In addition, though, for 2011, a 100% bonus depreciation applied to capital expenditures above $500,000 on new equipment, including for businesses spending in excess of $2 million. Unless changed, under current law for 2012, the Section 179 expensing level is scheduled to fall back to $125,000 (subsequently retreating to $25,000 for 2013), and bonus depreciation declines to 50%.

For good measure, at the end of this year, increases in personal income, capital gains and dividends tax rates are scheduled to take effect. At the very least, the President has called for increased tax rates on upper incomes, which would mean reduced incentives and resources for entrepreneurship, investment and job creation.

Regulatory Activism Will Abound. The Obama administration shows no inclination for reining in its regulatory activism. Just consider the President's pro-regulation recess appointments to kick off 2012 to the National Labor Relations Board and the Consumer Financial Protection Bureau. As a report from titled "President Obama starts new year with sweet pitch to his liberal base" makes clear, these were appointments meant to score political points, rather than decisions based on what makes sense for economic growth and job creation.

Given these actions and the President's campaign rhetoric, Mr. Obama seems intent on pushing a populist, liberal, class-warfare, anti-business agenda heading into the November election in the hopes that his liberal base will be energized.

These and other uncertainties and potential cost increases will continue to dampen entrepreneurial and business activity.

Considering this entire scenario, it's very difficult to envision the U.S. economy getting back to real annual GDP growth of better than 4 percent, which is where growth should be during recovery/expansion years. To the contrary, while the economy should continue to expand in 2012 due to those resilient private sector players, real growth promises to continue to be uneven and under-performing. Likewise, employment growth will continue to come up short compared to where it should be at this point in a recovery, with consumer confidence similarly restrained.

One factor that could change the outlook for 2012 is if business owners and investors see a pro-growth political majority emerging as the November elections approach. In that case, given that markets are forward-looking, growth could begin to pick up during 2012.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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