On Those First Quarter GDP Numbers

It’s hard to be an entrepreneur and at the same time be a pessimist. Entrepreneurship really requires optimism. Of course, that optimism must be rooted in reality.

 

It’s been tough, therefore, to be an entrepreneur in recent years, not to mention an economist for a small business group. After all, you long to be optimist on the economy, but policymaking has made robust optimism simply not realistic.

 

We were reminded of this unfortunate fact when the U.S. Bureau of Economic Analysis released its initial estimates on first quarter GDP last week. After one of the worst recessions in the post-World War II era ended in mid-2009, the subsequent recovery has been grossly under-performing.

 

During periods of economic recovery/growth, based on data over the past six-plus decades, we should be experiencing real growth averaging at least in the 4.0 percent to 4.5 percent range.

 

Real GDP growth in the first quarter came in at a mere 2.2 percent. And during this recovery, growth has averaged only 2.4 percent, without growth in even one quarter touching 4 percent.

 

Quite simply, it continues to be one of the worst economic recoveries on record.

 

But, again, given the egregiously anti-growth tax, regulatory and spending policies; largely nonexistent U.S. trade policy; and misguided monetary policy that have dominated for more than four years now, no one should be surprised by this dismal economic record.

 

Particularly troubling in the first quarter GDP data was the fact that private nonresidential investment was so poor, with investment in structures falling by 12 percent, and software and equipment only inching forward by 1.7 percent. That’s troublesome now and for the future.

 

Looking ahead, if such policymaking persists, no one should be surprised if the U.S. meanders along in a Europe-like sluggishness.

 

Of course, things do not have to be that way. Our nation can return to economic greatness and leadership if we choose to unleash the creative power of entrepreneurs, investors and businesses by getting government out of the way, that is, by permanently and deeply reducing tax rates, deregulating, reining in the size of government, advancing free trade, and refocusing monetary policy on price stability.

 

That would be cause for entrepreneurial optimism rooted in policy reality.

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.  

NY Post Commentary on Jobs and the Economy

SBE Council chief economist Raymond J. Keating had an article published in the July 11 New York Post titled "Behind Our Worsening Jobs Picture."

Check out the article here.

State GDP Growth Reflects Weak Recovery

Earlier this month, the U.S. Bureau of Economic Analysis released its latest estimate of real GDP by state.

The good news was that real state GDP grew in 48 states last year, compared to only 10 states experiencing positive growth in 2009. Nationally, real GDP by state expanded by 2.6 percent in 2010, after shrinking by 2.5 percent in 2009 and declining by 0.3 percent in 2008.

In 2010, the top growth states were North Dakota at 7.1 percent (benefiting from energy production), New York at 5.1 percent (getting a big boost from finance and insurance), and Indiana at 4.6 percent (aided by durable goods production).

Meanwhile, only Wyoming and Nevada suffered declines in real state GDP - with Wyoming at -0.3 percent and Nevada at -0.2 percent. Nevada was hit hard by another big decline in construction.

However, while growth was uneven across the nation, these state-by-state numbers reflect the reality of an overall under-performing economic recovery. During years of economic recovery and growth, annual real GDP growth should be in the range of 4.5 percent.

Most sobering, though, is the reality that real GDP by state in 2010 came in below the level it was in 2007 -- $13.144 trillion in 2007 versus $13.1 trillion in 2010.

At the state level, 22 state economies were smaller in 2010 than they were in 2007.

More than three years of activist government, particularly at the federal level, has taken a heavy toll on the economy. State level lawmakers, Congress and the White House need to lift the burden of government activism (including unprecedented increases in spending and regulation), so that the private sector - in particular, entrepreneurs and small businesses - can lead the economy back to robust growth across all 50 states.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

A Different, Real Road to Economic Recovery

The big government juggernaut almost seems unstoppable in our nation’s capital these days. Higher taxes. More regulation. Government bailouts and takeovers.

And of course, government is supposed to lead an economic recovery.

One might think that no one in Washington, D.C., is presenting an alternative to the drive led by President Obama to set up government as the answer to all of our economic woes.

In reality, though, there are some voices presenting alternatives. What’s nice is that, contrary to what’s being peddled under Obama-nomics, these ideas actually make economic sense.

In a March 2 Wall Street Journal op-ed, Congressman Paul Ryan (R-WI) presented some key ideas that would help get our economy back on track.

• Ryan proposes that the top personal income tax rate should be reduced to 25 percent, rather than increased to 39.6 percent, as proposed by the President. Also, the lower tax brackets would be combined into a 10 percent rate on the first $100,000 earned by couples.

• The United States’ noncompetitive corporate income tax would see the top tax rate drop to 25 percent as well.

• Rather than pushing through a 33 percent increase in the capital gains tax rate, Ryan proposes eliminating the capital gains tax.

• He also suggests implementing a market-based price guideline for monetary policy in order to guarantee sound money.

• And he wants to implement reforms that provide “permanent solvency” for Medicaid, Medicare and Social Security.

When the failure of the Obama agenda of more government becomes more widely recognized, we will need ideas like these to turn the economy in the right direction.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Will the House-Passed Stimulus Help Small Business?

The big rush is underway to push through the “economic stimulus” package. The U.S. House advanced their version of the bill yesterday, and without one Republican vote. Just about every single politician supporting the bill can’t say for sure whether it will help the economy or not. If that is the case, then why are they risking nearly $900 billion ($1.5 trillion with interest) of our tax dollars on a massive spending measure that may not work?

For small business owners, the tax items in the House bill are generally worthless.
Yes, small business owners who have cash-on-hand may benefit from the extension of Section 179 expensing (if they decide to make an investment). But for many small business owners who are lucky to have discretionary cash and capital, uncertainty in the economy as well as where Congress will take tax and health care policy this year and next has them hanging onto every penny of profit. Of course, for those small business owners who struggle daily to get by (what cash flow?) – the tax measures mean very little.

SBA loans may get a recession make over, but from what I have read about program changes (and given the outlook for the economy) my guess is that these modifications will only marginally help small businesses.

There’s a lot of spending in this bill and it appears that a big chunk of it is directed to the states to cover their losses (another bailout for bad planning and decision-making), and to support existing federal programs. Yes, $188 billion in new construction/project money has been included, but unfortunately two conditions in this gigantic bill – the prevailing wage requirement (Davis-Bacon) as well as the E-verify mandate -- mean that small businesses will be put at a competitive disadvantage when bidding on these federal projects.

While the Senate package is shaping up to be even bigger that the House bill (and more bipartisan, I might add), some of the tax measures under consideration seem to be more beneficial for small businesses (an AMT fix, etc.).

If Congress took more time to get additional input on the package, they would find out what the true source of pain is for small firms and address those accordingly. Payroll tax relief would certainly help small business owners and their employees. Such a move would put more resources in both of their emptying pockets. Making some of the current tax relief measures permanent (like personal income tax rates, the research and development tax credit and capital gains taxes) would allow for entrepreneurs to plan “long-term” rather than worrying about what financial tools and resources they will have at their disposal in the future. And, giving self-employed people tax parity with larger companies in deducting health insurance is a long overdue move, and certainly needed right now.

It’s important that Washington act boldly to get our economy back on track. But it’s more important that they do the right thing at this critical moment.

Karen Kerrigan, President & CEO