A Serious "To Do" for National Small Business Week

With National Small Business Week scheduled for May 20 to May 26, it’s an ideal time to take a quick look at the state of small business, along with policymaking directed at small business.

No doubt, the last few years have been tough on our nation’s entrepreneurs.

Consider the number of unincorporated self-employed (Bureau of Labor Statistics data). The recent high was hit in December 2006 at 10.9 million (seasonally adjusted data), and the direction ever since has been down. There was a leveling off from early 2009 to early 2010 around 9.8 million to 9.9 million, with the decline subsequently resuming. As of April 2012, the numbers stood at 9.3 million, and has hovered around that mark for the past three months. That’s the lowest level since mid-1985.

The data on incorporated self-employed only goes back to 2000, and is seasonally unadjusted. In terms of the yearly averages, the high was hit in 2008 at 5.8 million, and has declined in each year since, registering just over 5.1 million in 2011. In April of this year, incorporated self-employed came in at 5.26 million, which was up from 5.03 million in April 2011 and 5.12 million in April 2010, but down from 5.48 million in April 2009 and 5.73 million in April 2008.

The SBA Office Advocacy’s latest “Small Business Quarterly Bulletin” also offers some annual data on business births and death, along with business bankruptcies.

The births and deaths data are not terribly up to date. But on the births side, they came in at 870,000 in 2006, for example, and then fell to 845,000 in 2007, 786,000 in 2008, and 701,000 in 2009, with an uptick to 722,000 in 2010. As for deaths, from 737,000 in 2005, they increased to 763,000 in 2006, 804,000 in 2007, 901,000 in 2008 and 877,000 in 2009.

In terms of business bankruptcies they rose from 19,695 in 2006 to 28,322 in 2007, then increasing to 43,533 in 2008, and 60,837 in 2009.  The numbers then decreased to 56,282 in 2010 and 47,806 in 2011.

No matter how you analyze these trends, the news is not good.  Therefore, it’s not good for economic growth and job creation.

That takes us to the key policy question: What can be done to help small business get back on its feet, and get the economy back on a track of solid, robust growth?

President Obama served up some ideas on May 16.  As stated in a White House press release: “Today, President Obama will visit a small business in the Washington, DC area where he will urge Congress to act on the ‘To Do List,’ specifically highlighting the need to invest in small businesses and jumpstart new hiring and entrepreneurship by passing legislation that gives a 10 percent income tax credit for firms that create new jobs or increase wages in 2012 and that extends 100 percent expensing in 2012 for all businesses.”

What about these ideas?

Well, extending 100 percent expensing for capital expenditures certainly would be a plus. Although it must be noted that its temporary status tends to shift the timing of investments, while making it a permanent option for all businesses would provide a clear incentive for investing now and into the future.

Meanwhile, the 10 percent income tax credit for firms creating new jobs or increasing wages in 2012 is more gimmicky. It certainly would give a one-year bump for small firms already hiring or planning to hire. But as for creating additional hiring beyond that, it’s unlikely to have much of an effect. Not many business owners are going to make the long-term investment in new workers based on a one-year tax credit.

In reality, the best policy course for small business turns out to be the best course of action for the entire economy. A productive “To Do” list would include:

First, all of the increased taxes and regulations that are either in the pipeline or being pushed must be stopped, including ObamaCare and its increased taxes and regulations; and massive personal income, capital gains, dividend and death tax increases scheduled to kick in at the end of this year.

Second, the massive increase in federal spending that has been imposed in recent years must be rolled back, so that those resources can be more productively used by consumers, investors and businesses in the private sector, and to remove the accompanying threat of still more tax increases down the road.

Third, a positive, pro-entrepreneurship, pro-growth agenda must be adopted that revolves around substantial and permanent tax and regulatory relief. For example, both personal and corporate income tax rates must be reduced to encourage productive economic activity, boost the bottom lines of business, and to make the U.S. more competitively globally. Ideally, capital gains, dividend and death taxes should be eliminated, as they simply amount to multiple layers of taxation that deter entrepreneurship and investment. And as noted earlier, expensing of capital expenditures needs to be made a permanent option for all businesses as a clear incentive for investment that will improve efficiency and expand production for businesses, and boost worker productivity and therefore income.

Fourth, on the energy front, the political, tax and regulatory attacks on domestic oil and gas firms not only need to be rolled back, but government prohibitions regarding both onshore and offshore oil and gas exploration and production must be removed. Such actions will help to expand supply, and reduce pressures on oil and gasoline prices.

Fifth, the U.S. needs to regain global leadership on reducing international barriers to trade. By lowering trade barriers, U.S. entrepreneurs, businesses and workers have expanded opportunities in the international marketplace, while enhancing choices and reducing prices for consumers and businesses in terms of consumer and capital goods.

Sixth, Congress needs to narrow the duties of the Federal Reserve. Namely, the Fed’s dual mandate for monetary policy, i.e., full employment and price stability, must be replaced by a singular mandate of focusing on price stability. That lone purpose makes sense for monetary policy, as inflation always is a monetary phenomenon, while monetary stimulus accomplishes nothing in terms of economic growth. To the contrary, the added uncertainties and inflationary threats that come with Fed efforts to gin up the economy only wind up hurting the economy. When the Fed is focused on keeping inflation in check, that means businesses are better able to plan and invest.

Seventh, Congress needs to place a moratorium on regulations moving through the pipeline. Across all federal agencies, the thousands of regulations being proposed and promulgated is mind-numbing and investment sapping.  The uncertainty continues to breed low confidence among entrepreneurs, and fear among investors.  In addition, intrusive and government-knows-best thinking at the Federal Communications Commission is harming innovation and investment in our nation’s broadband ecosystem and wireless infrastructure. The spectrum crisis is real, and the federal government must quickly free up more of our nation’s airwaves for auction (without conditions) and allow the private sector to utilize these and its own resources in the most effective and efficient way to create more capacity.  Unfortunately, the FCC has become an obstructive force. It first slammed the door shut on one critical merger, and now is nitpicking and micromanaging the details of another.

That’s a serious “To Do” list that would make a real, immediate and lasting difference for small businesses, and therefore for economic and employment growth.

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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.

Business Tips on TV: Chuck vs. Entrepreneurship

by Ray Keating
Business Tips on TV #4

At the end of last season, things were changing substantially for the characters on NBC’s “Chuck.” But as entrepreneurs grasp better than most, change can come often and fast.

And in fact, more change came in this season’s premiere episode that aired on Friday, October 28 - change, again, that business owners and managers understand.

As a quick review, “Chuck” features Chuck Bartowski (Zachary Levi), Sarah (Yvonne Strahovski), and John Casey (Adam Baldwin), who were fired from the CIA/NSA at the close of last season. For good measure, Chuck lost the Intersect (a computer with government secrets and fantastic skills implanted in his head), while his friend Morgan (Joshua Grimes) mistakenly downloaded the Intersect into his own brain. But using an $800 million dollar wedding gift from former bad guy Alexi Volkoff, Chuck and Sarah now own the Buy More (the electronics store where Chuck and Morgan have long worked and used as a cover), and set up their own private spy firm called Carmichael Industries.

So, now Chuck and Sarah are entrepreneurs. And some of the challenges of entrepreneurship were noted in the first episode of this fifth and final season of “Chuck.”

Most notably was the issue of funding. With their nearly a billion-dollar wedding present, one might think that funds would not be an issue. But to start up their global spy firm, cash burned quickly.

Sarah tells Chuck, Casey and Morgan: “We mowed through the Volkoff fortune on start-up costs.” Among the expenses she noted is a private jet, and “the fresh shrimp that Morgan likes to eat on the private jet.”

Ramping up a business, of course, can be quite costly. It’s not all that difficult to run through large wads of cash if expense are not thoroughly thought through and watched. And of course, the business has to start bringing in the necessary revenue.

Sarah declares, “If we’re going to stay solvent, then we have to collect soon.” That is, they need more paying clients for Carmichael Industries. But with various forces aligned against them, and their own troubles - as Chuck says, “We’re still working out the kinks” - that’s not going to be easy.

Later, Chuck talks to Morgan about the dreams he has for Sarah and himself, saying, “In order for those dreams to become a reality, I need this business to succeed.” Ah, the familiar cry of so many entrepreneurs.

Naturally, though, more woes hit the business in this first episode, with a nefarious person at the CIA - the one who fired Chuck, Sarah and Casey from the agency - gaining access to and freezing Chuck’s remaining $40-plus million.

Chuck and his team suddenly find themselves cash starved, and worried about where the spy firm is headed.

But it dawns on Chuck and Sarah that since they still (secretly) own the Buy More, then the opportunity exists to operate the spy firm. Chuck explains, “We use the store to support the spy team. We take Buy More’s profits put them into Carmichael Industries until both companies can make money. But in order for that to work, the store actually has to turn a profit.”

It’s not unusual, of course, for entrepreneurs to juggle and use profits from one endeavor to get another off the ground.

So, it seems like we’ll see more of the operations in the Buy More, which is now so critical to funding the team’s spy firm. That should be fun, as the dysfunctional Buy More is the source of so many laughs in “Chuck.” And it should provide still more business tips on TV due to that same dysfunction.

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Ray Keating is the chief economist of the Small Business & Entrepreneurship Council and the author of “Chuck” vs. the Business World: Business Tips on TV. Get the book here.

Entrepreneurs Over Members of Congress

It’s always nice to see on occasion the American people keeping things in the right perspective.

On August 5, Rasmussen Reports released a survey on how Americans view certain professions.

At the very top, 89% viewed small business owners favorably, with only 6% saying unfavorable. Similarly, 89% viewed entrepreneurs (people starting their own businesses) favorably, versus 7% unfavorable.

Small business owners and entrepreneurs even beat out pastors and religious leaders (74% favorable and 19% unfavorable).

Who came in dead last among the professions listed? You guessed it. Members of Congress were viewed unfavorably by 72%, and favorably by only 23%.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

The Self-Employed, the Recession and Vacations

It’s understandable that this tough economy makes it tougher for some people to take a vacation. Indeed, as noted in an August 4 Wall Street Journal story, it’s particularly hard on the self-employed.

In a piece titled “For the Self-Employed, It’s an Endless Workweek,” Sarah Needleman makes three key points:

• In this recession, competition for freelance work has intensified, and made it even harder for many solo entrepreneurs to get away on vacation.

• While on vacation, many self employed stay in contact through mobile devices in case of a business emergency.

• One piece of advice is to build a network with peers, so you have someone who can temporarily fill in for you.

The entire piece is worth reading.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

High-Tech Immigrant Entrepreneurs

Immigrants are critical to the well-being of the U.S. economy. And that most certainly includes immigrant entrepreneurs.

Earlier this month, the U.S. Small Business Administration’s Office of Advocacy released a new study by David Hart, Zoltan Acs, and Spencer Tracy, Jr. titled “High-tech Immigrant Entrepreneurship in the United States.”

Among the findings of a survey of “rapidly growing high-impact, high-tech companies” were:

• “We find that about 16% of the companies in our sample had at least one foreign-born person among their founding teams. This estimate is lower than that found in most previous studies of high-tech immigrant entrepreneurship. Nonetheless, our data show that immigrants play a crucial role in this vital economic activity.”

• “Policymakers are rightly concerned that government should sustain a healthy climate for starting and running high-impact, high-tech companies like those in our sample. Immigration policy, as it affects highly educated and highly experienced foreign-born individuals who might be drawn into high-tech entrepreneurship, is an important element of that climate.”

The full study can be read here.

What are the necessary policy measures? Provide broadbased tax and regulatory relief to spur entrepreneurship and investment in general, while implementing immigration reform that opens more doors for legal immigration.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Pushed Into the Waters of Entrepreneurship

For many, entrepreneurship is part of the American Dream. They want to own and run their own business.

Others – sometimes called reluctant entrepreneurs – get pushed into entrepreneurship. That is, they lose a job, and find that starting up and running their own business might be a better option than again working for someone else.

In the current tough economy, it can be a difficult decision. Once laid off, does it make sense to try to find another job, when businesses overall are shedding employees, or should one take the plunge into the entrepreneurial waters during a time of economic uncertainty and worry.

The April 27 New York Daily News ran a brief, but interesting piece on a few individuals choosing the small business ownership route, and served up some insights. In part, the Daily News reported:

It took being laid off twice in six months for Judy Goss to decide to launch her own business… Her career moves are what many people who’ve been shown the door think about: Is it better to look for a new job when few companies are hiring, or is now the right time to be your own boss?

Making the best decision will depend largely on your finances, risk tolerance, the type of business you want to launch and your drive…

Having a cash cushion is critical, said certified financial planner Scott Brewster of Park Slope, Brooklyn, because cash flow can be so unpredictable. “You might need two years of living expenses, not to mention business capital,” Brewster said. “Some businesses, like restaurants, have a highly volatile revenue stream.”

Not an easy choice. But when entrepreneurship calls, is it wise not to answer? That depends on each individual, and their particular circumstances and skills.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

A Respite From the Gloom

With people running around Washington and Wall Street proclaiming armageddon in financial markets and the economy if politicians don’t pledge to risk another $700 billion in taxpayer dollars, it’s pretty easy for an entrepreneur to get down in the dumps.

So, let’s take a brief respite from the gloom to read an article from the September 25 Wall Street Journal titled “For Entrepreneurs, Opportunity Still Knocks.” It offers some hope, noting areas where small firms might reap rewards as larger firms cut back, including perhaps cheaper facility and equipment costs, and picking up “employees at a discount.”

In addition: “Certain industries are also faring better than, say, financials and real estate. Technology, health care and leisure and hospitality are doing reasonably well these days.”

Hey, it’s something.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Entrepreneurs and a Tough Economy

The September 14 Sunday New York Times ran an interesting article (“Economy to Entrepreneurs: Turn Back”) about entrepreneurs who have decided to work for larger firms when faced with a tough economy.

The piece is mostly anecdotal – so one can debate how widespread this phenomenon is – but well worth reading.

Few in the entrepreneurial sector, however, would likely disagree with the following from the report:

Research has consistently shown that the share of employment and sales accounted for by small businesses tends to be more cyclical than for large ones, says David B. Audretsch, a professor at Indiana University and the director of the Max Planck Institute of Economics in Jena, Germany. When the economy expands, small businesses gain more than large companies. In an economic downturn, small businesses tend to be hit harder.

Suffering the most are companies in construction, manufacturing, retailing, finance and overseas travel, says Chad Moutray, chief economist of the federal Small Business Administration. As for location, he says, “small businesses have been hardest hit in areas where the housing crisis is at its worst.”

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

SOX, Government, Venture Capital and IPOs

Is government squashing entrepreneurship?

Well, did I really have to ask?

James Freeman, an assistant editor of The Wall Street Journal editorial page, has an important piece in today’s (July 18) Journal. It’s titled “Who’s Going to Fund the Next Steve Jobs?”

The piece serves up some worrisome numbers regarding venture capital and IPOs:

• Last quarter marked the first time in 30 years that not a single company backed by venture capital went public in the U.S.

• Venture-backed IPOs in 2005 and 2006 were far below the levels of the early 1990s, never mind the boom years that followed. A recovery in the early months of 2007 still didn't push IPO numbers anywhere close to the number of young companies being acquired by bigger, more established firms.

Freeman worries that the venture-funded-entrepreneurial-drive model “may be collapsing.” Why? You guessed it – the ills of government over-regulation.

There is, of course, Sarbanes-Oxley, which means entrepreneurs become paper pushers, rather than, well, entrepreneurs. Freeman notes that Kate Mitchell of Scale Venture Partners pegs the “SOX tax” at “up to $3 million per year per company,” while Steve Harrick of Institutional Venture Partners pegged the tax at $5 million.

But there’s more than just SOX. Freeman notes that people like Jack Biddle, cofounder of Novak Biddle, point a finger at “the 2003 analyst settlement forced upon Wall Street by then New York Attorney General Eliot Spitzer. The theory was that separation between investment banking and stock analysis would eliminate biased research. The result is very little research of smaller companies by investment banks.” No research? That results in “no institutional buyers or liquidity for small companies,” according to Biddle.

Like we said, government squashing entrepreneurship. Read Freeman’s entire piece, and then wonder if our elected officials will ever fix the mess they’ve made.