Wednesday, March 28, 2012

Washington On The Back Of Small Business

Washington On The Back Of Small BusinessSmall businesses, private companies that employ fewer than 500 people, as defined by the Small Business Administration, employ nearly half of the American workforce. Small business, not Corporate America, is the cornerstone of the American economy. Salaries earned from small businesses are the primary driver of consumer demand, 70% of the American economy.

Small business hiring is integral to consumer spending, and it is therefore integral to economic recovery. Some 28 million unemployed, underemployed, and "marginally attached" workers, drawing an average of less than $16,000 in unemployment benefits and wages from menial jobs, have all but lost their status as “consumer spenders”. These 28 million people have little chance of landing good jobs and contributing to the economy as long as small business is under attack through regulations and taxes.

The regulatory environment has become incredibly daunting for the small business owner. In 2010 the SBA published a report (.pdf) that stated that government regulation cost US small businesses an average of $8,000 per employee in 2008. The American Enterprise Institute reported an average cost of nearly sixteen thousand per employee! If these numbers weren't scary enough, we must keep in mind that they were derived before the advent of the Patient Protection and Affordable Care Act ("Obamacare") and hundreds of additional intrusive business regulations from a menagerie of alphabet soup agencies.

If small business owners’ attitudes toward regulation are any indication of willingness to hire, we’re in big trouble. According to the July 2011 Small Business Outlook Survey, published by the US Chamber of Commerce, nearly 80% of small business owners view the current regulatory environment as unreasonable, and 85% say they are somewhat or very worried about the impact of new regulations on their business. Nearly all of the survey participants chose regulation as one of the greatest impediments to hiring.

And we cannot discount Washington's threat of tax increases on the small business owner.

Much talk has been made in Washington about raising taxes on individuals who earn more than $200-250K per year. This is especially bad news for many small business owners, who file their businesses through their individual tax returns. Such a tax hike would punish the small businesses capable of hiring while doing essentially nothing to raise taxes on the targeted "millionaires and billionaires", the majority of whom earn their money through capital gains.

Corporate and governmental hiring aren't sufficient to spur a true economic recovery. There cannot be a true recovery until small businesses hire en masse, and that won't happen until Washington gets its claws off the backs of small business owners.

Tuesday, March 27, 2012

The McJobs Recovery

The McJobs RecoveryIn their zeal to report positive economic news, the mainstream media often forget that employment has both a quantity and quality component. While it's true that there has been a slight uptick in hiring over the last couple of quarters, it is also true that federal income tax withholdings are down from last year. In other words, people are earning less in taxable wages.
If the American economy added nearly 2 million jobs over the past 12 months, as the BLS asserts, but federal withholdings are down, that means that the majority of new hires have taken low-paying jobs. Indeed, nothing says economic recovery like "you want fries with that" from the mouth of a former high-wage earner.

Monday, March 26, 2012

Deadbeat Uncle Sam: Bringing Down The Whole Family

Deadbeat Uncle Sam: Bringing Down The Whole FamilyThere is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved. 
Ludwig von Mises

Money Monetary Theorist Cullen Roche opined on Seeking Alpha last fall that high levels of sovereign debt are beneficial to an economy during a balance sheet recession. With all due respect, Mr. Roche is dead wrong.
In 2010 Carmen Reinhart and Kenneth Rogoff (of This Time Is Different fame) published an eye-opening National Bureau of Economic Research working paper in which they determined the effects of heavy sovereign debt on GDP. According to Reinhart and Rogoff, government debt inexorably becomes a drag on an economy after passing 90% of GDP.

Last year three economists from the Bank for International Settlements wrote a follow-up to the NBER piece which verified Reinhart and Rogoff’s conclusions. Using 20 years of data from 18 OECD countries, Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli found that, with debt-to-GDP ratios above 85%, GDP falls an average .1% for every 10% rise in aggregate sovereign debt. This is an important revelation, as the U.S. debt-to-GDP ratio since the financial crisis has blasted past 85% to over 100%.

Highly indebted nations, which hurt their own economies with profligate spending, often spend even more during times of economic duress. This is precisely what the U.S. has done, and this is a primary reason why the “recovery” has been so anemic. Using the formula outlined in the BIS paper, the current level of U.S. sovereign debt is decreasing quarterly GDP growth by .75%. That means that, if the government had tightened its belt at 85% debt-to-GDP, quarterly GDP growth would currently be hovering around the post-WWII average of 3.28%. In other words, we would be recovering instead of just treading water.

Our deadbeat Uncle Sam is bringing us down. In fact, the Peter G. Peterson Foundation suggests that, at the current level of growth, our dear uncle's debt will eventually pull us into perpetual recession.