Is Inc.com joining those in the media who seem to be hoping that our entrepreneurial economic expansion will slow down? You may come to that conclusion when you read their story on the Democrats' Small Business Index (SBI):
With a perfect storm of rising interest rates, energy prices, and health care costs, the health of the nation's small-business climate is at an eight-year low, according to Congressional Democrats.Combined with the impact of hurricanes Katrina, Rita, and Wilma, these conditions have "hindered the ability of entrepreneurs across the country to start and grow their businesses," Rep. Nydia Velazquez (D-N.Y.) said in statement.
The Democrats' SBI stands in stark contrast to other reports recently released, including one by the NFIB that shows a robust outlook for small business.
So why does the Democrats' SBI, once again, give a different picture than most other reports of its kind? The answer is in what they include in their index.
Many of the factors that they load into their index are macro economic variables that have never been shown to really have much a direct impact on small businesses, including balance of trade and federal deficits. While there may be legitimate reasons to be concerned about these types of measures, there is no evidence that they have any direct impact on small business start-ups or growth.
Other variables that they include are inconsequential or even meaningless for small business:
- They include the Russell 2000 index, which is a measure of stock prices of smaller public companies. The vast majority of small businesses employ fewer than 20 people and they are not publicly traded.
- They include venture capital activity. While this is an interesting factor for some discussions, VCs fund only a small fraction of one percent of businesses.
- They include a broad measure of commercial credit, rather than the more specific measure of small business credit reported by the SBA that most recently showed a 5.5% increase in bank funding of small business.
Probably the most important reason to be skeptical about the Democrats' SBI is what it does not measure. The cost/scope of regulation and tax rates have been proven in studies from around the world to be the two most important predictors of entrepreneurial activity. While the Democrats' SBI does include cost of regulations as one of their seventeen variables, they do not include a single measure related to taxes or tax rates.
Why don't the Democrats want to include tax rates in their index? Could it be that it does not fit their agenda? Who cares what really matters to small business and entrepreneurial economic development? This is politics!
