The Entrepreneurial Mind

For many years I have been the optimist. The enthusiasm that I experienced in my daily interactions with entrepreneurs and aspiring entrepreneurs was contagious. The data that was showing a shift to an entrepreneurial economy gave me so much hope for the future.

However, I have gotten a lot of questions lately about what caused the change from my formerly rosy outlook to what more than a few of you have termed my new personality of "Professor Doom."

I believe that things have gotten seriously off track. Why? My immediate concern is that the inflation genie is out of the bottle. As a result, I believe that we will have at least a few years of difficult times ahead of us. Once inflation takes root, as I believe it now has, there are no quick and easy solutions.

On top of these short-term worries, I have several growing concerns rooted in more macro, fundamental changes
occurring in our society, culture and economy.

First, we never seized the opportunity to create a true shift in our tax policy in this country. We know that lower taxes and a simple tax system help entrepreneurial economies grow. Our tax policy in the US is rooted in the mid-1900s. The role of taxes are to raise the funding needed to provide for the basic constitutional functions of government. But over the past 60 to 70 years taxes have become a major tool used to shape culture and implement social policies. More recently taxes have become a mechanism to direct economic behavior in directions decided upon by politicians and bureaucrats at all levels of government. We now see this at work in the entrepreneurial economy.

Second, for several decades entrepreneurship was growing below the radar in our economy. But as entrepreneurship became more dominant in our economy, politicians and their minions just could not keep their hands off. It grew and prospered so well when they left it alone. But now they are convinced that entrepreneurs cannot possibly do their work without support from governmental agencies bloated with career bureaucrats who have never had to make a payroll. We are quickly headed toward a policy of socialized entrepreneurship.

Third, there are efforts around the globe that seek to change the current economic order. Some of these are economic forces that want to replace the US role as economic leader. If they could achieve this through the power of free markets I would say congratulations and job well done. But many are using noble issues such as environmentalism and social justice as smoke screens to hide their true intentions, which include gaining economic advantage or even crippling capitalism. Those countries that control much of our supply of oil manipulate us like a dealer controls a junkie. They use the power of supply and demand as a means of keeping us dependent.

Lastly, our drift toward socialism over the past several decades has changed our culture from one based on self-reliance to one based on entitlement and dependence. Given the momentum created by the policies of the past few Presidents, and given the platforms of the current two candidates, the growth of government's role in our lives will continue expand. Sustaining our entrepreneurial culture will become increasingly difficult if this trend is not reversed.

I am optimistic that we can turn things around. I just hope we have the wisdom and collective resolve to do so.

Posted by Jeff Cornwall at 07:26 AM | Permalink | Comments (3)

The inflation news released today is not good news. We had a 1.1% increase in the CPI in just the past month, according to a report released today by the US Department of Labor. This is the kind of double digit annual inflation that many of us have been worried about. Mind you it was only for a month, but inflation can be infectious in an economy. The ripple effects of energy will soon make their way through the rest of the economy if this persists.

And if you think I am the agent of doom (and I know at least a few of you do feel that way) read what Nouriel Roubini, Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business, has to say. (Thanks to Andy Tabar for passing this along).

Posted by Jeff Cornwall at 01:26 PM | Permalink

Once again Walmart has its finger on the pulse of American consumers. Just when inflation is kicking in and the economy softens they are seeing strong growth. How? They are listening to the customer.

They are marketing aggressively and focusing on prices and values. This is just what the consumer wants to here right now.

From the St. Paul Pioneer Press:

Sales in entertainment were strong at Wal-Mart, with flat-panel televisions continuing to run in the high double-digit same store sales increases. Some retail observers see Wal-Mart's aggressive marketing of inexpensive electronics as a threat to Richfield [MN]-based Best Buy.

The Pioneer Press article also reports on flat sales at Walmart challenger Target, which has not changed their strategy of shifting up in brand quality and to a more upscale approach to merchandising

We are seeing the same thing in the restaurant market. Value sells. McDonald's is showing strong performance with increases in same store sales. At the same time, upscale restaurants are closing left and right.

Also, many entrepreneurs I know in the service sector are experiencing pressure from their customers to trim back pricing or risk losing customers to low cost competitors.

The advantage that entrepreneurs are supposed to have is our ability to be nimble. Now is a time to be very nimble.

Listen to your customers. Think like your customers. Your reality in should be built on their perceptions. Inflation is scaring them. Rational or not, it doesn't matter. It is time to focus on pricing and value.

Posted by Jeff Cornwall at 06:48 AM | Permalink | Comments (1)

My post yesterday got a comment questioning why business owners are so worried about inflation and its affect on debt.

During periods of high inflation, many small business cannot keep pace with higher costs. Their profit margins will shrink as costs go up more quickly than they can increase prices. We are already seeing evidence of this.

When margins shrink, businesses may no longer be good credit risks for banks. Their cost of borrowing money goes up. Or in some cases, they may become out of compliance with the profit margins required in the restrictive covenants in their loans. The banks may force them to move their loans to another bank. That will mean the transaction costs for the new loan and typically higher interest rates.

The Fed will soon begin to use higher interest rates to cool off inflation. The cost of debt goes up. During our last period of inflation in the late 1970s mortgage rates hit 16-18%. Higher rates hung around late into the 1980s, when we still were paying 9% for a prime plus a quarter business loan.

Inflation of 2-3% we can handle. We have had a long period of solid economic growth with modest inflation. Younger entrepreneurs have never known anything else. What many of us think is coming is double digit inflation. That changes everything. Profits will be harder to maintain. Debt will cost more and can become much more difficult to secure.

Those who get out ahead of this will have a better chance to be OK. Those who do not will have a higher risk of failure. See this recent post I wrote on steps entrepreneurs should be taking to shore up their income statements and balance sheets to prepare for a period of much higher inflation.

Posted by Jeff Cornwall at 06:37 AM | Permalink | Comments (4)

It should come as no surprise that inflation is the top concern in the most recent poll of small business owners conducted by the NFIB. What surprises me is that it has taken so long for people to pay attention.

Since 1983, the average percent of owners in the monthly NFIB poll citing inflation as a top problem has been 3 percent. As recently as February 2008, only 8 percent cited inflation as their top problem. By May, 17 percent said inflation was their top concern, and in June it shot up to 20 percent. To be honest, I worry that it is not even higher right now. The beast of inflation is on the loose and will likely be with us for quite a while.

Small business owners are planning to keep on spending -- a sign that any recession will be short and not very deep. I have argued all along that Washington is paying attention to the wrong economic issue. Plans for hiring and capital spending, as well as job openings, inventory investment plans and expected credit conditions, are all stronger than in past recessions.

Among those surveyed, expectations for real sales gains and improvements in business conditions are as bad as in 1980-82, the worst economic period in recent years. But this time is is will be inflation induced, and not a true deep downturn in economic activity. I see an economy that will be going nowhere faster and faster and faster. That is what long term inflation can do an economy. We will be busy, but will make little real progress due to the beast of inflation eating up any progress through a higher cost of doing business.

Posted by Jeff Cornwall at 06:02 AM | Permalink | Comments (1)

Americans celebrated Tax Freedom Day on April 23rd. It is the mythical day when Americans stop working for the government and start working for themselves.

The Spanish think tank Institución Futuro wrote me to let me know that they have started an initiative to celebrate Tax Freedom Day in Spain, which occurred on May 21st this year.

Since taxes have become so hidden to most citizens, it is important to get the word out about the real cost of taxation and government. I hope more groups take on this initiative.

Posted by Jeff Cornwall at 06:29 AM | Permalink | Comments (1)

In the wake of the Kelo decision of the US Supreme Court, which greatly diminished property rights in the US, many states moved to restrict the use of eminent domain. Now lawyers and politicians are finding loop holes in these laws.

A case in point can be found in the story of a Nashville business owner. From the Tennessean:

The city has begun legal proceedings to seize the property of a Music Row landowner who has refused to sell to a Houston developer, setting up a fight that has already prompted the involvement of a national advocacy group.

The Metropolitan Development and Housing Agency filed papers in a Nashville court Friday to start a process that would take the offices of Country International Records at 23 Music Circle East.

The action, the city's first test of eminent domain since the state legislature tightened condemnation laws two years ago, was taken after the agency determined that negotiations with building owner Joy Ford would not work, said Joe Cain, the agency's development director....

MDHA has argued that Ford's property can be considered blighted because it lies within the Arts Center Redevelopment District.

Dictionary.com defines blight as it relates to property as "the state or result of being blighted or deteriorated; dilapidation; decay: urban blight." It makes no mention that the property does not fit into politicians grand plan for their city. And yet, that is how the city of Nashville has redefined the word blight.

Joy Ford owns a thriving business. She does not want to sell it. As you can see from the photo below it is not what anyone could define as blighted property. Anyone except city officials eager to pander to developers.

Am I against development? No! But, I am against is the erosion of property rights in the US in this post-Kelo era.

One of my fears when the Kelo decision came down is that the same folks who were abusing eminent domain were the same ones supposedly fixing it. However, even with the passage of state and local laws to place restrictions on eminent domain, small business and home owners are at the whim of politicians and their army of attorneys who seek to increase their tax base through forced re-development.

Posted by Jeff Cornwall at 09:50 AM | Permalink | Comments (1)

According to a recent survey, 42% of NFIB members ranked the cost of natural gas, propane, gasoline, diesel and fuel oil as a "critical" problem. The issue has climbed from being the #10 ranked issue concern to the #2 concern in this year's survey.

Inflation is real and will become an even bigger concern over the coming months.

Here are two stories that the NFIB is sharing as examples of this growing problem.

Jim Buchy
Buchy Food Service
Greenville, Ohio
Buchy Food Service is a fifth-generation, family-owned business that began as a manufacturer of meat and sausage products in 1878 and is now a full-line food distributor with a 100-mile service territory. The company prides itself on service and has long claimed, "We have no minimum shipment requirements or drop-ship charges." Yet, as energy prices continue to rise, the cost of delivering goods -- a staple of the service that Buchy’s provides to its customers – has risen dramatically. The rising delivery costs are having a big impact on the 139-year-old business, causing Buchy’s to examine ways in which it can consolidate services -- something they are reluctant to do.

Douglass Henry
Henry Molded Products Inc.
Lebanon, Penn.
For over 40 years Henry Molded Products, Inc. has been providing customers with high quality molded fiber/pulp products. They produce recyclable products that are environmentally friendly using 100% pre- and post-consumer newsprint, kraft paper and other waste papers, and are a nationally recognized manufacturer of green products. Henry Molded Products relies on natural gas to create its products and now pays more than $100K per month on its natural gas bill for his factory. Over the last few years, his energy costs have more than doubled.

The NFIB is taking the right stand on this issue, pushing for more freedom within the energy industry. From a letter that Dan Danner of the NFIB sent to Congress:

Small business owners need immediate relief from high energy costs, and drilling offshore is a critical step towards increasing the domestic supply of oil and natural gas and reducing prices at the pump. Unlike some of their larger competitors, escalating fuel prices hit small businesses particularly hard because they often must absorb these cost increases instead of passing them on to their customers.

In order for our economy to regain its footing, we must be able to meet the energy needs of small businesses, and I urge your strong support of this important energy policy.

Posted by Jeff Cornwall at 10:56 AM | Permalink | Comments (1)

The Commission on Growth & Development recently issued their report on global economic development: "The Growth Report: Strategies for Sustained Growth and Inclusive Development". The report concluded that there is no fast and easy answer. It takes long-term commitment and patience to create sustainable growth in an economy.

Key conclusions of the report include:

-- Growth is a crucial part of poverty reduction and the improvement of people’s lives. It is impossible for poor countries to lift large populations out of poverty without growth. Equality of opportunity and a focus on individuals and families, gender inequalities, and economic security, however, is critical to maintaining the support for growth oriented policies. Open access to free markets is key.

-- That growth is a long-term challenge that requires leadership, persistence, stamina, pragmatism, transparency and the support of the population. In an age of quick fixes and sound bites this will be a challenge.

-- That growth requires engagement with the global economy to import knowledge and technology, to access markets, and to generate a strong export sector – critical in the early stages of growth. The global nature of our economy is unavoidable.

-- That resources, especially labor, must be mobile. The Report also recommends a bridging of the divide between the formal and informal labor sectors by allowing export-oriented industries to recruit workers on easier terms than prevail in the formal sector but with the same essential worker protection in the areas of health and safety, working hours and child labor. It highlights the need to better manage the migration challenge and the results of changing demographics.

-- Access to capital is fundamentally important.

Posted by Jeff Cornwall at 07:27 AM | Permalink | Comments (1)

Tax Foundation President Scott Hodge recently published an article (it can be found here) on the opportunity he sees for federal tax reform during the next administration -- regardless of who wins. He puts it this way, "For the first time since 1986, the stars may be aligning for a grand bipartisan compromise on fundamental federal tax reform."

Tax reform and lower tax rates are critical steps to help keep our entrepreneurial economy expanding over the coming decades.

The article outlines what Hodge believes are the five basic steps for politically realistic tax reform:

Step 1: Eliminate tax exemptions and deductions.
Step 2: Make any tax reform a tax cut and tax simplification.
Step 3: Continue to shield low-income earners with a super-deduction.
Step 4: Make everyone a stakeholder.
Step 5: Fend off the special interests.

My take -- unfortunately any progress on simplification will inevitably get undone because politicians do not want to fend off special interests. Politicians live off of special interests -- the money from K Street is what makes Washington tick.

Posted by Jeff Cornwall at 05:37 AM | Permalink | Comments (2)

The National Dialogue on Entrepreneurship reports on the findings of a long-term study to spur entrepreneurial growth in Appalachia.

A new study sponsored by the Appalachian Regional Commission (ARC) assesses the impact of the ARC's Entrepreneurship Initiative. This effort, which operated between 1997 and 2004, was the first Federal program that explicitly sought to invest in and support local entrepreneurship development efforts. Overall, the program invested $47 million into various projects, and these investments had a positive impact in terms of creating new jobs, attracting other new investments, and stimulating new business creation.

Here are the overall findings from the study:

Jobs created and/or retained 12,178
New businesses created 1,787
Students and teachers trained 11,634
Clients served by incubators 475
Actual private $ leveraged $72,802,868
Public cost / job created or retained $579 - $3,994
Public cost / business created or expanded $2,988 - $7,818:

What a wonderful story of how entrepreneurship is helping to turn around one of the poorest regions in America. What should be the next step to help these entrepreneurs? As we know from around the world, the best policy is to cut taxes and get government out of their way. But this is not the message we are hearing from the campaign trail, is it?

Sadly, Americans have not been educated in what sustains an entrepreneurial economy. Instead, we have created almost a knee jerk reaction in this country that assumes that once someone creates success and wealth through free enterprise, it should be taxed and shared with everyone else..

The positive impact of programs like this one will soon be overwhelmed by our steady drift toward socialism in the US.

Rather than celebrate the successful entrepreneur, we envy the fruits of their efforts.

As Winston Churchill warned, "Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery."

Posted by Jeff Cornwall at 05:31 AM | Permalink | Comments (1)

I have worried openly that both major parties in the US are following agendas that have little to offer for entrepreneurs. All of the remaining candidates in both parties favor programs that will lead to higher taxes and expanded roles for government.

This past weekend the Libertarian Party choose former Republican congressman Bob Barr as its presidential candidate for 2008. Might he offer an alternative choice more favorable to our entrepreneurial economy?

What helps entrepreneurs is lower, simpler taxes and less governmental involvement in the economy. These are the two of the major issues addressed thus far by Barr. He favors a massive roll-back in the role of federal government and a change to a consumption tax (which includes a repeal of the 16th amendment that created the income tax).

Does he have a chance of winning? Probably not. But, he currently is already tracking about 6% in recent polls. This is much higher than any Libertarian candidate has ever registered.

He does offer a voice for those who favor more freedom and less government. The last two Republican Presidents and the current party nominee have all left that part of their party behind. Just a Nader pulled the Democrats sharply left, as we see in the two final candidates remaining this year, perhaps Barr could help pull the Republicans back to the right.

I don't endorse candidates at this site. But I do examine how their issues impact small business and our entrepreneurial economy. Mr. Barr has caught my attention.

Posted by Jeff Cornwall at 07:28 AM | Permalink

The Tax Foundation estimates that on average Americans spend about 2.5 hours of a typical eight hour work day working to pay their taxes. Or, if you want to think of it in terms of a typical work week, you spend all of Monday and Tuesday up until the end of your morning coffee break working to pay your taxes.

Think about that when you hear the calls for even higher taxes!

Posted by Jeff Cornwall at 09:23 AM | Permalink | Comments (2)

Thomas Frank of the Wall Street Journal offered a rather harsh analysis of the economic boom that was the past two decades.

It is, in other words, a political disaster, with tax cuts, trade agreements, deregulatory measures, and enforcement decisions all finely crafted to benefit one part of society and leave the rest behind. Few of the voters who gave Ronald Reagan his landslide victories, it is fair to say, intended for this to be the outcome. They wanted their country to stand tall again, certainly; they wanted the scary regulators off their backs, maybe; but I can recall no conservative who trumpeted those long-ago elections – or any of the succeeding contests, for that matter – as a referendum on plutocracy.

Say what? Have no fear.... James Pethokoukis sets the record straight in his column at US News.

Posted by Jeff Cornwall at 05:46 AM | Permalink

American politicians are talking about higher tax rates, bigger government, and intervention by bureaucrats in markets to pick winners and losers (what I call socialized entrepreneurship). As the US drifts toward socialism, could we see our neighbors to the north passing by us heading away from such policies?

From the National Dialogue on Entrepreneurship (emphasis added):

A new study from Canada's Institute for Research and Public Policy seeks to understand why and to see whether any potential solutions are available. The author, Donald McFetridge, fingers the business sector’s lack of innovation and entrepreneurial spirit as primary cause for Canada's productivity lag. While the Canadian government has introduced multiple programs to stimulate innovation, the national innovation culture is still quite weak. McFetridge contends that new innovation policies should focus on supporting "market incentives for entrepreneurship" through reduced taxes and regulation.

Posted by Jeff Cornwall at 05:41 AM | Permalink

In the latest small business poll from the NFIB, entrepreneurs see an upturn toward the end of the year.

The NFIB Index of Small Business Optimism rose 1.9 points in April to 91.5 (1986=100). Half of the gain was due to an improved outlook for business conditions 6 months out, and a quarter was from improved earnings trends. Improved earnings during a slowdown seems to indicate that business owners saw this soft economy coming and took steps to cut costs.

However, the net percent of owners reporting higher average selling prices rose again this month. And the percent of owners citing inflation as their No. 1 problem was up to the highest reading since 1982. The number of those planning to raise prices also rose significantly.

Inflation is starting to hit main street.

Posted by Jeff Cornwall at 06:31 AM | Permalink | Comments (2)

I am in Cleveland at John Carroll University this week conducting a workshop on taking entrepreneurship across the campus.

Last night over dinner, one of my hosts told a story about a recent business event. A local business leader said that one of the problems with economy in Northeastern Ohio is that they don't have enough entrepreneurs.

Trust me. I am sure that there are plenty of aspiring entrepreneurs. Every survey shows how prevalent entrepreneurial aspirations are in America today. No, the problem is not with a shortage of entrepreneurs. The problem is that this area does not have public policy that supports entrepreneurial economic activity.

For example, one of the most important predictor of entrepreneurial activity is taxes -- Ohio ranks 46th in overall tax rank in a recent report by the Tax Foundation. Even worse, Ohio ranks 48th in individual taxes. Since most entrepreneurial ventures are pass-through entities (LLCs, S-corp, partnership or sole proprietorship), the individual tax ranking is the most important tax predictor of entrepreneurial activity.

Posted by Jeff Cornwall at 05:40 AM | Permalink

A new global study from The Global Entrepreneurship Monitor (GEM) reports that women entrepreneurs are a key contributor to economic growth in low/middle income countries, particularly in Latin America and the Caribbean.

Among the findings:

- There is no gender difference in the survival rate of women's businesses versus those of men in high-income countries.

- Women who are employed and have built a social network of entrepreneurs are more likely to become entrepreneurs. The social and economic benefits of working are driving women's entrepreneurship more than increased education or household income.

- Women tend to be less optimistic and self-confident than men about starting a business. But once involved in entrepreneurial activity, women's confidence builds, and they are more likely to know other entrepreneurs, and exploit viable opportunities just like their male counterparts. Given difference in how various cultures around the globe view economic independence among women, the initial lack of confidence is not surprising. The good news is that once they take the entrepreneurial plunge, they gain confidence. Entrepreneurship has not only economic implications, but social implications for women as well.

- Fear of failure is also higher for women in all country groups compared to their male counterparts. Women in Europe and Asia low/middle income countries had the highest fear of failure rates (40.3%) compared to women in Latin America and the Caribbean (34.2%), and women in high-income countries (27.1%).

A good way to help women entrepreneurs is to join with those of us who give micro-loans through Kiva. I just made eight micro-loans to aspiring women entrepreneurs around the globe.

Posted by Jeff Cornwall at 06:44 AM | Permalink | Comments (1)

I remain somewhat concerned about the current slow down and/or recession. I remain very concerned about inflation. If you are an entrepreneurs, it is time to prepare for the worst. Here is a summary of a talk I gave to a group of printing company owners yesterday.

To get prepared for any economic downturn, it is best to think in terms of getting your financial statements in order.

First let's look at the Income Statement.

Revenues

Even though budget cutting is part of getting ready, do not cut back on marketing efforts. Now more than ever you need to stay front and center in the minds of your customers. Competition is going to get even tougher, so you need to keep your competitive edge by reminding the customers that you want their business. Many of your competitors will slash marketing budgets to save money. That will give you an advantage if you keep getting your message out there.

As part of this effort, take special care of your best customers. Make a personal sales call on them to let them know their business matters. Pay particular attention to those customers who are loyal, as their loyalty could get tested during difficult times.

As soon as you observe any increases in your costs of doing business, begin an aggressive campaign to increase prices. Frequent small price increases usually work best.

Focus on revenues that generate good margins. The goal should be to grow profits, not sales. Get rid of business that is not making good margins. When inflation heats up these accounts can quickly become money losers for you.

Expenses

Cut your overhead expenses. This will lower your break even and help buffer your profit margins from sudden price increases from your suppliers or if a major customer suddenly is forced to cut or even cancel orders from you. Overhead is your enemy right now.

Get back to basics. Look around your business to see what could be cut without having a drastic impact on your business. This may involve staff. This is painful, but may be necessary to protect the jobs of those that remain. Cut any fluff that you have allowed to creep into your expenses.

I even go so far as to tell folks to get back into your start-up mentality. Bootstrap, bootstrap, bootstrap!! This may be particularly effective in marketing. I said earlier that marketing should not be cut back. But it can almost always be done more efficiently.

Now let's turn to the Balance Sheet.

Cash

Cash is King.

Improve your cash flow. The steps outline above can help. Also pay attention to accounts receivable. During difficult times your customers will begin to slow down payments to take care of their own financial strains. Stay aggressive on collections. Use carrots and use sticks to keep their payments coming in a timely basis.

Build your cash reserves. The larger the cash war chest you have the better you can make it through sudden price increases from suppliers and sudden losses of key customers. It provides a shock absorber that you will definitely need more than once in the coming months.

Debt

In addition to building cash reserves, pay down debt as aggressively as you can. There are two reasons for this.

First, as inflation heats up interest rates may go up even faster than they have recently come down. This will effect your new loans and all of your existing debt, such as lines of credit, that have variable rates.

Second, banks will become much more strict when it comes to the covenants and performance requirements built into your loans. If you miss these numbers, the odds have increased that you will feel pressure from your bank to get in compliance. They can call in a note even if you make every payment on time if you start to fall below some of the financial ratios that are part of your loan agreement.

If I sound urgent, it is because many of these things will take some time to get in order. If I am right about the economy, you need to take action now. If I am wrong, the worst that happens is that you have significantly improved your financial conditions. That is not a bad thing even in good economic times.

Posted by Jeff Cornwall at 06:22 AM | Permalink | Comments (1)

According to the 2008 American Express OPEN Spring Monitor, small business owners have made the following changes since the 2007 American Express OPEN Fall Monitor, released in September.

- 34% do not offer healthcare coverage to employees; 29% didn’t offer coverage in September 2007

- 6% have reduced coverage in the last six months; 4% reduced coverage in the six months preceding September 2007

- 6% have eliminated coverage altogether in the last six months; 2% eliminated coverage in the six months preceding September 2007

- 9% have required employees to pay a larger share of healthcare costs over the last six months; 5% required employees to pay a larger share in the six months preceding September 2007

- 20% have been shopping for a new healthcare carrier in the last six months; 15% were shopping for a new carrier in the six months preceding September 2007

The healthcare solutions will not address the underlying problem behind much of this -- the cost of healthcare is a main contributor of inflation. If people had to pay for their own healthcare out of pocket (we all pay for it, but this gets hidden in lower net pay, taxes, and in the cost of goods and services) and if we tracked the cost of healthcare like we pay attention to the cost o gas the outrage would deafening.

While they may address the issue of access, all of the "reform" proposals on the table right now will only increase the total cost of healthcare. Access and cost are both fundamental problems that need to be addressed.

Employees are not the only ones feeling the effects of -- small business owners' health is also suffering.

- 71% of small business owners said being an entrepreneur meant they were so busy that they took their health for granted.

- 90% said there are aspects of their life that suffer as they seek to maintain work/life balance

- 20% indicated maintaining their health/fitness was the area that suffered the most.

This is also alarming to me. Poor health is a major cause of people leaving the world of entrepreneurship.

Posted by Jeff Cornwall at 05:20 AM | Permalink

The Brookings Institution has been busy pushing forward on an agenda for socialized entrepreneurship.

Two items from the National Dialogue on Entrepreneurship this week caught my eye (and raised the hair on the back of my neck).

First:

A new report from the Information Technology and Innovation Foundation and the Brookings Institution suggests that a new National Innovation Foundation could do a better job of structuring key Federal agencies to support innovation. The study recommends that a newly created National Innovation Foundation serve as the Federal government’s primary support mechanism and point of contact for issues related to innovation. The report proposes three possible structures for a new NIF: housed within the Commerce Department; a publicly-sponsored corporation similar to the Corporation for Public Broadcasting; and, as an independent federal agency like the National Science Foundation.

I must admit I would never have dreamed of modeling anything after the Corporation for Public Broadcasting.

Next. another report. I should note that both of these are from the same series, which they call Blueprint for American Prosperity: Unleashing the Potential of a Metropolitan Nation:

A new Brookings Institution study contends that current Federal policies do too little to promote cluster creation, i.e. agglomerations of businesses, service providers, and other partners who operate in a particular field or sector. As part of a wider set of programs to spur innovation, the report recommends that policymakers initiate a new set of programs to catalyze cluster activity across the US. This effort would contain two components. First, a Cluster Information Center would help map cluster initiatives across the US and provide research and evaluation about these programs. This effort is modeled on a successful European effort, the European Cluster Observatory. Second, a new Federal grant program (of about $360 million) to help fund state and regional cluster initiatives. This effort would help seed state and local innovations and also build closer connections between Federal, state and local partners.

And while we're at it, let's create another federal agency promoting rent seeking and model it after a European agency that tries to steer business activity to advance social agendas.

No thanks, Brookings! Keep your hands off American free enterprise! Markets work. Federal bureaucracies do not.

Posted by Jeff Cornwall at 05:24 AM | Permalink | Comments (1)

I was at a meeting attended by several local entrepreneurs the other morning. They all agreed that everyone is worried that the economy is in bad shape, but none of them were really feeling recessionary pressures in their businesses. The only thing that worried them directly was inflation.

In economics, perception can very quickly become reality. With enough talk about a bad economy we can all start behaving like there is poor economic conditions.

Take the latest results from the OPEN survey from American Express Small Business Monitor as a case in point.

Optimism among small business owners is at the lowest point in the six-year history of the OPEN survey. The economy is cited by four in ten small business owners (44%) as the issue that will most sway their decision on the next president of the United States, followed at a distance by homeland security (cited by 16%).

HOWEVER, despite concerns over the economy, growth is still a priority for entrepreneurs as seven in ten business owners plan to grow their business over the next six months and 31% of entrepreneurs report plans to hire, up 7% from the fall.

That is the psychology of mass panic that can make a weak economy seem worse than it really is. The media loves bad news (as they used to say -- "It sells newspapers"), so they have an incentive to make even worrisome news about the economy sound much more dire than it actually is at the present time. It can also lead to behaviors that make the economy become worse than it otherwise might have.

Are we in a slow down? Yes. Is it across all sectors? No. Is it across all geographic regions? Definitely not. Are we in a recession? Not yet, and if small business has its way and pursues the growth plans they are talking about, I doubt we will actually experience a true recession.

However, I still remain very concerned about inflation. Very, very concerned.

Posted by Jeff Cornwall at 09:50 AM | Permalink | Comments (2)

Today is the mythical day known as Tax Freedom Day. For some this day actually occurs around Valentine's Day, while for others it is actually in the dog days of summer.

Here is a summary explanation from the Tax Foundation:

Tax Freedom Day will arrive on April 23 this year, the 113th day of 2008 (ignoring Leap Day). That means Americans will work nearly four months of the year, from January 1 to April 23, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels.

Americans, as a whole, work a significant number of days each year to pay for things other than government, but nothing else is so expensive. Americans will work longer to pay for government (113 days) than they will for food, clothing and housing combined (108 days). In fact, Americans will work longer to afford federal taxes alone (74 days) than they will to afford housing (60 days). As a group, Americans will also work longer to pay state and local taxes than they will to pay for food.

Tax Freedom Day had arrived later for the four previous years, but due to an expected slowdown in the nation's economy and a massive one-time fiscal stimulus tax cut passed earlier this year, Tax Freedom Day is projected to arrive three days earlier this year compared to last year.

Here is a graphic of what we spend our income on in the US:

Or for a lighter version of the same story check out this YouTube music video of Tax Freedom Day.

If the three presidential candidates have their way, it could be much later in the year for all of us within a few years. In fact, it might even make the late 1990s (during the last Clinton administration) look good. Here is tax freedom day graphed over time:

Posted by Jeff Cornwall at 09:55 AM | Permalink

From the testimony of the Tax Foundation's Vice President for Economic Policy Robert J. Carroll before the Senate Finance Committee this week:

...[F]undamental tax reform has the potential to reduce the compliance burdens imposed on both households and businesses, and at the same time create an environment for greater economic growth in the long-term in a manner that is appropriately fair.

A fundamental issue...[is] the choice between income-based and consumption-based taxes. Consumption taxes generally reduce the tax on saving and investment, and... [will] boost economic performance and living standards in the longer term, in a way that retained the current progressivity of the tax system.

...[R]eforming the corporate income tax is becoming more urgent as our major trading partners around the world take the initiative.

Tax compliance (not taxes, just the paper work they create) costs small businesses more than $1,300 per employee per year. That is $26,000 for a small business with twenty employees that could have gone to adding another employee or expansion.

The corporate tax levied by most states in the US is higher than the corporate tax rate of country of France. Even socialist nations are finding the benefits of lower tax rates for their economies.

But, there is no relief in sight for those of us in the US. None of the three remaining Presidential candidates have real tax reform or tax cuts in their platforms. All three include policies that will significantly expand government, and in turn, will create the need for higher taxes to support their new initiatives.

Not only are jobs going overseas, but so are the entrepreneurs we need to help transform our economy. We have always benefited from the entrepreneurial spirit of our immigrants. More and more immigrant entrepreneurs are finding that they can find more opportunity in their home countries.

Bad news all around for the long-term outlook for this entrepreneurial economy.

Posted by Jeff Cornwall at 05:45 AM | Permalink | Comments (2)

The House Committee on Small Business is talking about using the tax code to stimulate small businesses the economy. From their news release (via beSpacific and Ben Cunningham):

Times change and so should the tax code, but with tax day less than a week away millions of entrepreneurs are facing outdated IRS provisions that stifle their ability to boost the economy. Today, the House Committee on Small Business heard from a panel of business owners and tax experts at a hearing focused on modernizing sections of the code while making it more small business friendly. As part of the forum, the Committee also issued a report titled "Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code," which provides specific recommendations on fixing provisions that impact small firms.

What they are proposing is what is euphemistically known as tax reform. However, note the following graph:

See the spike in the number of pages in the tax code after the early 1980s? That's what happened after the Reagan "tax reform". The tax code actually got much more complicated when they sold it as a "tax simplification."

Finding seven ways to tweak the current code will do nothing to help small businesses in the economy. Pulling the current tax code out by the roots and starting fresh with a sales-based federal tax that is protected from special interest meddling will. Small businesses spends over $1,300 per employee just on tax compliance under the current system.

Beware of the Trojan horse called "tax reform." It will only make things worse.

Posted by Jeff Cornwall at 01:24 PM | Permalink | Comments (2)

There is more talk these days from Washington and from those on the campaign trail that government needs to take an active role guiding the economy. With entrepreneurship the driving force in our economy, and for that matter in most economies around the globe, this is an alarming trend. Sen. Clinton is talking about the need for the federal government to set our economic priorities and strategies.

This is absolutely counter to all that we know about the appropriate role for government in entrepreneurially-based economies. The more government gets involved in managing economies, the more complex the tax code gets (they use this to shape our behaviors) and the more regulation inevitably follows. These are two of the major factors that stifle entrepreneurial activity.

But, the activist approach to economic policy (what I like to call socialized entrepreneurship) also creates lots of mischief that leads to even more regulation and government intervention at the micro level.

Case in point from governmentexecutive.com:

The chairman of the Senate Small Business and Entrepreneurship Committee is demanding an explanation from the State and Defense departments for how a wealthy 22-year-old arms dealer, under investigation for providing decades-old ammunition to Afghan security forces, was inappropriately classified as a small disadvantaged business on dozens of federal contracts.

Responding to an April 3 report from Government Executive, Sen. John Kerry, D-Mass., sent letters to Defense Secretary Robert Gates and Secretary of State Condoleezza Rice on Thursday requesting responses about AEY Inc. of Miami, and its owner, Efraim Diveroli.

Kerry is interested in how AEY obtained its SDB designation -- despite never requesting or garnering such a classification from the Small Business Administration -- and if the company received any preferential treatment as a result of the mistake.

Just as people seek to exploit opportunities in the market, they will seek to exploit artificial market opportunities created by government policies. That is why big government Republicans are quite happy with the status quo of the current 65,000 page tax code. Those who help shape the code through lobbying also get to exploit it economically.

But, not to worry. Sen. Kerry has it all under control. He has called for hearings, which will surely solve all of the problems created by the regulatory mess he and others in Washington helped to create in the first place. More rules, more regulation, more hearings..... it never ends.

(Thanks to Ben Cunningham for passing this along).

Posted by Jeff Cornwall at 07:37 AM | Permalink

Recession clouds appeared in the skies over Main Street, according to the most recent National Federation of Independent Business Small Business Economic Trends member survey. The NFIB Index of Small Business Optimism fell 3.3 points in March to 89.6 -- its lowest reading since the monthly surveys were started in 1986, and the lowest quarterly reading since the second quarter of 1980. The decline was driven by a sour outlook for business conditions and real sales growth, accounting for half the decline in the Index. Weaker plans to create new jobs accounted for 21 percent of the decline.

"We are seeing recession readings," said NFIB Chief Economist William Dunkelberg.

What is worse is that the labor market is still somewhat tight and price pressures continue to push costs up.

More signs that stagflation might be on the horizon.

Posted by Jeff Cornwall at 05:28 AM | Permalink

One of the myths about entrepreneurship is that high growth, high potential ventures (some call them gazelles) are the main driver of economic growth. For example, consider this quote from National Dialogue on Entrepreneurship: "High-growth businesses -- sometimes known as gazelles -- -are the real drivers of innovation and economic growth in our economy."

High potential businesses are those that tend to attract venture capital. VCs need businesses that yield very high returns in a very short time -- some will tell you that they seek 100% annual returns with an exit within 3-5 years and others simply say they seek 5 times their initial investment within about the same time period. However, gazelle companies represent a tiny fraction of 1% of entrepreneurial ventures.

Do they have an impact? Of course. Are they the "main driver of our economy"? No.

Those boring little entrepreneurs who toil away with only their own investment -- maybe with a little help from their family and friends -- is what really drives today's entrepreneurial economy. It is these small businesses that now generate about 50% of the US economy and have created 77% of new jobs for the past twenty years. They do so with ingenuity, bootstrapping, passion, persistence, and as Monroe Carell told our students yesterday, patience.

Gazelles quickly get absorbed into corporate America within 3-5 years if they have any success. The average entrepreneur is not even considered successful unless the business lasts at least five years. They are in it for the long run.

Rather than measuring success in terms of mind-boggling returns to investors, the average entrepreneur measures success in terms of making a living for his/her family, by creating good jobs, by becoming able to contribute to building a better community.

Don't misunderstand my point. I like high growth. high potential businesses. We get a few coming through our program and they are challenging, interesting, and fun to watch. I hope we get more.

But, they are not the heroes of our entrepreneurial economy. That title belongs to the average entrepreneur who will never get a dollar from a venture capitalist -- who builds a successful business seemingly out of almost nothing.

Average entrepreneurs may not be "gazelles", but they are the work horses we need to move this economy steadily into future.

Posted by Jeff Cornwall at 05:45 AM | Permalink

From James Pethokoukis at US News:

The Fed's brokering and backing of the JPMorgan-Bear Stearns deal may be just the start. Think about it: Uncle Sam might well be on the verge of doing one or more of the following: 1) refinancing a couple million mortgages and requiring lenders to write down the value of loans; 2) buying--via the Fed--billions in mortgage-backed securities; 3) creating a new government entity to nationalize troubled institutions.

Nationalizing part of the housing industry? Nationalizing health care? Sounds like we are marching down the trail to socialism. A scary outlook for our free market economy!

Posted by Jeff Cornwall at 08:40 AM | Permalink | Comments (2)