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)

A new Tax Foundation Fiscal Fact shows that nearly half of U.S. states tax job providers at a higher rate than any other country in the developed world. Counting the federal rate alone, the U.S. has the world's highest corporate tax rate, but including average sub-national rates (federal plus state in the U.S.), Japan edges out the U.S. for the highest-tax location.

This study breaks the tax down by state, adding each state's corporate tax rate to the federal corporate tax rate. The results show that 24 states impose, when combined with the federal rate, a higher corporate tax rate than in any other nation. In fact:

- 24 states have a combined corporate tax rate higher than top-ranked Japan.
- 32 states have a combined corporate tax rate higher than third-ranked Germany.
- 46 states have a combined corporate tax rate higher than fourth-ranked Canada.
- All 50 states have a combined corporate tax rate higher than fifth-ranked France.

Posted by Jeff Cornwall at 06:42 AM | Permalink

I have been working with a graduate student on a project that is looking into government programs to encourage angel investment that he is conducting for a national angel network group. He sent along an article published last fall in the Economist that said the following:

First of all, stop spreading money around trying to clone lots of Silicon Valleys....

However, there is an even more important factor than money: culture. Nokia's success was not the result of far-sighted planning or subsidy by the government of Finland. One Nokia executive confides: "The biggest boost to our firm was the deregulation that followed the second world war and the government's avoidance of protectionism." One of the most innovative things Nokia did was to spot that the handset could also be a fashion accessory. And coming from such a small and open market, it was forced to think globally.

Secondly, governments keen to promote innovation need to look out for market distortions and over-regulation that can be stripped away. Entrepreneurs can face an uphill battle legally, and not just culturally, in many countries.

As the headline of this story reads, "The best thing that governments can do to encourage innovation is get out of the way."

This is one graduate student who has been paying attention to his professor!

(Thanks to Jeff Williams for passing this along).

Posted by Jeff Cornwall at 05:30 PM | Permalink

The cynicism of publications like the New Yorker toward free markets and free enterprise never ceases to amaze me. The New Yorker published an article this month by James Surowiecki titled "What Microloans Miss" that states the following:

This vogue has translated into a flood of real dollars: institutional and individual investments in microfinance more than doubled between 2004 and 2006, to $4.4 billion, and the total volume of loans made has risen to $25 billion, according to Deutsche Bank. Unfortunately, it has also translated into a flood of hype. There's no doubt that microfinance does a tremendous amount of good, yet there are also real limits to what it can accomplish. Microloans make poor borrowers better off. But, on their own, they often don't do much to make poor countries richer.

Oh really?

We know that to build entrepreneurial economies we need to build a culture that supports and encourages entrepreneurs. Microloan programs are reshaping the culture of several third world countries by supporting thousands of new entrepreneurs who are building grassroot capitalism among populations who knew only desperate poverty. The only income that many in these societies ever received were handouts -- be they from government agencies or NGOs. Microloans have given them a path to economic freedom.

It takes time to build wealth. And real wealth comes from free enterprise. Are microloans the answer to transform an economy? Of course not. But they are a critical step in building long term transformations. Microloan programs are not just jobs programs, or worse yet, mechanisms for the redistribution of wealth from one country to another. Instead, they are creating a cultural seedbed for economic freedom and independence.

The "richness" of a country is not just measured in GDP. Microloans are making societies richer by creating hope, independence, and pride among thousands of "micro" entrepreneurs. And over the long run this will surely create monetary wealth in the countries that benefit from these efforts.

Thanks to Andy Tabar for passing this article along.

Posted by Jeff Cornwall at 09:28 AM | Permalink

Even though many have expressed frustration that we have not been able to move more quickly with regulatory reform to help small business, even the small steps taken so far are having an impact.

The SBA Office of Advocacy estimates that small businesses realized $2.6 billion in first-year cost savings and $285 million in annually recurring savings as a result of fiscal year 2007 efforts to help agencies comply with the Regulatory Flexibility Act (RFA). The law requires agencies to review the economic impacts of proposed regulations on small entities and consider less burdensome alternatives. The figures are reported in the 2007 edition of the Office of Advocacy’s annual Report on the Regulatory Flexibility Act.

Posted by Jeff Cornwall at 08:39 AM | Permalink

Many home-based businesses are part of a life-style that can include home-schooling children. These "Mompreneurs" blend running a part-time home-based business with educating their children. The home-based business can be operated around the schooling schedule for the kids.

If a recent California state appellate court ruling holds up, those Mompreneurs might have to put their kids on a bus and ship them off to public school if they are not accredited teachers. From SignOnSanDiego.com:

"Parents do not have a constitutional right to home school their children," wrote Justice H. Walter Croskey in a Feb. 28 opinion signed by the two other members of the 2nd District Court of Appeal.

The ruling has rattled home-school families in San Diego County and throughout California. It is the subject of much speculation on the blogs, Web sites and networks that link thousands of home-schoolers statewide.

The purpose of a Constitution is to define what powers that government does have, not define or limit what rights citizens have under that government.

Posted by Jeff Cornwall at 06:39 AM | Permalink | Comments (3)

The Kauffman Foundation has issued a new report that reviews the most effective public policy to support entrepreneurial development. Their findings:

...[W]e find that the strongest consensus supports streamlining of local regulatory approvals and limits on progressive taxation at the state and local levels. Several other local policies also should facilitate entrepreneurial growth: congestion pricing to relieve traffic congestion; investments in local schools, amenities, and transportation infrastructure; and limited recognition by states of non-compete clauses in business contracts. There is as yet little evidence to support the targeted government support of research, particular industries, or firms.

Or in other words -- cut taxes and get government out of the way.

Hats off to the folks at Kauffman on this one. They have not always seen it this way, having favored a more socialistic approach to entrepreneurship policy (i.e., government picks and controls the winners through tax and other policies) in the past.

Here is a link to the complete report.

Here is a link to the summary.

Posted by Jeff Cornwall at 09:55 AM | Permalink

The SBA Office of Advocacy's Regulatory Review and Reform Initiative, or r3, is designed to identify and address existing federal regulations that should be revised because they are ineffective, duplicative, or out of date. r3 is a tool for small business stakeholders to suggest needed reforms.

Out of the 82 suggestions they received, the ten rules and regulations that the Office of Advocacy has chosen to target for reform can be found here.

Posted by Jeff Cornwall at 09:41 AM | Permalink

I completed my MBA degree in Finance from the University of Kentucky in 1980. While I was happy to be finished, in many ways it really didn't mean much for me in terms of job prospects. After all, people with twenty years of experience and an MBA were getting laid off all around. Those of us in the MBA program had contests to see who could get the most rejection letters from the resumes we sent out (one guy amassed over 150 letters).

This was a time of a very weak economy that was coupled with high inflation -- it became known as stagflation. And the more the Carter administration tried to do to fix it, the worse things got.

We were used to periods of inflation that were followed by mild recessions that cooled things off a bit. But not this time. This was a time that had a very different set of conditions. Consumer confidence was low, which fed the recession. But forces outside of our control (the Middle East to be exact) kept pushing energy prices higher. This plus strong unions that continued to fight for increases in pay and government meddling in what should have been free markets created run-away inflation.

I worry that the signs are there for a return to a similar mess.

Confidence is low. We saw it the last couple of weeks in surveys of investors that I blogged about. Now we see it in consumer confidence surveys. From the Wall Street Journal:

U.S. consumer confidence slumped in February, accelerating a decline that began in January, according to a report released Tuesday.

We also see signs that inflation is not easing in spite of the slowing economy. Also from the Wall Street Journal today:

Meanwhile, U.S. wholesale prices surged in January and core inflation also climbed above expectations, according to more data revealing price pressures amid the economic slowdown.

Once again, energy and wages are at least partly to blame for the inflationary pressures on our economy.

And what about the third ingredient for a potential economic disaster? Rather than following the course that took us out of the mess the last time -- cutting taxes and freeing the free market from governmental control -- we hear cries from Washington that they will fix problems we face in a different way. How?

The Democratic front runners both want to increase taxes, take profits from the oil companies (a sure way to push prices even higher), and put government in control of health care (another recipe for even more inflation in this sector). And McCain? Every bit of evidence is that he is a big government Republican and will likely follow a similar path as both of the Democrats.

Hang on to your cash! Keep your debt burden as low as possible! And get ready to hunker down for a rough couple of years!

Posted by Jeff Cornwall at 09:20 AM | Permalink

James Pethokoukis at US News and World Report suggests that we may be nearing the end of a twenty five year economic boom -- and there seems to be plenty of blame to go around:

America's 25-year superboom has been driven by 1) reduced regulation/more competition, 2) lower taxes, and 3) the end of the Cold War, which allowed capitalism to spread across the globe....

Yet right now there are calls for 1) a "timeout" from free trade, 2) more industry regulation, 3) high-cost mega-spending projects for the environment, and 4) higher income, investment, and payroll taxes.

Posted by Jeff Cornwall at 04:01 PM | Permalink

A newly released study from the Office of Advocacy of the SBA authored by Rafael Efrat documents the pervasiveness and the magnitude of the tax burden among small business owners in bankruptcy. The data suggest that the tax burden is more pervasive among small business owners in bankruptcy than among consumer petitioners. While less than one-quarter of all consumers in the bankruptcy sample reported tax debts, more than half of individual small business owners reported owing some tax debts.

This is more evidence that we need to tear up the current income tax code and replace it with a simple and less burdensome approach.

Posted by Jeff Cornwall at 03:26 PM | Permalink

James Pethokoukis at US News and World Report writes that a President Obama would push for a global tax as a means for redistributing wealth. Wealth should not be viewed as a zero-sum game. If we really want to build wealth around the world let's help help them create free and open markets with strong property rights, low taxes and few barriers to business formation.

Posted by Jeff Cornwall at 11:44 AM | Permalink

While government policies do play a roll in entrepreneurial activity, there is increasing evidence that culture plays a significant part in spurring entrepreneurial economic activity.

A newly released working paper from the Office of Advocacy of the U.S. Small Business Administration finds that American rural economies are as dynamic as their suburban and urban counterparts.

"America has an entrepreneurial culture and entrepreneurs are found in every setting. The lesson learned here is that rural America's resilience should not be underestimated," said Larry Plummer, assistant professor at Clemson University and co-author of the paper.

The authors' central finding is that the differences in the rate of establishment births and closures between rural, suburban, and urban areas, while statistically significant, is in fact quite small. That is, general business dynamics are not a function of geographic area.

So let's get government out of the way and let the American entrepreneurial spirit take wings.

Posted by Jeff Cornwall at 08:13 AM | Permalink

The National Federation of Independent Business Index of Small Business Optimism fell 2.8 points in January to 91.8 (1986=100), the lowest reading since January 1991.

But some of the underlying numbers related to employment are not as weak as one would expect to see when optimism is so low.

"The Index is sending a recession signal," said NFIB Chief Economist William Dunkelberg, adding, "But by comparison, this January reading is more of a recession in expectations than in hard economic data. Hiring plans and job openings are much stronger today than in 1991" (emphasis added).

So why the long faces on American entrepreneurs? It may be that they have heard the negative drum beat from the media (and some politicians) and believe it must be true. Their condition is not so bad, but from what they hear everyone else is falling on hard times, so things must be bad. Don't underestimate the psychology that can drive economic conditions.

Posted by Jeff Cornwall at 05:49 PM | Permalink

Matthew Bandyk at US News interviewed me for a column he wrote on how the Stimulus Package will impact small business in our economy. I told him that I doubted the package would work and that a recession was probably going to happen either way. On the other hand, I am more worried that it will work. The pressures for a large burst of inflation are still out there -- wage, healthcare and fuel price pressures and falling interest rates. If we over-stimulate the economy right now, we may end up in an even worse condition economically. Either way, be it a recession or a period of inflation, I see a tough period ahead for small business owners in America:

But Congress has chosen a different stimulus strategy, and while small-business owners will appreciate the extra cash, many are heading into uncharted territory. "There are a lot of young entrepreneurs who have never really experienced a deep recession," says Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University. "And almost none have experienced a period of inflation, so they're not really sure what those words mean in their day-to-day business." They may be about to find out.

Posted by Jeff Cornwall at 12:58 PM | Permalink

Since the devastating Supreme Court decision on the Kelo case, there have been efforts across the US to help shore up property rights. The absence of strong property rights has been shown to be an inhibiting factor to entrepreneurial economic development. Entrepreneurs are not as willing to take a risk with their investment and capital if they do not believe that their property rights will be protected by the government.

An important victory in securing property rights has just occurred in New Jersey.

The Superior Court of New Jersey issued a critically important decision to private-property owners in a case dealing with the state's interpretation of how properties can be deemed "blighted" and consequently ripe for eminent domain takings. To the delight of property owners, the Superior Court overruled the trial court's decision and held that the law only allows a property to be deemed "blighted" in narrow circumstances.

The dispute involved a commercial property owned by BMIA, LLC in Belmar, New Jersey. BMIA had been fighting to keep its property, the Belmar Mall, from being condemned for a redevelopment project. The Belmar Mall is a commercial center that contains 20 mom-and-pop businesses, along with three major chain tenants.

Here is a picture of this so-called "blighted" property:

The trial court ruled that this property was located in an area in need of redevelopment. On appeal, the Superior Court of New Jersey determined that the trial court mistakenly relied on this finding in condemning the property for a redevelopment project. The Superior Court's decision reinforced that the New Jersey Constitution restricts government redevelopment to "blighted" areas. Further the Court said that finding an area in need of redevelopment does not show that the property reaches the "blight" standard. In New Jersey, a property is found to be a "blighted" area if it is detrimental to the safety, health, morals or welfare of the community. This was not the case with the Belmar Mall, and, therefore, the court reversed the lower court’s decision.

Hats off to the National Federation of Independent Legal Foundation for participating in this case.

Posted by Jeff Cornwall at 01:48 PM | Permalink

Tax policy is a critical issue for entrepreneurial economic development. What we know is that lower taxes and a simple system are what can help entrepreneurship thrive.

The Tax Foundation has an interactive tool that allows you to compare the various candidates' tax policy positions.

Posted by Jeff Cornwall at 08:25 AM | Permalink

I know that I may be an outlier on this, but I am worried about a possible unintended consequence of the proposed economic stimulus package now in the works in Washington.

The push behind the stimulus legislation is a fear that the economy is slowing. But, the cure may end up being worse than the ailment.

Throughout 2006 and 2007 there were signs that inflation might heat in our economy up for the first time in the past quarter century. We faced a continuing tight job market, with both low unemployment combined with a significant shortage of available skilled workers being reported by small employers. Add to this the significant inflationary pressures from both the energy and healthcare sectors and we have the potential of a witches brew of inflation.

Call me callous, but I felt some relief at the news of a slow down in the economy. Let me be clear -- I was not rooting for a recession (defined as two quarters of negative economic growth). But just like a growing business, our economy needed some time to "adjust" to the incredible sustained period of very robust growth.

The economic stimulus, if it works as hoped for by its proponents, might simply re-ignite the inflationary embers that are still glowing. The inflationary pressures from labor, energy and healthcare will again push prices higher. We could then see the economy enter into an inflationary cycle that will not break until we eventually enter a deep and painful recession.

With prudent attention to interest rates and a commitment to the use of cross-the-board tax cuts (or better yet, true tax reform to meet the needs of our entrepreneurial economy), we can minimize the slow down and ease the economy back into sustainable long-term growth.

The Tax Foundation has additional thoughts on the proposed stimulus at their website.

Posted by Jeff Cornwall at 05:11 AM | Permalink

The New York Times -- that's right, the New York Times -- credits tax cuts for fueling the entrepreneurial economy in Ireland:

Government help for Irish entrepreneurs grew out of an overall economic policy devised in 1987 that reduced personal taxes, said Kevin Sherry, a director of Enterprise Ireland who specializes in start-up companies.

Sadly, we seem to have forgotten this lesson in the US. The Democrats have resurrected the politics of envy, harking any number of tax increase schemes. At the same time our Republican President offers us only a one time tax rebate as a feeble attempt to stimulate the economy.

(Thanks to Ben Cunningham for passing this story along).

Posted by Jeff Cornwall at 07:27 AM | Permalink | Comments (2)

I have taken issue quite frequently with the National Dialogue on Entrepreneurship and their pro-socialized entrepreneurship stances. This time their interpretation of tax policy just baffles me:

But, the effectiveness of government finance systems also matters. A new study from the Pew Center on the States raises some red flags about how some US states are performing on this front. Effective tax systems provide stable revenue, support efficient tax collection, provide transparent information about incentives, and give localities some say in how their tax dollars are used. Unfortunately, many state tax systems fail on these measures. As a result, these lagging states lack the ability to support new economic engines while continuing to provide outdated and unnecessary incentives to other economic sectors.

This report lists heavy tax states such as Minnesota and New Jersey as being effective tax collectors, while several low tax states are listed as being poor tax collectors.

The evidence is clear that tax rates are what matters in driving entrepreneurial activity -- and the lower the rates the better. We don't need government to be the engine of our economy. We need free enterprise to be the engine.

The notion that we need to redistribute wealth through the government to support entrepreneurs is, in a word, absurd. Leave the money in their pockets and see what really can happen!

Posted by Jeff Cornwall at 04:33 PM | Permalink

So what's worrying small business owners? Inflation!

While the Federal Reserve is focused on the problems of the large banks, small-business owners are worried about inflation according to the National Federation of Independent Business December Small Business Economic Trends report released today. Plans to raise prices to respons to higher costs rose from 21 percent in September to 26 percent of all owners in December.

"The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted viability," said NFIB Chief Economist William Dunkelberg.

Unadjusted, 27 percent of small-business owners surveyed reported raising average selling prices, up three points from November, and 12 percent reported lower selling prices, unchanged. This price cutting phase has lasted well over a year.

In case you didn't believe me when I wrote my last post on my fear of renewed inflation, please take another look at it given this new development.

I am not guaranteeing that we will have a period of sustained inflation, but the risk is real enough to cause me great concern. My concerns have grown even stronger over the past few weeks with some of the talk in Washington about the need for an economic stimulus. If the politicians move in this direction, the odds of serious inflation and all of the pain it will create goes up considerably. Stimulating spending during potentially inflationary times like these is like throwing gasoline on the fires of inflation that are already burning due to oil prices, a tight labor market, and soaring grain prices.

Posted by Jeff Cornwall at 06:37 AM | Permalink | Comments (1)

One of the most potent shots in the arm for our entrepreneurial economy over the long-term would be fundamental tax reform. Cross-sector and cross-economy studies show the impact of tax rates and tax complexity on entrepreneurial activity. I am one who advocates that since our economy is now driven by entrepreneurs owning small businesses (just over 50% of GDP according to the most recent SBA estimate), it is now time to rethink our approach to taxes in this country.

So far only one major presidential candidate, Gov. Huckabee, is advocating a plan similar to the Fair Tax that had gained some traction over the past year. It replaces the income tax with a sales tax. Before the lefties out there start gnashing their teeth and wringing their hands, note that most plans being discussed have provisions to rebate a large portion of tax back automatically each year to, in effect, exempt lower and lower-middle families from the impact of any tax.

I saw this morning in a story from the LA Times sent to me by Andy Tabar that the mainstream media is launching some preemptive strikes. Let's take a closer look.

The opening paragraph frames the story quite nicely for the left:

Mike Huckabee, one of the most conservative Republicans in the 2008 presidential race, has embraced one of the most radical ideas on the campaign trail: a plan to abolish all federal income and payroll taxes and replace them with a single 23% national sales tax.

"One of the most conservative Republicans"? Given his position on many issues I would not call him conservative. I guess since most of the rest of the field seems to be big government, liberal Republicans, the relative positioning is correct. But conservative? Hardly!

Next line is also interesting:

The idea -- dubbed the "fair tax" by proponents -- ....

Do I sense a bit of irony in the writer's tone here?

Note that this story is a report on the 2008 campaign and not an editorial. Here is the writer's take on the tax reform movement:

The sales tax proposal has been around for years but languished on the fringes of practical politics and policy. Tax professionals generally regard the idea as impractical, regressive and even "crackpot," as one critic puts it.

For more on my view of the criteria of practicality, please see my recent debate with the NFIB over the wisdom of practicality and political expediency.

But, wait... The writer brings in an expert. She talks to tax professionals! No ox getting gored there! The last time we relied on tax professionals to fix the tax system was Pres. Reagan's so-called tax reform. All that act achieved was to lead to the doubling of the tax code -- now over 65,000 pages long.

The writer then goes on to paint this position as political suicide by citing examples of previous politicians who crashed and burned due to there support of tax reform. We see some hint of the oppositions strategy -- fear tactics. They will talk about an "added" 23% tax, failing to mention that the income tax goes away. Oh, and they also omit the key provision that exempts a large number of Americans from paying the tax through a simple across the board refund.

Then, as a final attempt to discredit, the author ties the plan to Scientology and Texas millionaires (they clearly must be the worst kind...). I kid you not:

Among the early advocates of a national sales tax were members of the Church of Scientology, a group that battled the IRS for years to gain recognition as a legitimate religious institution eligible for tax-exempt status.... [T]he issue was taken up by another group, Americans for Fair Taxation -- better known as Fairtax.org -- founded in 1995 by a group of Texas millionaires.

Please know that I do not endorse Gov. Huckabee. My approach has been to comment on and support positions, but not candidates. On taxes I like his proposed system, but note that he is silent on scaling back on the federal government and reducing the total tax burden. Remember that to fuel an entrepreneurial economy we need to not only simplify the system, but also cut the tax rates.

Posted by Jeff Cornwall at 07:42 AM | Permalink | Comments (2)

I received the following comment from Dr. Graboyes of the NFIB to my reply to his comments from my original post about their 10 healthcare principles. I would welcome your thoughts on this debate! Has the NFIB become part of the problem or am I being too idealistic and naive?

I believe Dr. Cornwall unintentionally validates my arguments rather than his own in that: (1) the "pragmatic" actions he describes are polar opposites of NFIB's current efforts; (2) the Cato Institute does not advocate a total retreat of government from health care; and (3) the solutions Dr. Cornwall offers are not solutions.

(1) In the 1940s, employer-sponsored health insurance arose from the private sector, not from the government. Private firms offered health insurance to circumvent the suffocating effects of wage-price controls.
The firms had found a loophole in the law, and federal government's role was to acquiesce, not to innovate. In the 1970s, the low-deductible policies Prof. Cornwall laments were private sector responses to Nixon-era public policies. In both cases, bad public policies led private firms to pursue problematic responses. NFIB's current strategy is to do the opposite: we want good public policies that lead private firms to take constructive actions.

(2) The Cato Institute is, as Prof. Cornwall notes, "about as market-oriented as they come." No doubt, NFIB's positions on health care reform will not be entirely to Cato's liking. But, contrary to Prof.
Cornwall's claim, even Cato doesn't advocate a total retreat of government from health care. In "Sinking SCHIP: A First Step toward Stopping the Growth of Government Health Programs," Michael Cannon urges health care deregulation "thereby allowing government health programs to focus on those patients who most need assistance." That sounds like reducing government's role, not eliminating it. In "Crisis of Abundance," Cato scholar Arnold Kling offers a market-oriented plan that cuts the government's proportion of health care spending, but does not eliminate it. (I reviewed the book favorably at:
http://www.nabe.com/publib/be/0704/reviews.html) As long as government has some role in the mix, distortions will be present, and second-best solutions will be inevitable. The tough part of the debate is figuring out what that second-best is and not settling for less. It is there that free-market proponents will disagree.

(3) My previous posting asked Prof. Cornwall "[W]hat proposals would you take to Congress and the state legislatures? We're looking for specifics, and we'd be glad to listen." His response was: "Give the consumers control of their health care dollars. Remove the employer from the health care system. What a way to truly put small business on a level playing field with big corporations. Tear down government barriers to a truly free health care system - deregulate health care. ... We can reform Medicaid like we reformed federal welfare. Shift that money back to the state in block grants free of federal mandates. We can deregulate health care just as we deregulated so many other powerful industries during the Reagan era."

Good, thought-provoking ideas. But they're bumper stickers, not specifics. Let me suggest an experiment: Put the above suggestions in a letter on university stationery. Send a copy to each of the 535 members of Congress and 7,000+ state legislators. Ask each recipient for a mere 30 minutes of time to discuss the ideas. Now calculate two variables: X = the number of "thank you for your interest" letters signed by legislative interns and Y = the number of legislators willing to meet with you. My guess is that X will be at least 100 times Y.

When I'm a college professor, I can advocate any fantasy health care system my imagination desires. NFIB doesn't have that luxury. NFIB represents 350,000 member firms, their employees, and the larger community of small businesses. Sweeping philosophical declarations won't protect their livelihoods. Prof. Cornwall says: "Don't tell me that such fundamental change is not pragmatic or realistic." Well, sometimes we have to tell you that; NFIB can't demand all or nothing. We have to remember Voltaire's, "The perfect is the enemy of the good."

On the other hand, it's tempting to let pragmatism to turn to sloth and timidity. So Prof. Cornwall and others like him do a great public service by pushing us to achieve as much as we can and not settle for less than what is possible. Thanks to him for his advice and willingness to talk.

Posted by Jeff Cornwall at 11:55 AM | Permalink

Friends, even good friends, do sometimes disagree.

I truly appreciate the time and thought that Dr. Graboyes put into his comment on my recent post on the NFIB's principles for health care reform. Let me try to respond.

The position the NFIB has taken is a pragmatic one. I concede that it may be the best among available pragmatic solutions. I would argue that our health care mess -- we both agree that the current system is a mess -- is a result of decades of pragmatism. World War II was ending. Wage controls that had been put in place to keep inflation in check. The federal government, labor and large corporations decided that offering health care benefits was not a violation of wage controls. So a pragmatic solution was to create a system of employer sponsored health insurance as a way to increase compensation without increasing actual wages. It was a pragmatic economic shift.

Fast forward a couple of decades. President Nixon had instituted wage controls once again to stave off the inflationary pressures in our economy. This time the pragmatic solution was to enrich health care benefits. We moved from a major medical system (what is now called a high-deductible plan) to one of very low deductibles. Again this enhancement of compensation was a pragmatic way around wage controls.

Inflation, at least in health care, is once again rampant. And once again, we hear calls for compromise and pragmatism.

I agree with Dr. Graboyes. Our current health care system is not free enterprise. It is one based on a system of rent seeking behavior on the part of corporate medicine, physician and hospital lobbyists, health insurance corporations, and labor. I would like to see how these principles will take us down the road to liberty.

Dr. Graboyes says, “100% private is not going to happen, and one is hard-pressed to find any market-oriented think tank that advocates total retreat of government from health care.” This is just not true. For example, the Cato Institute is about as market-oriented as they come. Michael F. Cannon in an article published at the Cato Institutes's website said the following:

In a field dominated by lefties and rent-seeking weasels whose unifying goal is to provide health insurance to everyone, it is easy to get caught up in universal coverage fever. Even erstwhile conservatives have been seduced into thinking we can achieve universal coverage in a free-market way.

Yet a free market would not provide health insurance to all; some people are uninsurable, others don't want health insurance. National Review made the point nicely: "to achieve universal coverage would require either having the government provide it to everyone or forcing everyone to buy it." Either way, government calls the shots. If conservatives adopt universal coverage as their goal, the left will have already won.

Dr. Graboyes asks for another solution.

Give the consumers control of their health care dollars. Remove the employer from the health care system. What a way to truly put small business on a level playing filed with big corporations. Tear down government barriers to a truly free health care system - deregulate health care. Don't tell me that such fundamental change is not pragmatic or realistic. We can reform Medicaid like we reformed federal welfare. Shift that money back to the state in block grants free of federal mandates. We can deregulate health care just as we deregulated so many other powerful industries during the Reagan era.

Will it be uncomfortable? Yes. Will it be painful? Yes. But we have created a critically ill health care system that needs powerful medicine to return to wellness.

Posted by Jeff Cornwall at 02:57 PM | Permalink | Comments (1)

I have had the pleasure to interact with the 502nd Infantry Regiment that is working to bring entrepreneurial economic development to Iraq. It is part of the story that is just not getting reported.

My main contact has been Major Tim Collier, on the right of this picture from Camp Victory, Iraq. He is part of team working to help rebuild the economy from the ground up.

The goal of this operation is to begin the rebuilding process of the basic economic infrastructure and to help develop distribution channels for trade.

The initial focus is on the carpet industry. One local business hopes to produce a world class reproduction of the famed Pazdyk Carpet, acknowledged to be the oldest hand knotted rug in the world. The plan is to knot ten of these carpets over the next six months.

Below is a picture of the loom being used in this business and the carpet that they are reproducing.

Helping to rebuild the Iraqi economy will be a slow process. By focusing on free enterprise and small business ownership, a future of sustainable economic growth is possible.

Posted by Jeff Cornwall at 08:35 AM | Permalink | Comments (1)

I wrote the other day that I was concerned with the direction the NFIB was taking regarding their position on health care reform. My reading of the tea leaves was correct. They have released their "Principles for Health Care Reform."

They list ten principles: universal, private, affordable, unbiased, competitive, portable, transparent, efficient, evidence-based, and realistic.

A few of these words need to be examined.

Realistic is generally a word policy people use when they plan to tweak the current system and engage in compromise. I have never understood the logic of tweaking a fundamentally flawed model. And it is often unwise to compromise on our principles -- that seems oxymoronic to me. A principle is a firmly held belief. I thought the NFIB stands for free enterprise as a fundamental principle. Why compromise that principle when it comes to health care?

It is interesting that they chose to list universal as their first principle. Understand that the word universal has become a code word for a federalized system. They may try to hide that fact behind having private aspects to it, but universal in the world of policy means mandated. And for health care, that means a socialized system.

Think I am reading too much into this? Here is what they have to say about their principle of private:

To the greatest extent possible, Americans should receive their health insurance and health care through the private sector.

"To the greatest extend possible"??? You can drive a freight train through that loop hole! Liberty is a foundational principle in our system. It is sad that we seem to be finding more and more convenient reasons to compromise on our freedoms, particularly our economic freedoms.

I guarantee that their principle of efficient can never happen by "realistically" tweaking the system and making it a federally controlled and planned mandated system. And while we are talking about efficiency, let's see how they intend to achieve efficiency:

Health care policy should encourage an appropriate level of spending on health care. Laws, regulations and insurance arrangements should direct health care spending to those goods and services that will maximize health.

You got it. We will let the federal government regulate efficiency. I guess that makes sense. The federal government is bastion of efficiency, after all.

Generally I have been on the same side of issues with the NFIB. Their stand on regulatory flexibility is to be commended. Their stand on Kelo and property rights is also on the mark. Their approach to health care reform stands in stark fundamental contrast with those two positions.

Posted by Jeff Cornwall at 08:20 AM | Permalink | Comments (4)

The Democrats in Congress are talking about cutting taxes. On the surface that sounds like good news for small business. However, their plan is not a simple one -- nor is it permanent.

From James Pethokoukis at US News:

Time to prime the pump? Democrats sure think so. "There was an overwhelming consensus that the time has come to stimulate the economy" is what Barney Frank, chair of the House Financial Services Committee, told Bloomberg News yesterday. This stimulus would presumably be done through targeted tax cuts, tax rebates, or increased government spending. All temporary measures to give the economy a quick boost. All quaint throwbacks to old-fashioned, Keynesian, demand-side, "put money in people's pockets" thinking. And all unlikely to give the politicians the "bang for the buck" they might hope for.

Pethokoukis offers a pretty compelling history and economics lesson to support his point. Worth a read!

Posted by Jeff Cornwall at 02:09 PM | Permalink | Comments (2)

This morning I attended a small business summit sponsored by the new mayor of Nashville, Karl Dean. An overflow crowd heard remarks from the Mayor, the state director of NFIB Jim Brown, and the head of the Nashville Chamber of Commerce Ralph Schulz on the needs of the over 530,000 small businesses here in Tennessee.

Jim Brown of the NFIB talked about the need for less regulation on small business -- a good goal that boosts start-up activity. He also talked about the need for lower taxes and how -- another noble goal. However, in the same breath he warned us that the current tax shortfalls we are seeing across the country as the economy slows do not bode well for entrepreneurs. It seems that there is a disturbing pattern during times like these. Local and state governments go after more revenue from small business owners through taxes and fees to offset the overall drop in sales tax revenues.

But then came a major disconnect for me when he shifted his remarks to health care. Rather than trust the free markets that he so strongly advocates for on behalf of his small business members, Brown applauded our Governor's expansion of the state-run health insurance program to include small businesses through a new program called "CoverTN."

We are seeing this across the country. It started when large corporations such as Walmart began to lead the charge for a federal government healthcare program as a fix for the current healthcare crisis. Large corporations began to signal that they would support a nationalized healthcare policy. Then, advocates for small businesses began to fall right in line.

It amazes me that those who advocate lower taxes and less regulation on one hand are willing to support the enactment of a national healthcare plan that would create a gigantic bureaucratic black-hole of taxes on the other hand. Governmental meddling in healthcare delivery and payment in large part created the healthcare system crisis. So now we are willing to hand the entire healthcare system over to that same government lock, stock and barrel in the name of political expediency?

Posted by Jeff Cornwall at 11:16 AM | Permalink | Comments (4)

We have been watching the growing pessimism of small business owners over the past few months as seen through the NFIB's monthly survey. It now looks like the Federal Reserve is the Grinch that has stolen entrepreneurs' Christmas.

Reaction by small-business owners to Federal Reserve rate cuts in September and October sent the National Federation of Independent Business Small-Business Optimism Index down 1.8 points to 94.4 in November -- the lowest reading since 1993. Seventy percent of the index decline came from two index components, the outlook for real sales and the outlook for business conditions in six months.

"Things were looking good on Main Street until the Fed warned that the economy was at risk of sinking," said NFIB Chief Economist William Dunkelberg. "That warning had credibility, and the logical response was to cut hiring, capital spending and other growth-related activities. And indeed that occurred in the last 12 days of September and continued into October and November. In general, small-business owner expectations that were on the rise before the Fed announcement fell after the announcement, and have drifted to lower levels since."

One bit of good news is that the credit debacle that is behind much our current economic woes is not effecting credit conditions for small businesses. In fact, credit conditions continue to look normal. Regular borrowing activity was reported by 32 percent of the owners, four points below October but typical of readings since inflation ceased being the number one business problem 15 years ago. The net percent of owners reporting loans harder to get in recent months rose one point to a net 7 percent, typical of readings for the past several years.

Once again we are letting politicians and lobbyists set policy for the economy. The business missteps and outright greed from the mortgage and real estate industry is what created this mess. But, rather than let the market work this out, we are going for another bail-out.

Worst of all, these policy decisions coming out of Washington (including the President's misguided consumer mortgage bail-out) are clearly hurting the one true and sustainable strength in our economy -- the small business sector. If left to the market to sort out, we would have had a fairly short, albeit painful correction. However, the unintended consequences of the Fed's actions and possible bail-outs from Washington will be the probability of a long-term hit on small business growth that could actually create the economic downturn these folks claim they are trying to prevent.

Posted by Jeff Cornwall at 06:31 AM | Permalink

Ben Cunningham writes about Sen. Kerry's desire to "help" small business at his blog TaxingTennessee.

LEAVE US ALONE!!! For the love of all that is good and healthy.... why do politicians actually believe they can "help" us...the LAST thing in the entire universe that small business needs is the idiots in Congress "helping" them.

Thank goodness for Tom Coburn...he is all that is standing between us and the tyranny of the good intentions of our government.

Amen!!!!!

Posted by Jeff Cornwall at 01:19 PM | Permalink | Comments (1)

The primary reason for the decline in the number of small businesses providing health insurance appears to be that owners of new firms are reluctant to introduce health benefits, according to a National Federation of Independent Business Small-Business Poll released today. The poll on purchasing health insurance found that 52 percent of small-business owners do not offer either employee health insurance or an insurance purchase subsidy.

"It's much better for employee morale if a small-business owner never offers health benefits, than it is to offer them and then be forced to take it away because it is too expensive to continue," said William J. Dennis, NFIB's senior research fellow. "Small-business owners experience considerable turmoil in their early years. They often experience cash flow problems and are reluctant to incur additional expenses such as health insurance. What's new to this picture is that it appears that new small-business owners are waiting longer or choosing not to offer health insurance benefits to their employees at all."

Excluding those who switch insurers or go out of business, very few small employers drop health insurance benefits all together, about 1- 2 percent of the population annually.

For the 47 percent of small employers who do offer some type of employee health benefit, 36 percent offer insurance to all or most full-time employees, 5 percent offer insurance to some or a few full-time employees, and 6 percent offer premium reimbursement to employees who purchase health insurance on their own.

According to the poll, the owner or manager is the person most likely to shop on behalf of the firm for health insurance, and they rely heavily on insurance agents or brokers for guidance This does not always serve them well. Survey data found that agents/brokers did not raise the subject of Health Savings Accounts (HSAs) in 59 percent of cases involving their discussion of employee health insurance with small employers.

"This poll tells us that if small-business owners want to know about all of their health insurance options, they need to conduct their own research. They need to be able to ask their insurance agents very pointed questions about HSAs and other health insurance options," said Dennis.

I know this is wishful thinking on my part, but with over half of our workers employed in small businesses perhaps it is time to uncouple health insurance from our tax code. The system we now have in America is based on the economy of the mid-1900s when most workers were employed by large corporations (one in five worked for Fortune 500 during that era). Health insurance for employees was a loop-whole to that unions and corporations concocted to get around wage freezes post World War II. This same alliance used Nixon's wage freeze as a reason to move from high-deductible major medical plans to low deductible insurance plans.

Just as economic crises created the mess that is now our health insurance system, perhaps the impending train wreck that is today's health insurance model in the US can lead us to a consumer driven free-market model.

Posted by Jeff Cornwall at 10:05 AM | Permalink | Comments (2)

I have not blogged in a while about any post-Kelo cases on eminent domain, but this one from Missouri caught my attention. The NFIB has take a strong position on this case.

The Missouri Supreme Court will be deciding a critically important case for all property owners. The court is being asked to determine if an unchartered city or county in Missouri can use eminent domain to take property belonging to a private business.

Only 2.9 percent of Missouri’s cities are constitutionally chartered, and two thirds of current eminent domain cases involve unchartered municipalities. A victory in the Missouri Supreme Court would therefore halt the majority of eminent domain takings in Missouri and could influence eminent domain cases in other states. Since the U.S. Supreme Court's devastating decision in Kelo v. New London, which opened the door for widespread eminent domain abuse

The case before the court is City of Arnold v. Tourkakis. In this case, the City of Arnold seeks to condemn the business property of Dr. Homer Tourkakis, a local dentist, who has owned the property for over 20 years. This is yet another example of how the Kelo decision has eroded the fundamental right of property that is foundational to our economy.

Dr. Tourkakis argues that since Arnold is not chartered under the Missouri constitution, it does not have the power to take private property through the use of eminent domain.

The state Circuit Court found in favor of Dr. Tourkakis and issued two interesting holdings: 1) that the Kelo-esque goal of the city's actions - to make way for the building of a shopping center - does not constitute a "public use" under the Missouri constitution, and 2) that the Missouri constitution does not allow unchartered cities and counties to utilize the constitutional taking power.

"If the Supreme Court of Missouri upholds the Circuit Judge’s decision, it would simultaneously end every taking by an unchartered city and county, and would also establish that Missouri does not accept the standard for public use that the Kelo case set out nationally," Karen Harned, executive director of NFIB's Legal Foundation. "This would be a resounding victory for property owners in Missouri and hopefully will influence other state courts to look closely at how their state constitutions' limit eminent domain uses in their states."

Posted by Jeff Cornwall at 01:39 PM | Permalink

The NFIB released its October survey of small business owners and the mood is... well, shall we say less that upbeat.

"Things were looking good until September 18 when the Fed warned that the economy was sinking," said NFIB Chief Economist William Dunkelberg. "The logical response of small-business owners was to cut hiring, capital spending and other growth-related activities."

Owners did try to hire and fill needed positions in October, but with little success. Fourteen percent reported increasing employment an average of 2.9 workers per firm compared to 11 percent who reported workforce reductions averaging 4.2 workers, an average decrease of about 0.1 employees per firm.

Things seem a little worse for jobs in the construction industry, with 11 percent reporting that they increased the size of their workforce, while 16 percent cut employment. Although it was not all bad news in construction, where there are signs of some firming of demand. In July of 2006, a net 40 percent of the construction firms were raising prices, compared to a net 1 percent reporting higher prices in September 2007. Now, more firms are raising prices, indicating stronger support from non-residential construction and home additions and repairs.

With entrepreneurs being the job engine in this economy, this is not good news for the near future.

Twenty-two percent reported unfilled job openings, down three points from September. Over the next three months, 15 percent plan to create new jobs (down three points), and 10 percent plan workforce reductions (up one point), yielding a seasonally adjusted net 11 percent of owners planning to create new jobs -- down three points.

"Jobs disappear when owners don't expect sales to grow," Dunkelberg said. Fourteen percent of the owners reported that the availability of qualified labor was their top business problem, down three points from September.

And now for the news that put a chill down my spine. The net percent of owners reporting higher average selling prices rose six points to 15 percent of all firms. Plans to raise prices also gained a point to 22 percent of all owners.

"The Fed may be preoccupied with recession but small-business owners’ reports of price hikes suggest that inflation can't be dismissed," said Dunkelberg. "The historic relationship between inflation and the percent of owners reporting higher prices suggests that inflation will be showing some new, unwanted, vitality."

Indeed! And in case you missed my caution about inflation, read this.....

Posted by Jeff Cornwall at 06:30 AM | Permalink | Comments (1)

I have a post at our LockeSmith blog about the need to look to free markets to find the fix for healthcare in the US.

The third choice [for our healthcare system] is to let the free market once again drive healthcare. Sadly, this alternative is getting precious little attention right now. We live in an age where the Republicans are taking us on a gentle stroll to socialism, while the Democrats offer the alternative of a full speed sprint.

Posted by Jeff Cornwall at 03:57 PM | Permalink | Comments (2)

I have been concerned about inflation for the past two years. Low unemployment, higher energy costs, and misguided government policies have all made the hairs on the back of my neck stand up due to my fear of what havoc inflation could bring to this economy. It seems the Fed now shares my worry.

Many entrepreneurs have never had to do business in an age of inflation. In fact, the last bad inflationary period we had was almost thirty years ago. Since then, careful control of the economy with interest rate policy has helped to keep things in check. I am reminded of this every time a young entrepreneur asks me what it is like to live in inflationary times. I have to remind myself that if they are under 30, inflation is not even in their vocabulary. And even if they are 40, they were young kids the last time we had to deal with an inflationary economy.

Periods of inflation create panic and fear. A mob mentality erupts, with people trying to spend and buy before the price goes up even more. And that is what the beast of inflation lives on. Panic buying just makes inflation worse. Interest rates are pushed up and up and up to try and tame the beast. Some of us remember 18% mortgage rates. I had just finished an MBA in Finance the last time we faced this scenario. It was a scary time to be trying to enter the job market. Financial institutions were in disarray -- none were hiring and most were laying people off with much more experience than we had just coming out of school.

Recently, many small business owners have begun to feel the pinch of inflation. Health care costs, energy costs, and many raw material costs are pushing up prices on almost everything. Add to that labor shortages in key areas, and you have the recipe for inflation.

During past periods of inflation we were still in the old economy. Big companies could pass along the increased prices to consumers, who due to stronger unions in those days were able to push wages higher to keep up. If their ability to raise prices fell behind, they had lots of cash reserves and knew that they could soon catch up. They just laid people off, shrunk inventories, and tight supplies then pushed up prices. All of this would continue until the economy ran out of gas. We then had a recession to cool things off.

But, we are now in an entrepreneurial economy -- remember 50 cents of every dollar in the economy are being generated by small businesses. Small businesses are always tight on cash flow. And if their inputs of raw materials and other direct operating expenses go up, they may not be able to pass along these costs quickly enough to keep their cash flow positive. And they certainly don't have large cash reserves to ride out the recession that is likely to follow an inflationary period.

So why the current worry about inflation? Hasn't the Fed got this all under control?

Unfortunately, many of the major causes of inflationary pressures right now are not within the ability of the Fed to control. Many of the top oil producers in the world do not have the most reliable governments. Iran, Russia, Venezuela, Nigeria, and Saudi Arabia are all among the top 10 exporters of oil. Many of these countries may soon make good on their promise to use oil as a weapon and hold back supply. If that happens, our current gas prices would seem like a nostalgic memory from days gone by. There are predictions of several more years of bad hurricanes. Some say even one more bad season is more than our economy will be able to take. We dodged the bullet this year, but we are still in a period where bad storms are likely for several years to come.

Another change that makes inflation harder to control is that we are in a much more open, global economy than we have been in the past. When we had inflation in the mid-1900s, everyone was faced with the same pressures and all could raise prices in relative harmony. Today inflation is quite variable around the world. Therefore, foreign competitors might not face the same inflationary pressures that we do in the US. That would put us at a huge price disadvantage. This is particularly an issue with our skilled labor shortage.

Finally, China and India are lurking. Both countries see themselves as the potential economic superpowers of the next century. They are big enough, strong enough, and centrally controlled enough to potentially use inflation and a weak economy in the US as wedge to gain advantage in the world economy.

So what can a small business do these days to try and weather this impending inflationary storm? Get back to basics and manage conservatively:

- Keep overhead low.

- Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.

- Watch your margins carefully. Worry about growing profits, not sales.

- Don't lock into long-term contracts that have narrow margins with large customers.

- When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump.

- Pay down variable interest loans ASAP, especially now that interest rates are temporarily back down. As long as there is inflation, interest rates will keep going up over the long term.

Posted by Jeff Cornwall at 06:17 AM | Permalink | Comments (4)

An interesting post from ImmigrationRoad.com:

While immigration reform is going nowhere on Capital Hill, leaving many highly-skilled but frustrated workers wondering whether they've made a mistake by coming to the U.S., the European Union has timely unveiled an ambitious plan to lure millions of skilled professionals to the continent. The EU-wide "Blue Card" program, named after EU's blue flag, is designed to attract the best and the brightest to its member nations by offering a standardized system and many benefits.

Facing an estimated shortfall of 20-million workers in the next 20 years, the European Commission wants to fix it early. One way, obviously, is to invite more immigrants. However, the United States, Canada and Australia have been the top destinations of the world's talent, with Europe falling far behind.

Yes, we need to get control of our borders. But I am afraid that we have taken our eye off of the importance of immigration in this economy. Immigration and entrepreneurial economies have always gone hand-in-hand. In addition to a "blue card" idea from the EU, the US also needs another card (let's color it a "red card" for urgent) to support the flow of legitimate entrepreneurs looking for the freedom this country offers to business owners.

Posted by Jeff Cornwall at 08:43 AM | Permalink | Comments (1)

The SBA announced today some updates on small business in the US economy. One of these updates is another indication of the importance of small business as the employment engine of our economy. The updated data shows that the nation had an estimated 26.8 million small businesses, of which 6.1 million were employer firms. Although the total number is steady from their previous report, the number of entrepreneurial firms with employees is up from 5.9 million figure released earlier in the year.

Posted by Jeff Cornwall at 10:11 AM | Permalink | Comments (1)

Recent reports from the SBA find that entrepreneurial firms are now over 50% of the GDP, and have created about 78% of all new jobs every single year for the past twenty years.

A new study released by the SBA gives some insight into the role of growing entrepreneurial firms in the economy. Bruce Kirchhoff of the New Jersey Institute of Technology and Brian Headd of the Office of Advocacy of the SBA authored the working paper, entitled Small Business Growth: Searching for Stylized Facts.

Using census and other public data, the study examines how firms started, grew, merged, declined, survived, and closed from 1992 to 2002. The authors' analysis determined that:

- Firm survival four year survival rates were consistently at about 50 percent. This was consistent during the ten year time frame of the study. This is consistent with recent studies using other data bases, and should finally put a stake in the heart of the urban myth that only 10-20% of firms survive. What is sad is how many scholars, business media types, and "experts" still perpetuate the failure rate myth.

- Industries that grew in employment did not necessarily have higher rates of fast growers but industries
with high rates of fast growers tended to have high rates of decliners. About 35 percent of employer (private sector, nonfarm, single-establishment) firms had no employment change from one year to the next, about 11
percent closed each year, about 25 percent shrank in employment each year and about 28 percent grew in
employment each year. This finding reinforces the breath of the entrepreneurial strength in our economy. Rather than depend on a few firms in a few industry sectors, this entrepreneurial economy is very diverse and widely dispersed.

- Fast growing firms (defined as having a 50 percent or more increase in annual employment with at least a five-employee increase) were only 3% of all firms. Given the burn-out rate of fast growing firms, this finding is reassuring to me. My experience is that slow and steady is want leads to long-term survival in business. As fun as things like the Inc 500 can be to watch, these may not be the firms we need to focus on for our long-term economic development.

Posted by Jeff Cornwall at 07:31 AM | Permalink

The Tax Foundation has released its latest ranking of State Tax Climate. Wyoming tops the list this year as the most business tax-friendly state, followed by South Dakota. At the bottom of the list are Rhode Island and New Jersey.

You can read the full report here or see a summary of the state rankings for the past several years here.

Posted by Jeff Cornwall at 04:40 PM | Permalink | Comments (2)

Research continues to clearly show that there are three critical areas of public policy that support and foster entrepreneurial economic development:

1- Lower tax rates and a simple tax system

2- Minimal regulatory hurdles for new businesses to start and fewer regulations effecting operating small businesses.

3- Strong protection of private property rights.

All of these factors are part of the The World Bank's annual Doing Business report. The 2008 version finds that the top five countries for ease of doing business are:

1- Singapore
2- New Zealand
3- United States
4- Hong Kong
5- Denmark

In terms of progress from last year, "Eastern Europe and the former Soviet Union have surpassed East Asia in the ease of doing business."

You can read a detailed overview of the report here.

Posted by Jeff Cornwall at 03:08 PM | Permalink

Nathan Giffith begins a scary story at LockeSmith blog courtesy of the Progressives in our midst:

I've decided what I'm going to be for Halloween: a Progressive! I'll scare... well, I probably won't scare anyone. In fact, it would probably help me blend in a great deal more than I usually do.... The point is, Progressives ought to scare us a great deal more than they do.

Posted by Jeff Cornwall at 03:45 PM | Permalink

The latest survey of small business owners from the NFIB reveals that small business owners are still cautious about the economy. The optimism index is still below the historic average, although it did improve a bit from last month.

On the employment front, small business owners tried to fill jobs in September, but with little success. Thirteen percent of those responding to the monthly NFIB Small-Business Economic Trends survey increased employment an average of 3.7 workers per firm, but 14 percent had reductions of 3 workers. Three-fourths of the reported payroll jobs were in medical care, education and government, industries not dominated by small firms, where hiring was weak.

Many are still reporting difficulty in attracting qualified workers. A seasonally adjusted 25 percent reported unfilled job openings, unchanged from August, keeping the unemployment rate low.

Eighteen percent of firms plan to create new jobs over the next three months, up a point over August numbers, while 9 percent plan reductions, up a point. This produced a seasonally adjusted net 14 percent of owners who plan to create new jobs, down a point from August but very solid. Fifty-seven percent said they hired or tried to hire new workers, up four points from August, but 84 percent of those trying to hire reported few or no qualified applicants.

Posted by Jeff Cornwall at 06:43 AM | Permalink

Nathan Griffith ponders about "markets" at our LockeSmith blog:

We've all heard about "the market" doing this to people, doing that to people…But I labor under the impression that most folk don't have a good conception of the fact that "the market" is shorthand for a much more complicated idea. For example, most people think the market rewards those with money. In fact, the market defines what a good decision is, and then rewards those who make good decisions.

Posted by Jeff Cornwall at 01:35 PM | Permalink | Comments (1)

The young people now entering the workforce have been called Generation Y. Many of us call them the Entrepreneurial Generation or the "E" Generation due their high rates of business start-up right out of, or even while in school. An article from the Boston Globe argues that the "E" stands for Entitlement just as much as it stands for Entrepreneurial.

They are...the upstarts at the office who put their feet on their desks, voice their opinions frequently and loudly at meetings, and always volunteer -- nay, expect -- to take charge of the most interesting projects. They are smart, brash, even arrogant, and endowed with a commanding sense of entitlement.

Perhaps their entitled attitudes are part of what is making them so entrepreneurial as seen from this quote from that same article.

"They have been groomed, they've been told that they are the best, and they've seen people from this same generation make millions of dollars just before them. They think, 'I want to be the next Google, Amazon, or eBay. After all, these companies were founded by young people. Now it's my turn.'"

A recent article in the Wall Street Journal examines how employers are changing benefits and perks to meet this new generation of workers.

And family-friendly companies are looking very different today than they did a few years ago. The waning of boomers with their uptight ways, and the rise of the we-want-it-all millennials, are spurring major shifts in employer programs.

Whether they are entrepreneurial, entitled or both, they sure are keeping those of us who teach entrepreneurship busy!

(Thanks to Steve King who writes Small Biz Labs for passing the Globe along).

Posted by Jeff Cornwall at 08:20 AM | Permalink

Read my colleague Mark Schenkel's thoughts on the "fat tax" (not a typo) at our blog LockeSmith:

Let me be clear, I am not advocating that politicians seek ways to increase taxes, whether through the creation of new tax code or the revision of old code. I'm just suggesting that the use of a simple tax that encourages all those who are inclined to pursue the creation economic value equally is likely to generate more overall value at the end of the day.

Posted by Jeff Cornwall at 09:31 AM | Permalink

The entrepreneurial economic wave that is sweeping around the globe is even getting our neighbors to the north feeling a little adventuresome.

A new study finds that one in eight Canadians (13%) plan to start a business in the next five years, and of those over a quarter plan to do so within the next twelve months. And many of these aspiring entrepreneurs are not among the usual suspects of experienced managers looking for a path to riches. Just as we see in other economies, entrepreneurship is fast becoming a career path for people ranging from the economically disadvantaged looking for true independence and empowerment to blue collar workers no longer willing to put their livelihoods in the hands of large corporations and unions.

From Ipsos News Center:

Notably, it appears that the past experiences of would-be entrepreneurs differ slightly from those who are already running their own businesses. For example, while nearly one quarter (21%) of existing entrepreneurs claim to have come from an executive or managerial role prior to starting their own business, just 15% of aspiring entrepreneurs state that they come from that same background. Further, while one in eleven (9%) existing entrepreneurs cite previous experience in blue collar or labourer work, a larger proportion (13%) of aspiring entrepreneurs are emerging from blue-collar backgrounds. In fact, with just 15% of aspiring entrepreneurs coming from a managerial background, this suggests that most Canadians believe that this type of experience is not necessary in order to be able to manage one's own business.

Thanks to Ben Cunningham for passing this study along.

Posted by Jeff Cornwall at 06:36 AM | Permalink

Read Nathan Griffith's essay on why Social Security reform is so difficult in the US today at our LockeSmith blog.

Posted by Jeff Cornwall at 05:52 AM | Permalink

The story of the dry cleaners who got sued for $67 million by a judge for losing a pair of his pants has taken a sad turn. From the Washington Business Journal:

The Chung family said it closed one of its dry cleaners in D.C. after losing money fighting the high-profile lawsuit involving a missing pair of pants.

South Korean immigrants Jim Na and Soo Chung, who operated Custom Cleaners...for seven years, were sued in 2005 by D.C. administrative law judge Roy Pearson for $67 million for mishandling a pair of pants.

The amount in the high profile case was later lowered to $54 million.

Despite winning the suit that went to trial in June in the D.C. Superior Court, the Chungs spent money fighting Pearson and ultimately had to close the store, according to a press release issued by their attorney.

Pearson is not giving up on his attack on these small business owners. He is appealing the court's ruling, so the case goes on and the legal costs continue to grow for the Chung family.

Karen Harned, executive director of the National Federation of Independent Business Legal Foundation, had this to say about this case:

"Small-business owners, like the Chungs, live in fear every day that they will be the next victim of a frivolous lawsuit and could possibly lose their business. For the Chungs, this fear has become a reality - forcing them to close the doors to Custom Cleaners. Even after they were victorious at trial, the costs and pressures of the ongoing lawsuit have now taken the business that they worked so hard to maintain and operate. It is disgraceful that our legal system operates this way. Outrageous litigants should not be able to use our judicial system to take advantage of innocent small-business owners.

"NFIB hopes the D.C. government will follow through with the proper proceedings to ensure Mr. Pearson is no longer entrusted with the authority to make legal decisions on behalf of the people of the District of Columbia. Removing Pearson's robe as an administrative judge is a small, but important, step towards changing the system so that the courts are no longer used to kill the American dream. It unfortunately is too late to save Custom Cleaners. However, we hope this regrettable story will help the public and government officials realize that tort reform is needed to prevent these types of frivolous lawsuits from killing another small business."

I could not agree more! I hope they do remove the judge from the bench for this despicable act. If these efforts are successful, I can see the headline: Judge Exposed -- Loses His Robe and His Pants.

Posted by Jeff Cornwall at 10:23 AM | Permalink

I share some of the latest news -- and not good news, I might add -- on the current push for new public economic policy coming out of Washington at the LockeSmith blog.

Posted by Jeff Cornwall at 11:00 AM | Permalink

Small business owners do not seem to be feeling the effects of the credit problems touted in the media, according to the August National Federation of Independent Business Small Business Economic Trends Report.

Regular borrowing activity was reported by 35 percent of owners surveyed, down one point from last month. The net percent of owners reporting loans harder to get in recent months rose two points to a net 7 percent, but this is still an historically low percentage. Readings as high as 12 percent were common in the early 1990s.

Only 3 percent of the owners cited the cost and availability of credit as their No. 1 business problem, far from the record 37 percent reached in 1982 and typical of readings for the past decade. Thirty-five percent reported all their credit needs met; 4 percent reported problems obtaining desired financing, typical of readings for the past few years. The net percent of owners reporting higher rates on their short-term loans was 14 percent (seasonally adjusted), two points above July, but one of the lowest readings since 2004.

Although tight credit does not seem to be slowing small businesses down, economic conditions have created
a very cautious attitude in small business owners according to this survey. Sales and profits seemed to be rather anemic. Capital and inventory spending was reported as weaker.

The one report that continues to worry me is that wage pressure still seems to be a problem for many small businesses. Those of us who remember inflation gone wild and past periods of stagflation (a recession and inflation all rolled into one big mess, as we had in the late 1970s and early 1980s) are keeping a wary eye on wage and other inflationary pressures in the economy.

Posted by Jeff Cornwall at 10:00 AM | Permalink

There are calls for Canada's floundering system of socialized entrepreneurship to become even more meddlesome. Read my post at LockeSmith for my post on calls for this disturbing shift in public economic policy to our north.

Posted by Jeff Cornwall at 06:48 AM | Permalink

Nathan Griffith rights a provocative essay about the notion of democratic deficits at our new LockeSmith blog.

You hear a lot in European Union circles about "democratic deficit." The argument--or perhaps more accurately, assumption--is that EU institutions are not sufficiently accountable to voters. I have to admit, the term has always disturbed me, though not for the usual reasons. I'm not disturbed that there is a deficit, though many EU folks get highly exercised on that point. Instead, I'm disturbed that we worry about there being enough democracy. (Or, as you're probably thinking now, I'm just plain disturbed.)

Posted by Jeff Cornwall at 08:56 AM | Permalink

The post I made on the Oregon Innovation Initiative created several comments questioning my critical view of this set of policies and initiatives. I decide that our new blog LockeSmith was a better venue to use to respond. If you want to follow the continuing debate on this issue, please see this post at our other blog.

Posted by Jeff Cornwall at 02:54 PM | Permalink

See my commentary on Bush's plan to rescue the subprime mess at our new blog site, the LockeSmith Blog.

Posted by Jeff Cornwall at 08:59 AM | Permalink

I am pleased to announce a new blog called the LockeSmith blog. It is a joint effort of three of us here at Belmont. There will be periodic posts by Prof. Nathan Griffith (Political Science), Prof. Mark Schenkel (Entrepreneurship), and me. Here is the mission of the blog:

The Lockesmith Blog hopes to play an important role in the growing resurgence of the scholarship of classical liberalism through the exploration of the principles of individualism, private property and the free market, the rule of law, and social toleration.

The blog carries on the work started by Dr. Larry Hall, former Dean of the College of Arts and Science here at Belmont University. Larry was Nathan's mentor while here at Belmont, so it is only appropriate that he make the inaugural post.

We hope you enjoy this new blog. I will still be doing most of my ranting and rambling here at the Entrepreneurial Mind, but will also do cross-posts at the LockeSmith site. Please add the LockeSmith blog to your favorites and sign up for a regular feed so you don't miss a post.

Posted by Jeff Cornwall at 09:13 AM | Permalink

The SBA has released their updated small business statistics. Here are a few of the highlights:

- Represent 99.7 percent of all employer firms.

- Employ about half of all private sector employees.

- Pay more than 45 percent of total U.S. private payroll.

- Have generated 60 to 80 percent of net new jobs annually over the last decade.

- Create more than half of nonfarm private gross domestic product (GDP).

- Hire 40 percent of high tech workers (such as scientists, engineers, and computer workers).

- Are 52 percent home-based and 2 percent franchises.

- Made up 97 percent of all identified exporters and produced 28.6 percent of the known export value in FY 2004.

- Small innovative firms produce 13 times more patents per employee than large patenting firms, and their patents
are twice as likely as large firm patents to be among the one percent most cited.

The number of new small businesses has grown steadily over the past few years. In 2002 there were about 570,000 new small firms. That number grew to almost 650,000 new businesses in 2006.

The new stricter bankruptcy laws have clearly had an impact. Bankruptcies in small businesses had been 34,000 - 39,000 per year for several years, but dropped to 19,000 in 2006.

Even with our growing dependence on small business in the US economy, the regulatory costs for small businesses continues to grow. The average employer with 20 employees pays about $7, 647 per employee in regulatory costs ($1,304 of this is tax compliance). The average cost per employee for large firms is about $5,282.

Posted by Jeff Cornwall at 08:31 AM | Permalink

The NFIB's Chief Economist William Dunkelberg released this statement on small business job growth:

"Small-business owners managed to do some solid, but not spectacular, hiring in July. Sixteen percent reported increasing employment an average of 4 workers per firm, compared to 11 percent who reported workforce reductions averaging 2.4 workers. For all firms, this was an average increase of 0.4 employees per firm. Seasonally adjusted, the numbers are less impressive, with 14 percent increasing employment by 3.7 employees per firm, 13 percent reducing employment by 2.6 workers and, including all firms, a gain of 0.1 employees per firm. In construction, 20 percent increased the size of their workforce an average of 4.2 workers, and 12 percent cut employment by an average of 3.3 workers, producing an increase for all construction firms of 0.4 workers per firm (not seasonally adjusted).

"Twenty-three percent (seasonally adjusted) reported unfilled job openings, down three points from June. The decline in the percent of firms with unfilled openings anticipates an increase in the unemployment rate in the months to come. Thirteen percent of the owners reported that the availability of qualified labor was their top business problem, unchanged from June. Only taxes and the cost and availability of insurance received more votes for the number one business problem. No one likes high energy prices, but for service sector firms, this is not likely to be a top problem.

"Over the next three months, 17 percent plan to create new jobs (down three points), and 10 percent plan workforce reductions (up three points), yielding a seasonally adjusted net 13 percent of owners planning to create new jobs -- up a point from June. Fifty-four percent reported hiring or trying to hire new workers, 80 percent reported 'few or no qualified applicants' for their positions.

"That's a tight labor market," Dunkelberg concluded.

Since small business employs about 50% of all American workers, we need to keep our eyes on these trends.

Posted by Jeff Cornwall at 07:11 AM | Permalink | Comments (1)

Some of you may have seen this quote in the recent issue of Forbes, but it is worth repeating. It comes from a recent column by John Stossel in the New York Sun:

America became an economic power despite, not because of, Hamiltonian intervention. Hong Kong and much of East Asia went from abject poverty to affluence in a few decades not because their governments gave people "tools they need to compete" -- they didn't -- but because they exercised limited powers.

I wish Mr. [David] Brooks and other Hamiltonian conservatives understood that freedom and prosperity have nothing to do with bureaucrats managing society through schooling and tax manipulation.

Prosperity comes from leaving people free in a legal system that respects their persons and property so they can pursue their dreams while taking responsibility for their actions. Free people find their own tools if the state leaves them alone.

In the era of big government, the last thing we need are champions of the statist Hamilton.

What we need now are champions of the libertarian Jefferson, who said in a very un-Hamiltonian way: "I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it."

I was reminded of the difference between the more libertarian brand of conservatism and big government conservatism when Arthur Laffer came to campus. He stressed several times that one of the most important outcomes of the Reagan tax cuts was that they created more money for government. Hamilton would have been proud of that view.

To only advocate for lower taxes misses the most important part of the economic equation that American needs follow. To help foster our entrepreneurial economy we need to focus on creating less government and more freedom.

Posted by Jeff Cornwall at 07:15 AM | Permalink

There is a growing resentment toward business, according to a survey conducted by the Financial Times and Harris. From the Financial Times:

A popular backlash against globalisation and the leaders of the world's largest companies is sweeping all rich countries, an FT/Harris poll shows.

Large majorities of people in the US and in Europe want higher taxation for the rich and even pay caps for corporate executives to counter what they believe are unjustified rewards and the negative effects of globalisation.

Viewing globalisation as an overwhelmingly negative force, citizens of rich countries are looking to governments to cushion the blows they perceive have come from the liberalisation of their economies to trade with emerging countries.

What is most chilling about these findings, if they prove to translate into policy, is that they won't just hit big corporations and their executives. It never seems to work that way. Punitive taxes and attempts to redistribute the wealth will also hit entrepreneurs hard.

Say what you will about corporate greed, a solution that includes higher taxes will make the pie they are trying to redistribute much smaller. Entrepreneurial activity is much more vulnerable and reacts much more quickly to significant increases in tax rates, and entrepreneurship is the engine of the current global economic expansion.

Thanks to Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 05:46 AM | Permalink | Comments (2)

Ryan Healy has an article at Web Worker Daily that offers more insight into Generation Y (aka Entrepreneurial Generation). Trust and entrepreneurial culture seems to be what he sees as key to providing these folks with jobs that they will stay with over time.

(Thanks to Natalie Wozniak from Minne-so-cold for passing this along).

Posted by Jeff Cornwall at 06:58 AM | Permalink

The National Dialogue on Entrepreneurship offers some interesting facts about the 20 million self-employed in the US recently reported by the Census Bureau:

- Each day, 2,356 Americans decide to go into business for themselves.

- Their companies account for 78% of all US businesses.

- They collectively obtain annual receipts of $951 billion.

- Georgia (up 7.6%) and Utah (up 7.2%) showed the highest annual increases. The national average increase was 4.4 percent.

- The fastest growing sector was Web search portals, where the number of self-employed jumped an astounding 41.2 percent in one year.

Posted by Jeff Cornwall at 05:23 AM | Permalink

James Pethokoukis from US News & World Report offers more evidence of the global entrepreneurial economic boom that has been underway now for almost a decade.

"This is far and away the strongest global economy I've seen in my business lifetime," is how U.S. Treasury Secretary Henry Paulson recently described the current global boom. Hyperbole? Actually, that dramatic declaration probably under states things. Let's refer back to this piece of analysis from Paulson's old firm, Goldman Sachs: "If we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data [have] been collectible for much of the world."

Indeed, the global economy is growing at about a 5 percent annual pace, according to the International Monetary Fund, after growing 4.9 percent in 2005 and 5.4 percent last year. By contrast, the global economy grew at a 3 percent pace from 1980 to 2000 and at 4.7 percent from 1960 to 1980.

As support he links to an important and compelling report issued by the Federal Reserve Bank of Minneapolis and this "Fiscal Fact" from the Tax Foundation.

He rightly ties much of this growth to worldwide efforts to lower tax rates. There is a growing mountain of evidence for the impact that lowering marginal tax rates has on fueling entrepreneurial expansion in an economy.

This evidence only adds to my concern that many politicians in the US now want to return to higher marginal tax rates to pay for new government initiatives, such as universal health care.

Posted by Jeff Cornwall at 05:18 AM | Permalink

Every day was Christmas for Michael Clark, but now the holiday's over.

From the attic of his condo in Woodbridge, Va., the 38-year-old Web developer ran an Internet radio station that spun his beloved Christmas carols all year long. Then in March, a panel of federal judges sharply increased the royalty charges for playing music online.

Since then, it's been one long, silent night for Clark and his hundreds of listeners at christmasmusic247.com. His site and hundreds of other free Internet radio stations already have shut down. (Jim Puzzanghera, latimes.com)

This Sunday night an entrepreneurial seedbed that was part of the digital revolution will go silent. A federal court decided in March that web-based radio stations would now have to pay a higher royalty (a 100% increase) -- and for those still broadcasting after Sunday July 15th there would be a retroactive payment due covering the time back through 2006. There was a late appeal to the decision, but it failed this past Wednesday. The US House held hearings -- what they always do when they know they can really do nothing about something -- and as expected, did nothing.

So the countdown continues.

During time of change, those in the status quo fight change, while entrepreneurs embrace it. In the music business we have seen them suing 15-year-old girls over downloading music, and now we see them going after obscure webcasters.

Rather that embracing change and finding ways to turn it to their advantage, the status quo fights change at every turn. Eventually change always wins, but in the short run the preservers of the status quo fight on in quixotic fashion.

The entertainment industry is in a period of what my friend Peter Vaill calls permanent white water. If you fight the currents, eventually you will drown. The only way to make it to the bottom of the river is to follow where it takes you and try to avoid the obstacles and challenges that inevitably will pop up along the way.

Posted by Jeff Cornwall at 07:12 AM | Permalink

A better regulatory environment is ahead for Tennessee's 513,000 small businesses, thanks to a new law signed by Governor Phil Bredesen. Tennessee's Regulatory Flexibility Act of 2007 will set the stage for a more transparent regulatory environment for small businesses in the state and encourage entrepreneurial success.

The Act requires state agencies to analyze the economic impact of a proposed rule on small businesses and to consider less burdensome alternatives that will accomplish the regulatory goal.

Thanks to the key business groups supporting the legislation, which included the National Federation of Independent Business (NFIB) and the Tennessee Jobs Coalition, which includes a number of leading member organizations.

Posted by Jeff Cornwall at 11:11 AM | Permalink

The latest survey from the NFIB finds small business owners losing confidence in the economy.

"Small-business owners have seen little to encourage them about growth," said NFIB Chief Economist William Dunkelberg, "but there are few signs that the economy is ready to slip into an actual recession."

Some highlights from this month's survey"

- Hiring plans among small firms faded some in June, but job openings are historically high and unemployment remains low. Seasonally adjusted, job growth was flat compared to May. However, unfilled positions were reported to actually be a bit higher in June and still a concern for business owners. Of concern for future growth is the finding that fewer small business owners have plans for new job creation.

- Capital spending and future plans for capital outlays have both weakened, indicating a more cautious stance. This seems to be tied to a view that conditions will likely not improve over the next six months.

- Small business owners are taking care to manage inventories, with only 5 percent of owners reporting a gain in inventory stocks.

- Sales seem to be flat, with about as many owners reporting increases in sales as those reporting decreases in sales. But inflation is still a worry as more report increasing prices (31%) than report decreasing prices (13%). Profits have also gotten weaker for most small businesses. Any increase in prices is being eaten up by increasing labor costs. Another factor that causes me concerns about inflation.

- Finally, borrowing is down, which is yet one more sign of caution among small business owners.

Posted by Jeff Cornwall at 06:00 AM | Permalink

The Council on Economic Competitiveness has a new report on how our economy can be more resilient in the face of economic, natural, and political crises. While the report is a very interesting read, I can offer the short version for entrepreneurial enterprises: cash is king. If you have a war chest of cash, you can weather almost any economic storm.

(via the National Dialogue on Entrepreneurship).

Posted by Jeff Cornwall at 06:56 AM | Permalink | Comments (1)

James Pethokoukis at US News writes that a new report from Goldman Sachs says that China is now probably the most powerful global economic engine and we all might be singing "Blame China" when the next recession hits our economy:

"So, what constitutes a recession in modern times, and when do they occur?...We suspect it would almost certainly involve a major economic slowdown in China. On almost any criteria (and topic), it is impossible to underestimate China's positive impact on the buoyancy of world growth this decade. That said, our China proprietary indicators show no sign of an imminent slowdown. In addition, our various proprietary indices suggest that the underlying global macro environment remains favorable...Moreover, if we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data has been collectable for much of the world."

I would add the following to a list of countries to watch: Brazil, Russia and India.

Posted by Jeff Cornwall at 06:25 AM | Permalink

That is the question that is posed in the cover story at Fortune this week. The answer seems to be "yes" if you define business in terms of Big Business.

James Pethokoukis at US News also explores this question. His answer is also "yes", since Big Business loves to pick who they see as the likely winner, loves the status quo, and is absolutely head-over-heels in love with big government.

And what does the entrepreneurial part of our economy think of Hillary? Pethokoukis asked me that question. Here is what he printed from my answer to this question:

There has emerged a sharp contrast between the interests of Big Business and Small Business. In the past century, Big Business, Government, and Labor created a cozy relationship in which they found common ground to support each other. This system worked great until the 1970s-1980s, when the Big Businesses that dominated our economy for so many decades lost their economic steam. Entrepreneurs began to fill the void, creating 78 percent of all new jobs over the past 20 years. Big Business has continued to be supportive of both parties, and as a result both parties have mostly ignored the emergence of the entrepreneurial economy we now find ourselves in. They govern as if it is still 1965. However, over 50 percent of the GDP (according to the Small Business Administration) is now generated by small business in the U.S.

Posted by Jeff Cornwall at 06:03 AM | Permalink

The Brookings Institution’s Hamilton Project (affiliated with centrist Democrats) has released a new series of reports focused on reforming America's tax system. Here is a link to their report.

What do they have in store for us if a Democrat assume power? Higher marginal tax rates for one thing. James Pethokoukis conducted an interview with Larry Summers (part of the last Clinton cabinet). Here is what Mr. Summers had to say about raising taxes:

The purpose of the tax system is to raise revenue in the best possible way, but you have to be aware of the changing economic context. At a moment like the present when inequality has increased very dramatically, it means that being smart about the tax code means making adjustments in the direction of increased progressivity. So I don't think we are asking too much of the tax code, given that we need to raise more revenue.

Sorry Mr. Summers, but you are living in a world that no longer exists -- this is the wrong time to increase top marginal tax rates. This is no longer the 1900s with our corporate economy where one worker in five worked for a Fortune 500 company. We are now in an entrepreneurial age where 50% of the workforce is employed by small business owners. And we know from studies from around the world that higher tax rates do one thing in an entrepreneurial economy -- they slow down expansion and growth.

Posted by Jeff Cornwall at 09:44 AM | Permalink | Comments (3)

Here is a link to a 15 minute interview with almost Presidential candidate Fred Thompson. The first part of the interview addresses his pro-growth approach to tax policy.

Posted by Jeff Cornwall at 11:34 AM | Permalink | Comments (3)

There are now about 20 million self employed in the US. Jimmy Atkinson has a summary of common retirement options based on the 2007 tax code for those of you who are among that growing group of entrepreneurs at his blog Ask the Advisor. Remember that self employment also means "self retirement" for the most part.

Posted by Jeff Cornwall at 05:47 AM | Permalink | Comments (1)

I wrote a post a couple of months ago about the problems that current immigration policy is creating for high tech businesses in their hiring. However, our immigration policy impacts more that just the hiring of high tech workers. It is also having an impact on the creation of businesses in our entrepreneurial economy.

From TechJournal South:

More than a quarter of technology and engineering firms started in the United States over the 1995-2005 decade had a least one key foreign born founder. But those who grow frustrated faced with delays in obtaining visas move back home to start companies, says Vivek Wadhwa, executive in residence, Pratt School of Engineering at Duke University....

Nationwide, these immigrant-founded companies produced $52 billion in sales and employed 450,000 workers in 2005. The majority of these immigrant entrepreneurs came from India, United Kingdom, China, Taiwan, Japan and Germany.

Immigration reform should not be code for keeping people out. Rather, we need reform so we can assure the people we need come in. This should include both unskilled workers and skilled workers.

But more importantly, we should be actively recruiting immigrants who want to come to our system of free enterprise to start their businesses. This is no less important for today's world than it was to bring in the scientists we needed in the 1950s and 1960s to help fight the cold war. It we want to remain a world power, we need to continue to have a strong economy that leads the world.

Economic growth today is almost solely the domain of entrepreneurs. Let's attract the best, the brightest, the most passionate entrepreneurs the world has to offer. However, what ever we do, we must not create a bureaucratic system that controls what industry or type of business we think that we want them to start.

Let's qualify them by making sure that they have the basic experience and skills necessary to be successful business owners, and then turn them lose. Look at their education, their experience in business and as business owners, and their legal record.

Give preference to those educated in the US. Again from the TechJournal South article:

These immigrants come to the U.S. primarily to study and many received advanced degrees in engineering, math and science fields. But the once three-year process for getting a green card that permits them to work in the United States now stretches to six or even 10 years sometimes, says Wadhwa. Rather than deal with lengthy delays, they take their advanced U.S. educations and go home to start new companies.

Let them in -- or in many cases let them stay here -- and let them compete and innovate in a free market. If not, we are feeding competing economies with the entrepreneurs who will help those countries supplant our global economic strength.

(Thanks to Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 01:03 PM | Permalink

The entrepreneurial economy in the US is still moving ahead at a positive pace, albeit somewhat modest, according to the latest survey of small business owners by the NFIB

Job openings fell and are expected to nudge unemployment up, but unfilled positions remain high. Job-creation plans, although strong, were flat. Reports of price hikes eased, but continue higher than desired. Capital-spending plans, like actual outlays, were unchanged from the previous month.

24 percent, reported unfilled job openings, down by two points from April, but historically strong. Twelve percent said the availability of qualified labor was their top business problem, unchanged since February.

Over the next three months, one-fourth plan to create new jobs, up one point, and 6 percent plan workforce reductions, up two points, yielding a seasonally adjusted net 13 percent of owners planning to create new jobs, historically strong and unchanged from April. Fifty-four percent reported hiring or trying to hire new workers, though 78 percent of those reported "few or no qualified applicants" for their positions. Job-creation plans were positive in all industry groups.

Capital spending in May was flat. Plans to make outlays in the coming months remained weak, unchanged from April's 29 percent of owners. Profit gains have not triggered a boom in spending. Reported capital outlays over the past six months held firm at 60 percent. Nearly half, 45 percent, reported spending on new equipment, 24 percent acquired vehicles, 17 percent bought fixtures and furniture, 13 percent improved or expanded their facilities. Five percent acquired new buildings or land for expansion.

An unchanged and rather weak 12 percent said now is a good time to expand facilities. A net-negative 3 percent expect conditions to improve over the next six months, up five points from April and typical of readings at later stages of an expansion. A net 16 percent expect higher real sales, up two points, and a positive sign for growth. Overall, expectations for economic growth are soft, but better.

Twenty-eight percent of those surveyed reported higher sales, and 31 percent had lower sales, producing a seasonally-adjusted net 1 percent of all firms with higher sales in the most-recent three-month period, compared to the prior three months, down three points from April.

Unadjusted, 29 percent reported raising average selling prices, up one point, and 12 percent reported lowering them, down one point. The number of firms with earnings improvements gained in May, but the number of those reporting higher worker compensation rose three points to 29 percent. Only 16 percent managed to raise average selling prices. "Labor compensation will be pressuring profit margins all year," NFIB Chief Economist William Dunkelberg said.

Of the 21 percent reporting higher earnings, nearly two-thirds, 65 percent, cited stronger sales, and 5 percent each cited lower materials costs and higher selling prices. For the 40 percent reporting lower earnings, two-fifths cited weaker sales, 8 percent blamed higher labor costs, 10 percent cited higher materials costs, and 5 percent each pointed to higher insurance costs, lower selling prices and regulatory costs.

Regular borrowing activity remained flat, reported by 38 percent of all owners. Only 3 percent said their main business problem was the cost and availability of credit. Thirty-nine percent reported all their credit needs met, compared to six percent who reported problems obtaining the financing they wanted. The remaining 55 percent did not want or need financing.

All in all, these finding show that it is a good time to cut taxes to help kick entrepreneurial activity into a higher gear.

Posted by Jeff Cornwall at 05:31 AM | Permalink

Having been a healthcare business owner with hundreds of employees wanting healthcare coverage, I understand the frustration with our healthcare system from at least two perspectives -- as a provider and as an employer. From both perspectives I can tell you that the system we now have for healthcare payment cannot be sustained. However, most of the proposals we are hearing from the Presidential candidates will only make it worse. Just like so many questions we now face in this country, this is another case where government is not the answer.

Rudy Giuliani seems to be the only major candidate who has a solution to really address the healthcare system crisis. In the most recent debate he said:

"Health insurance should become like homeowners insurance or like car insurance: You don't cover everything in your homeowners policy. If you have a slight accident in your house, if you need to refill your oil in your car, you don't cover that with insurance. But that is covered in many of the insurance policies because they're government dominated and they're employer dominated."

I could not agree more. The mess we are in now is primarily the result of the mess that big corporations and the federal government created -- independently and through duplicitous acts throughout the latter half of the last century. Why we keep looking to either or both of them to fix the problem is beyond me. I only hope that if Giuliani is elected that this is truly a fundamental priority for him and that he can muster the will and support to fix the mess.

What is interesting is that many small businesses, out of necessity, are developing a system as Giuliani advocates ad hoc. They are sending their employees out to get individual insurance and helping to financial support that coverage through higher pay that they can offer through the savings of not providing group coverage. In many cases this takes it entirely out of the tax system, which is key to making this change in approach to healthcare payment work. There should be no tax deduction for health insurance -- period. Not corporate and not individual.

We have the best healthcare in the world. Let's not ruin it by making our method of paying for it a socialized approach. I am sure that most of my readers in other countries would testify that government systems are not effective.

For more excellent thinking on this topic see James Pethokoukis's essay writing for US News and Arnold Kling's essay at Cato's website.

Posted by Jeff Cornwall at 05:59 AM | Permalink | Comments (2)

The government wants to get its fingers into the new economy in a bad way -- it is what I call socialized entrepreneurship. And, if some of the Presidential candidates get their way we could see this trend taken to a whole new level. James Pethokoukis at US News has a good summary of Sen. Clinton's ideas on how the government can "help" innovation. All of her ideas involve more government programs and agencies that try to pick the winners and losers.

I guarantee you that any approach like the one outlined by Clinton will become a political circus, with special interests stepping up to get their pork. Entrepreneurship works best in a free market. Let's keep Washington's backroom deal making and politicking out of our entrepreneurial economy.

Posted by Jeff Cornwall at 05:55 AM | Permalink | Comments (3)

Well, the tax code just got longer, but this time the added pages (now about 65,000 and counting) should help out some small businesses, at least in the short-run.

The Small Business and Work Opportunity Tax Act of 2007 was recently passed in conjunction with legislation to continue funding the war in Iraq and to raise the minimum wage. The tax-related provisions are designed in part to provide benefits to small businesses likely to be hit hard by the minimum wage increase.

Here is a summary of the provisions that have an impact on small business as published by the accounting firm KraftCPAs (used with permission):

The Section 179 election to expense property in its initial year (rather than depreciate it) is extended through 2010 and increased from $100,000 to $125,000, effective for years beginning after 2006. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000). These amounts will be adjusted for inflation annually.

The Work Opportunity tax credit, which had been set to expire Dec. 31, 2007, is extended until September 30, 2011. This credit is available to businesses that hire employees from targeted groups of individuals, such as veterans, ex-felons, high-risk youth, and food stamp and supplemental security income recipients. The new law expands this list to include disabled veterans and individuals in counties that have suffered significant population losses. If you hire a target employee, your business can receive a 40% tax credit for the first $6,000 paid to that worker.

The individual and corporate alternative minimum tax (AMT) limits on the use of certain credits are waived, effective for years after 2006 as well as for carryback of these credits. This applies to the Work Opportunity credit and the credit for taxes paid on employee tips. Employers are also now eligible for the full tip credit despite the increase in the minimum wage.

[The act] includes certain S corporation and pension provisions, but they are generally too obscure and technical to cover in this [summary]. Contact your tax advisor to ascertain whether any of these changes affect your tax planning strategies.

Check with your own tax advisor to determine what, if any, impact these new provisions have on your business.

Posted by Jeff Cornwall at 01:22 PM | Permalink | Comments (1)

The entrepreneurial economy just keeps on chugging along. We just had our 45th straight month of real job growth.

Posted by Jeff Cornwall at 08:28 AM | Permalink | Comments (2)

Rising property taxes can often squeeze homeowners out of neighborhoods that they have lived in for years. And they can also force small business owners to sell their businesses. Such is the case of a 117 year old family owned amusement park outside of Washington, DC. From the Washington Post via Cato-at-Liberty:

For 117 summers, generations of children have frolicked through Trimper's Rides on this beach resort town's signature boardwalk. But this Memorial Day weekend might begin the last summer they circle the antique wooden carousel, fling around the Tilt-a-Whirl and loop through the Tidal Wave roller coaster.

The Trimpers say they are considering closing the amusement park and arcade this year.

As Ocean City has exploded into a megaresort, property taxes have soared for Trimper's, which operates on the last chunk of undeveloped land on the town's three-mile boardwalk. In the past three years, family members said, their assessed property value has tripled, from $21 million to $65 million.

So the family is now torn over the possibility of having to sell the business because they just can't generate enough revenue to pay for the property taxes. I know, I know. Don't cry for them -- after all they now own land that is worth $65 million. But, if you read the rest of the story, you will hear a message that I hear over and over -- it just isn't all about the money. This is a century old family business. They take joy and pride in providing good family entertainment and good jobs.

Yet another example of public policy that is blind to our entrepreneurial economy.

(Thanks to Bill Hobbs for passing this along).

Posted by Jeff Cornwall at 08:12 AM | Permalink | Comments (2)

It now looks like the SEC is willing to reconsider their decision not to extend the deadline for small public firm compliance with section 404 of the Sarbanes-Oxley Act. The Office of Advocacy of the SBA wrote to the commissioners in the wake of the SEC's decision not to grant postponement of deadlines for public firms with less than $75 million in market value. You can read the contents of the Office of Advocacy's letter here.

Keep in mind that this is merely an attempt to postpone the deadline. At some point compliance will probably be required of all public companies -- even the small ones. The estimated $500,000 in compliance costs per year is unfathomable for many of these smaller firms. And even worse is the fact that these rules will creep into the accounting standards for non-public firms, as well.

Posted by Jeff Cornwall at 10:14 AM | Permalink

From the National Dialogue on Entrepreneurship:

The latest assessment of entrepreneurial activity by the Ewing Marion Kauffman Foundation provides startling numbers for yet another year. The new report shows that an average of 465,000 people creating new businesses each month in 2006. Besides year-to-year changes in entrepreneurship activity, the Kauffman Index -- defined as the percent of the adult U.S. population of non-business owners who start a business as their main job each month -- captures long-term trends. The 2006 figure is up slightly from the previous year, it is equal to the average rate for the past ten years. Other highlights from the past year include: Asians, Latinos and immigrants far outpaced native-born Americans in entrepreneurial activity; African Americans experienced a decline; entrepreneurial activity for men did not change between 2005-2006, ending a downward trend that began in 2003; and, the rate of entrepreneurial activity for women declined slightly. The report also contains data on activity at the state level. The five states with the highest rates of entrepreneurial activity were Montana, Mississippi, Georgia, Oklahoma and Maine. The five states with the lowest rates of entrepreneurial activity were Michigan, Pennsylvania, South Carolina, Illinois and Delaware.

Posted by Jeff Cornwall at 05:49 AM | Permalink

After my post last week on small businesses and lawsuits, Ryan Zempel, Managing Editor of InstituteforLegalReform.com sent along a couple of interesting links.

The first is to a study called Tort Liability Costs for Small Business. This study shows that small businesses (those with $10 million or less in annual revenue) bear 69 percent of the total cost of the tort system to all U.S. businesses. That's $98 billion a year, or $200,000 per year for a business with $10 million in revenue, on average.

The second link is to a survey titled Small Businesses: How the Threat of Lawsuits Impacts Their Operations. This survey shows that, of those who expressed some concern about frivolous lawsuits, six in ten say the fear of lawsuits makes them feel more constrained in making business decision.

Posted by Jeff Cornwall at 01:53 PM | Permalink

This afternoon the NFIB released a major new study on small business and health care. Here are the key findings from this survey of small business owners:

- Cost is Most Important to Business Owners. When asked the single most important problem facing the health care system today, 74 percent of NFIB members identify cost. Expanding coverage ranks third at 9 percent. Given a second choice, an additional 20 percent identify cost (94 percent a first OR second choice); 28 percent note expanding coverage (37 percent a first or second choice).

- Information on Costs Helps. Seventy (70) percent of NFIB members think that making consumers more sensitive to health care and health insurance costs will encourage consumers to use less health care; 28 percent do not think it will. Increasing consumer price sensitivity can reduce health care prices. Steps to increase consumer sensitivity to and awareness of health-care (insurance) prices are a good thing.

- Premiums Should be Individualized. Seventy-six (76) percent think individual behavior that influences health outcomes should be included in the calculation of health-insurance premiums. Two obvious examples are smoking (89 percent in favor) and body mass/weight (72 percent in favor). They are less certain about other specific behaviors such as driving record (44 percent) and frequency/intensity of medical use in the last five years (51 percent). They also hold mixed views on factors such age (51 percent -- fair), location (39 percent -- fair), family medical history (35 percent -- fair), and credit score (16 percent -- fair). However, small-business owners do NOT think any of these factors should be grounds for insurance denial by a 69 percent – 30 percent margin.

- Healthcare Coverage Should be Voluntary. Fifty-eight (58) percent of NFIB members think the employer's role should be confined to voluntary provision of employee health insurance. Another 7 percent think provision of employee health insurance should be mandatory. Still, another 3 percent favor a payroll tax of some type to finance employee health insurance. Thus, 68 percent favor employers continuing to play a role in health-care financing. Thirty (30) percent disagree; they think the employer should have NO role in financing health insurance. The larger portion of this group (23 percent) think individuals should be responsible for themselves (employers excluded), while the smaller portion (7 percent) think government should be responsible for them (employers excluded).

- Keep Government Subsidies Out of the System. Fifty-seven (57) percent think the government, i.e., taxpayers, should NOT financially assist those without private health insurance or Medicaid. 42 percent think it should.

Posted by Jeff Cornwall at 03:27 AM | Permalink | Comments (1)

We hear so much about the health insurance crisis faced by small business owners, which is a real problem. However, liability insurance is at least as major an issue for small business owners.

Today in testimony before the U.S. House Committee on Small Business, NFIB Legal Foundation Executive Director Karen Harned laid out a strong case for liability reform. Specifically, she argued for legal reform that makes Rule 11 sanctions (which includes sanctions on lawyers and law firms that are party to frivolous law suites) mandatory for frivolous lawsuit filers.

Harned rightly pointed out that for the small business with five employees or less, the problem is the $5,000 and $10,000 settlements, not the million dollar verdicts. She said that when you consider that many small businesses gross $350,000 or less a year, which does not include the additional expenses of running a business, such as payroll, rent, cost of goods sold, or regulatory costs, $5,000 - $10,000 can significantly impact a small-business owner's bottom line.

Harned provided examples of small-business stories of lawsuit abuse including the now famous Washington, D.C. dry cleaner's pants suit case, where the plaintiff, Administrative Law Judge Roy Pearson, is suing the family-owned dry cleaner shop for $65 million over a lost-and-found pair of pants.

What is most frustrating is that so little attention is given to liability reform in the media, while we hear a constant drum beat for health care reform. The media continues to have a bias that obscures the fact that both issues are serious threats to the future of our entrepreneurial economy. In a recent survey conducted by the NFIB, small business owners ranked the Cost and Availability of Liability Insurance as the second-most important problem facing small business today, just behind health-care costs.

Posted by Jeff Cornwall at 02:05 PM | Permalink

One of my favorite writers and thinkers on the importance of freedom is Fr. Robert Sirico with the Acton Institute. I encourage you to read the text of a recent speech he gave a Hillsdale College, in which he argues that capitalism and its inherent freedom offers the most hope for the common good. Here is an excerpt:

We are all entitled to call ourselves socialist, if by the term we mean that we are devoted to the early socialist goal of the well-being of all members of society. Reason and experience make clear that the means to achieve this is not through central planning by the state, but through political and economic freedom. Thomas Aquinas had an axiom: bonum est diffusivum sui. "The good pours itself out." The good of freedom has indeed poured itself out to the benefit of humanity.

Posted by Jeff Cornwall at 09:14 AM | Permalink | Comments (1)

Regulation hurts entrepreneurial economic development. That has been shown in study after study. Still not convinced? Well, take a look at West Virginia. These pictures are from a new study that shows a stark picture of how too many regulations hurts the economy in West Virginia. They show major economic activity right across the border in states with friendlier economic climates.

A video of a local news report of this study can be viewed at Tax Tennessee's website.

Posted by Jeff Cornwall at 05:37 AM | Permalink

Bill Hobbs wrote a great analysis of the impact of the most recent tax cuts on our economy. His essay can be found at the website called Elephant Biz.

Posted by Jeff Cornwall at 02:02 PM | Permalink

The best sources of ideas for businesses comes from your experiences and interests. Many great businesses have been built out of hobbies and other passions. Often these businesses start very small, as what some call "lifestyle" businesses that eventually create a little income. Over time, the entrepreneur is able to transition from a few evenings and weekends to a full-time business.

But now our friends at the IRS are throwing a kink in this cool way to become economically independent. From StartupJournal:

The Internal Revenue Service is stepping up efforts to prevent taxpayers from deducting losses on activities that aren't genuine businesses run to make a profit. The problem: It's not so easy to tell a budding business from a hobby.

Officials say new research shows taxpayer errors in this area are costing the government billions of dollars a year in unpaid taxes. Thus, auditors are "on the lookout" for people trying to deduct losses from hobbies, an IRS spokesman says. To underscore the agency's concern, the IRS recently issued a fact sheet the spokesman says is aimed at "making sure that taxpayers know and abide by the rules."

Sure.... We should all expect some poor person turning their craft or hobby into a business to know the over 60,000 pages of "rules" that are the IRS code.

The story goes on to illustrates this point:

But how are you supposed to figure out whether your activity qualifies as a genuine for-profit business? That can be exceptionally tricky. The IRS says you should consider several factors, such as: Does the time and effort put into the activity indicate you intend to make a profit? Do you and your advisers have the knowledge needed to carry on the activity as a successful business?

Another factor is whether you have made a profit in the past. The IRS says it "presumes" an activity is indeed carried on for profit if you have made a profit during at least three of the past five tax years, including the current year. (The rule is different -- at least two of the past seven years -- for activities that consist primarily of breeding, showing, training or racing horses.)

The IRS has some handy "tips" at their website and there is more information at WorldWideWeb Tax.

Since a part-time business rarely can afford strong outside tax advice, the key is to be cautions and realistic on how you approach your business and make sure to keep very good records. Don't mix expenses and revenues that may create red flags. And keep good records, including a separate checking account for your fledgling business venture.

Posted by Jeff Cornwall at 05:57 AM | Permalink | Comments (1)

Once again entrepreneurs seem to be getting a bit grumpy about the economy according to the latest poll just released by the NFIB.

Capital spending activity by small firms remained lethargic. The frequency of reported capital outlays over the past six months was flat at 60 percent of all firms. Forty-three percent reported spending on new equipment, 23 percent acquired vehicles, and 13 percent improved or expanded their facilities. Seven percent acquired new buildings or land for expansion and 13 percent spent money for new fixtures and furniture.

Just 29 percent of owners plan to make capital expenditures over the next few months -- down four points from March, reflecting pessimism among of owners about the prospects for economic growth.

Twelve percent of the owners expressed the view that the current period is a good time to expand facilities, unchanged from March and a rather weak showing. A net-negative 8 percent expect business conditions to improve over the next six months, down a point from March but typical for the later stages of an expansion. A net 14 percent expect higher real sales, unchanged from March and eight points below January.

Other signs of their pessimism can be seen in inventories, which are down in this survey, and a general avoidance of taking on any new debt.

What makes matters worse is that the pesky demon known as inflation just won't go away either. This is what has given me the most heartburn about our economy over the past year.

Also, the SBA Office of Advocacy released the updated Quarterly Indicators: The Economy and Small Business today, which indicated that overall economic growth slowed in the first quarter of 2007.

Posted by Jeff Cornwall at 06:30 AM | Permalink

Forbes has released its latest tax misery index. See the details of their report here. Europe continues to be well represented on the list of heavy tax burdens.

Posted by Jeff Cornwall at 06:46 AM | Permalink | Comments (1)

I had the pleasure of hearing a talk by Erik Peterson of the Center for Strategic and International Studies. If you ever have the opportunity to hear him speak, by all means take advantage of it. His talk was on the world as his organization sees it in 2025. It is called Seven Futures (this web link as a great deal of detail on his analysis and presentation). The seven futures refers to the seven parts of the world outside of North America. Even if you are running a small business in the middle of Kansas, the world economy is, and increasingly will be, having an impact on your business.

A quick summary of the world in 2025 and beyond:

- The world is not positioning itself well for the growing entrepreneurial economy. Regulation, property rights and instability are all great concerns.

- Brazil, Russia, Indian, and China are key countries to follow (in addition to the US)

- By 2025 the developing world will account for over 50% of the total economic output

- Latin America does not have a good long-term outlook, due to over-regulation, governance "fatigue", and political alienation. Although becoming a major force, Brazil will most likely fall short of its potential to become a world economic power.

- Europe will never see true integration via the EU (which in my opinion is a good thing). Social welfare systems will be pushed to the brink with falling worker to retiree ratios. Although immigration may be necessary to sustain the workforce, anti-immigration attitudes are growing.

- Middle East and Africa has a rather worrisome mix of rapid population growth, modest economic growth, political instability and conflict, all mixed together with religious extremism.

- Sub-Saharan Africa has a long term AIDS crisis and increasing undernourishment. The glimmer of hope lies in untapped fossil fuels to boost the economy if they can be properly managed and governed.

- Russia and Eurasia has a weak economy with a population that could decline by a third by 2050. Aging population and health crises from environmental disasters put further strain on this region. Governance is key with massive reform, but the outlook of this seems bleak.

- South Asia has the potential to be an economic powerhouse, especially India. India is on track to be the most populous country by 2050. The relationship (or lack there of) between India and Pakistan is the only wild card.

- East Asia is the other potential economic dynamo, but interestingly China has only about a twenty year window to get it right. Their one-child policy is going to lead to a rapidly aging population with a dramatic shortage of females in China. Economic liberalization is unlikely.

Posted by Jeff Cornwall at 09:49 AM | Permalink | Comments (1)

My wife and I, two people squarely in the middle of the Baby Boomer Generation, have two great soon-to-be-college-graduate children who are squarely in the middle of the Entrepreneurial Generation (or as it is also called, Generation Y). Several recent studies seem to indicate that these two generations are leading the charge in the entrepreneurial economy today. So I read with great interest a new study released this week by OPEN from American Express about these two entrepreneurial demographic groups.

Here are a few highlights from this latest study:

- 36% of Generation Y small-business owners would jump right back into the entrepreneurial game even if their businesses fail, and surprisingly, 24% of Baby Boomers would do the same.

- Belief by both generations that America is worse off now than when they were kids

- More Baby Boomers say they are naturally energized than their Gen Y counterparts (50% GenY vs. 60% BB) but BB drink, on average, 1 extra caffeinated drink/day (2 GenY vs. 3 BB).

- On average, both groups work 10 hours/day and get 7 hours of sleep at night.

- Both groups agree free trade is a benefit to American entrepreneurs (72% for Gen Y and 69% for Boomers).

- 66% of GenY say they are tech savvy vs. less than half of BB (47%); 88% for both GenY and BB believe experience is more important than tech savvy.

- Both groups agree BB have the edge (59% GenY vs. 66% BB) because of experience.

Posted by Jeff Cornwall at 03:50 PM | Permalink | Comments (1)

From the Albany Times Union (via Ben Cunningham):

The former head of a publicly-funded program meant to help jump-start businesses admitted Monday to finagling a fraudulent $95,000 pay raise, using his corporate credit card for a trip to Disney World and insisting his father be included on two business junkets to China.

Posted by Jeff Cornwall at 07:17 AM | Permalink | Comments (2)

For months now I have warned that politicians just can't keep their hands off the emerging entrepreneurial economy. They have finally noticed the economic transformation this country is in and are responding by finding ways to gain control and offer favors.

From the National Dialogue on Entrepreneurship:

Congressional Democrats have taken the first step forward in their Innovation Agenda, passing the Small Business Lending Improvements Act of 2007. Aimed at lowering the cost of financing, the legislation would create four new loan programs: a Rural Lending Outreach program; a Community Express program; a Medical Professionals in Designated Shortage Areas program; and, an Increased Veteran Participation program. While passed by the House, the legislation faces opposition from the Administration over the inclusion of subsidies to reduce fees for lenders and borrowers in the 7(a) program.

Rather than empower the free enterprise system that fuels entrepreneurial actions, these policy makers want to take control and pick winners and losers. What we really need is much less intervention, control and regulation if we want to spur entrepreneurship, and not create more bureaucracy as this legislation would do.

Posted by Jeff Cornwall at 07:26 AM | Permalink

Today is the mythical day when you have stopped working for the government and started working for yourself -- it is Tax Freedom Day 2007. From the Tax Foundation:

Tax Freedom Day answers the basic question, "What price is the nation paying for government?" We divide the most authoritative figure for total tax collections by the most authoritative figure for the nation's income. The answer this year is that taxes will amount to 32.7 percent of our income. We convert that percentage into days worked, and if we started on January 1, it would take until April 30. That's when we could start keeping some of our earnings.

I don't know about you, but I've been working hard all of this year. It is nice to know that I finally get to "keep" what I earn for the rest of the year. Technically, since I live in Tennessee my tax freedom day was a couple of weeks ago -- and you poor folks in New York don't really get to celebrate for another couple of weeks....

Where did all of that money go? The Tax Foundation has this handy diagram to illustrate how those tax dollars get collected.

Posted by Jeff Cornwall at 09:25 AM | Permalink | Comments (1)

The Senate Small Business and Entrepreneurship Committee is taking testimony on the effects of Sarbanes-Oxley on smaller companies. At issue is how quickly the SEC will move to make smaller public companies comply with all of the requirements of Sarbanes-Oxley.

From the International Business Times:

In testimony prepared for delivery Wednesday to the Senate Small Business and Entrepreneurship Committee, [Securities and Exchange Commission Chairman Christopher] Cox didn't rule out an additional delay in applying the internal-controls requirement to smaller companies, but said that approach isn't "Plan A" for regulators.

Cox said the SEC plans to make changes in a matter of weeks, giving smaller companies plenty of preparation time. Under the current schedule, smaller companies would make their first assessment of internal controls starting this year, and have auditors weigh in starting in 2008.

Chief Counsel for the SBA Office of Advocacy Thomas M. Sullivan said in his written testimony submitted to the Committee that "There is a compelling record demonstrating that the costs of complying with Section 404 are large and disproportionately high for small public companies.... Advocacy believes that the excessive cost of Section 404 internal controls reporting may restrict a new generation of small innovative companies from seeking capital in the U.S. capital markets."

Sullivan went on to say, "Advocacy strongly recommends that the SEC continue to provide further extensions for small public companies until such time as more cost-effective procedures for internal controls can be developed." Additionally, he urged Congress to exempt smaller public companies from Section 404(b). These recommendations are consistent with a report from the SEC's own Advisory Committee on Smaller Public Companies. As the Advisory Committee has pointed out, Section 404 compliance costs in relation to revenue will be disproportionately borne by smaller companies.

But, Senator Kerry (Chair of the Committee) said the following in his opening statement:

Too many small public companies who played by the rules are now expected to deal with the time and financial burden required to comply with the Sarbanes-Oxley law. Last year, small businesses with less than $75 million in assets saw the number of financial restatements increase by 46 percent. This shows that small businesses getting ready to comply with Sarbanes-Oxley are having trouble. I believe that we will all benefit when small businesses eventually comply with Sarbanes Oxley. According to a recent United States Government Accounting Office (GAO) study requested by Senator Snowe, the cost of compliance and the time needed for small public companies to comply with Sarbanes-Oxley regulations has been disproportionately higher than for large public companies. Firms with assets of $1 billion or more spend just thirteen cents per $100 in revenue for audit fees, while small businesses are forced to spend more than a dollar per $100 in revenue to comply with the same rules.

So it seems that the most we can hope for is a little time, for Sen. Kerry clearly states that he believes that "...we will all benefit when small businesses eventually comply with Sarbanes Oxley."

However, the impact of Sarbanes-Oxley will not just be on public companies. Sarbanes-Oxley is already influencing commonly accepted standards of many private small businesses and non-profits. That means that even though these small organizations do not technically fall under this law, accountants are beginning to act as if they do in some areas of reporting. This is primarily to limit the accountant's liability in case an outside investor moves toward litigation, or in the case of a non-profit, if someone challenges the financial management by the board.

In terms of expenses related to regulatory compliance that comes from Sarbanes-Oxley, the cost of poker is about to go up for a large number of smaller organizations.

Posted by Jeff Cornwall at 03:04 PM | Permalink

From the Office of Advocacy of the SBA:

Small business is a big contributor to the nation's economy, generating 50 percent of the private, nonfarm gross domestic product (GDP), according to a study released today by the Office of Advocacy of the U.S. Small Business Administration. The study covers the period 1998 - 2004, and confirms the findings of earlier research.

You can find the full report here.

Posted by Jeff Cornwall at 09:38 AM | Permalink | Comments (1)

A study released by the SBA finds that more minorities in the US are pursuing entrepreneurial careers.

The highlights:

- In 2002, minorities owned approximately 18 percent of the 23 million U.S. firms.

- Using a proxy for measuring minority business growth, Black-owned firms had the highest growth rate for several measures between 1997 and 2002: 45.4 percent for the number of firms; 24.5 percent of total receipts for the group; and 16.7 percent for employer firm receipts. Asians also experienced growth in the number of employer firms, 12.6 percent, and in annual payroll, 25.3 percent. American Indian and Native Alaskan business growth was 2.1 percent.

- Hispanics or Latinos constituted the largest minority business community and owned 6.6 percent of all U.S. firms; 3.7 percent of employer firms and 7.4 percent of nonemployer firms.

You can see the full study here.

Posted by Jeff Cornwall at 10:48 AM | Permalink