Barbara’s Blog

Luddites were 19th century English textile workers who smashed the newly invented machines they feared would replace them. We now know that machines and other technology are enhancements used to increase productivity and don’t necessarily replace workers. Still, the post-recession economy may prove the Luddites right.

Technology replacing workers
New machines, software, cloud applications, and other technologies continue to debut. They help to make companies run more efficiently and, in many cases, using fewer workers. Earlier this year, AP reported “Some occupations are beneficiaries of the march of technology, such as software engineers and app designers for smartphones and tablet computers. Overall, though, technology is eliminating far more jobs than it is creating.”

Other findings by AP:

• Technology is enabling startups to launch with one-third fewer employees than in the 1990s
• Companies in the S&P 500 Index grew profits post-recession by one-third while cutting their payrolls in half

Low-paid workers
Those who have jobs may not have enough spending money to oil the economy. Kiplinger reported that 28% of workers are in jobs that earned them less than the poverty level (this is 5% more than in 2002). The Kiplinger Letter had it right: “An economy can’t grow if too many workers don’t have money to spend.”

The answer from some economists and politicians has been to raise the minimum wage. However, many small business owners have said that a higher minimum wage will force them to use fewer workers. What’s the right answer? I don’t know.

Conclusion
Early in the last century, the story goes that Henry Ford paid his workers $5 an hour, an unprecedented sum for the times, so that they could afford to buy the cars he sold. The real story (the reason for the high pay and how it was figured) may be somewhat different, but the lesson seems sound. In the short run, replacing workers with technology and paying low wages are helpful to the bottom line. I’m no economist, but it seems to me that in the long run, there may be few left to buy what we have to sell. The Luddites in the 19th century were concerned with their jobs; now it seems that they had a point when it comes to the economy.

During the political conventions, both parties promised a new tomorrow for small businesses. Unfortunately, there is an unhappy small business community today. According to results from the recent SurePayroll survey, most indicators are down:

• Optimism of small business owners in August was at 60%, which represents a 2% decline from July.
• Hiring in August (compared with July) was down by 0.1% (and paychecks for employees was down by 0.2%)
• Only 18% of small businesses sought loans in 2012, and 32% of these had trouble obtaining them.

How does this play against the political backdrop?

Democratic Party platform
The Democratic Party platform related to small business states:

“Small businesses employ half of all working Americans, and, over the last two decades, have created two out of three net new jobs. Democrats believe that small businesses are the engine of job growth in America. President Obama signed 18 small-business tax cuts to encourage businesses to hire more workers and make job-creating investments in machinery and equipment and proposed significant additional small business tax relief. He encouraged investment and supported start-ups by allowing businesses to write off the full cost of new equipment and machinery they bought in 2011. Altogether, the President’s Small Business Jobs Act accelerated $55 billion in tax relief through 2011. Democrats made it easier for small businesses to access the loans they needed to grow and hire. The President signed into law changes to help entrepreneurs raise capital while maintaining key investor protections. Small businesses are now once again creating jobs. Democrats have helped small businesses provide health insurance to their workers with a tax credit to help pay for the cost of coverage. In 2014, the tax credit will grow and small businesses will be able to pool their purchasing power together to get affordable coverage.

We recognize the importance of small business to women, people of color, tribes, and rural America and will work to help nurture entrepreneurship.

President Obama and the Democratic Party are committed to continue cutting red tape for small businesses, helping them sell their goods around the world and access the capital they need to grow. This includes tax cuts for small businesses that make new investments, hire more workers, or increase wages.”

GOP platform
The GOP platform related to small business and entrepreneurship states:

“America’s small businesses are the backbone of the U.S. economy, employing tens of millions of workers. Small businesses create the vast majority of jobs, patents, and U.S. exporters. Under the current Administration, we have the lowest rate of business startups in thirty years. Small businesses are the leaders in the world’s advances in technology and innovation, and we pledge to strengthen that role and foster small business entrepreneurship.

While small businesses have significantly contributed to the nation’s economic growth, our government has failed to meet its small business goals year after year and failed to overcome burdensome regulatory, contracting, and capital barriers. This impedes their growth.

We will reform the tax code to allow businesses to generate enough capital to grow and create jobs for our families, friends and neighbors all across America. We will encourage investments in small businesses. We will create an environment where adequate financing and credit are available to spur manufacturing and expansion. We will serve as aggressive advocates for small businesses.”

Bottom line
It is great to see both parties acknowledging the importance of small business to the U.S. economy. This rhetoric is great, but actions following the election are the only meaningful thing for small business and our country.

It’s vital for small business owners to assess whether the last four years of a Democratic Administration have been helpful to their companies and the economy, and to decide which party going forward can better serve small business interests. Vote accordingly.

The national unemployment rate in May 2012 was 8.2%. Five states (California, Nevada, New Jersey, North Carolina, and Rhode Island) and the District of Columbia had considerably higher rates (as much as 11.6% in Nevada).  For those who are unemployed, or underemployed, the lack of job opportunities has meant personal and financial challenges. They have been forced to tap into or even drain savings, rely on help from family and friends, or even turn to government programs for assistance. But their individual experiences pale in comparison to the loss to our country — it’s been a real talent and money drain.

My daughters are good examples. Each has a graduate degree but both have been stymied by the economy to make full use of their talents. My older daughter was laid off from her prestigious job as a clothing designer with a Fortune 500 company at the start of the recession. Since then she hasn’t been idle; she earned a master’s degree, had a baby, and continued to do contract work in her field. My younger daughter, who does advocacy for a nonprofit organization, has been essentially locked into a job with no prospects for growth; she even had to take a pay cut. Think of the designs that never got made, and the programs that never were advanced.

Now multiply these examples by the millions of similarly-situated, very talented, well-educated individuals who are unemployed, underemployed, or stuck in dead-end jobs. The country has lost the benefit of ideas, innovations, sales, and other indices of productivity. The country has also lost the ancillary benefits that result from the income that these people could have earned. Think of the taxes they would have paid, the houses and furnishings they would have bought, the investments they would have made. Also, think about the drain on the public resources to pay for unemployment benefits, food stamps, and other assistance programs.

Bottom line: I’m a big proponent of self-employment — creating your own job by starting your own business. But this route is not for everyone. The vast majority of people prefer, or are better suited, to be employees in someone else’s business. The sooner the economy starts to move at a much better pace than it currently is, the sooner the country will benefit from improvements in employment.

The U.S. Small Business Administration (SBA) releases quarterly statistics on business churn. What is this and why should you care about it? Business churn is defined as changes in the number of births and deaths of firms in this country. When business births (startups) increase and business deaths decline, the resulting rise in the number as business churn is good. “Business churn is needed to keep the economy from stagnating,” says the SBA.

Business births are vital for employment creation. The government says that small firms (20-499 employees) were responsible for three-quarters of job creation from the end of the economic downturn (from 2009 on). However, now (since 2011) even smaller firms (1-19 employees) are creating jobs.

Business bankruptcies—one of the ways in which businesses die—are on the decline for firms of all sizes. In the last quarter of 2011, there were 11,149 bankruptcies. In the first quarter of this year, there were only 10,998, showing that business deaths are on the decline.

Clearly, things are moving in the right direction. However, we are nowhere near pre-recession numbers in business creation. The number of unincorporated businesses created in 2011 is markedly below the number in previous years: 10,586,000 in 2006, 10,413,000 in 2007, 10,080,000 in 2008, 9,831,000 in 2009, 9,681,000 in 2010, and only 9,449,000 in 2011. It’s too early to pop the cork and celebrate the return of a strong economy, despite the statistical rise in business churn.

Word on the street (from small business owners I know) is that they are largely still just hanging on. They aren’t expanding. They aren’t hiring. They aren’t buying new equipment (other than what is absolutely necessary). There are “for rent” signs everywhere, with store fronts and office space showing significant vacancies. My personal view on business churn is not as rosy as the SBA’s, but I sure hope things change real soon!

The U.S. Census Bureau is the prime source of information on the economy, reporting regularly on retail sales, manufacturing, exporting, and other sectors. On June 11, the Census Bureau held an Innovation Day event to highlight the latest tools and techniques being used to do its work more efficiently and for less money.

If you rely on government information for your marketing or are just curious to know how the economy is doing, you’ll want to learn about developments at the Bureau. Some of the innovations already implemented or underway include:

• Collaboration tools for Census Bureau teams.
• Data collection using mobile devices (expected in the future).
• Deployment of mobile apps to enable immediate access to statistical information. The Economic Statistics app is expected to be released this August.
• New data products, such as the Local Employment Dynamics program, which provides local information about businesses and the characteristics of the employees working in those businesses.
• The use of crowd sourcing to update electronic map files.

Business reporting
Be sure to comply with required reporting to the Census Bureau. Based on the NAICS code, some businesses must report monthly, quarterly, or annually; others report every four or five years. The data typically covers your gross receipts, employment information, and expenditures.

The data you report is confidential; they are exempt from the Freedom of Information Act so your competitors won’t be able to access your company’s reported information. Failure to file a required survey can result in penalties.

Check your reporting requirements at the Bureau’s Business Help Site.

Jobs numbers announced on February 3 were surprisingly good. More jobs were created than had been expected and the nominal unemployment rate dropped. Maybe we’ve turned a corner in the economy and can expect things to continue to improve. At least that seems to be the sentiment from the Wells Fargo/Gallup Small Business Index for the fourth quarter of 2011.

The Index shows:

• Small business hiring intentions are the best since 2008
• 22% expect to increase the total number of jobs in their companies over the next 12 months

But looking closer at the results of the Index, there are some disturbing finds:

• Only 26% of small-business owners said they would hire full-time employees, compared with 72% who said they’d rather add temporary or contract workers (36%) or part-time workers (36%)
• 21% of owners said it is very to find the qualified employees they need for their businesses; 32% said it was somewhat difficult to find qualified employees

Why these disturbing results? It doesn’t look like small businesses are doing any significant job creation. Small business traditionally has been responsible for 60% to 80% of all job growth, but in recent years it has been lagging in this regard and likely will continue to do so.

Maybe owners are still feeling shaky after the recession and don’t want to commit to full-time workers at this time. Maybe tax uncertainty, the potential costs of health care, and regulatory burdens continue to plague small business owners.

For a robust economy, we need to create about 2.5 million jobs each year (4 million were lost during the recession). But maybe we need to reexamine the jobs that are needed so people can be trained to do them. Manufacturing jobs likely will continue to decline over time (despite a recent uptick).

I’m not an economist; I’m a small business owner who speaks to other owners. The consensus is that the environment for hiring is still not good. But let’s remain hopeful!

The Patient Protection Act of 2010 was supposed to be the panacea for high premium costs that pose a barrier for small businesses to provide coverage. To date, most small business owners I talk to say their premiums costs continue to rise, undaunted by the legislation. What’s more, uncertainty about future costs and government regulation on health care abounds. Here are some recent developments on the health insurance front:

• The U.S. Supreme Court has agreed to hear a case on whether the law (particularly the personal mandate requiring all individuals to have coverage or pay a penalty) is constitutional. Oral arguments likely will be in March 2012, with a final decision coming in June 2012. However, June may not bring a final determination on the constitutionality of the law; the court could decide to rule on procedural grounds, which would delay an ultimate ruling on constitutionality until 2015 or later.
• House Ways and Means Oversight Subcommittee heard testimony that the small employer health insurance credit designed to encourage small companies to provide or continue their coverage has been a flop. Critics say the credit is too complex (“convoluted”) and does not provide any incentives; it merely operates as a reward for those employers that happen to qualify for it. (If you want to learn more about the credit, read the instructions to IRS Form 8941, Credit for Small Employer Health Insurance Premiums.
• A report from the Treasury Inspector General for Tax Administration found that as of mid-May 2011, just over 228,000 taxpayers had claimed the credit. This is far fewer than the 4 million predicted when the credit was enacted last year.

On November 16, 2011, MyVenturePad held a webinar on Rising Costs, Unclear Mandates: How to Contain the Growing Cost of Employee Health Insurance. I was the moderator and the panelists were Robert Levin, editor-in-chief and publisher of the New York Enterprise Report, Dr. Bob Graboyes, the senior health care advisor for the National Federation of Independent Business (NFIB), and David Williams, co-founder of MedPharma Partners and author of Health Business Blog. If you missed the program, you can read a transcript through MyVenturePad.

There isn’t just one description of the current economic condition for all small businesses today.

Some are thriving and hiring new employees, adding locations, and venturing into new activities. One restaurant owner is working with a suburban municipality near me to open a second location and hopes to have the red tape behind him for an opening by January 2013!

Others, however, are hanging on by a thread, trying to survive until sales picks up. Another restaurant owner in the same county is in the process of moving into a new line of business and is trying to sell his place; he’s tired of the struggle.

How are you coping in this economy?

The NFIB Small Business Optimism Index last month declined for the fifth straight month. The report on optimism for August should be out this week.

Key findings for July include:

• 11% expect to reduce their workforce over the next three months
• Sales are trending downward for many businesses
• Capital outlays are expected to be weak for most businesses

Still, the report shows growth for some businesses:

• 10% expect to hire new employees
• 29% reported higher sales
• 20% expect to make capital outlays within the next six months

What does this duality mean for the small business community? Now that Congress is back from its summer vacation, there is sure to be considerable discussion about what to do to help grease the wheels of this economy.

Unfortunately, with the split in the community, there may not be a unitary voice about what should be done to better the lot of small business. Some businesses might appreciate government assistance in some form, including government-sponsored programs that they can benefit from. Most, however, would agree that government is part of the problem, not the solution. Taxes, regulations, and the general uncertainty that government has created by its discord, has contributed to the plight of the economy in general, and small business in particular.

From my perspective, politics should take a back seat to doing what government can do to help, which is primarily to get out of the way and let the marketplace get back to normal. Micro-initiatives that last a short time and benefit just a segment of the economy, such as last year’s cash for clunkers, don’t work in the long run.

Whether businesses are prospering or suffering, all could benefit from lower taxes on all levels of government and fewer regulations. Let’s hope politicians see the light.

State and local government arguably have a greater impact on business development and job creation than the federal government.  Two states recently took diametrically opposed approaches in trying to handle deficit concerns while still inspiring businesses and job creation.

It’s worth looking at these states’ actions.

Wisconsin
Under Governor Scott Wagner’s leadership, a number of measures favorable to small business have been put in place:

1. The Governor pledged to reduce spending rather than raising taxes.
2. A state-level deduction has been created for contributions to health savings accounts, a health care arrangement that’s attractive to many small businesses.
3. The governor signed into law the Relocation Tax Credit, which effectively waives income and franchise taxes for two years on a business moving to Wisconsin. This applies to companies that have not conducted business in the state for the past two years.
4. The governor is working on ways to reduce health care costs for small businesses. Recognizing that Obamacare would be more costly for small businesses, his administration is looking for ways to reduce costs. Toward this end, he signed a Tort Reform measure to cap punitive damages.

Illinois
This state recently raised significantly the tax rates on individuals and businesses. The individual rates see a 67% increase; the corporate rate rises by 30%. This makes Illinois the fourth-highest state corporate income tax in the country, and the fourth-highest combined national-local corporate income tax in the industrialized world.

According to the Tax Foundation, “the tax changes … have great potential for undermining Illinois’s ability to attract and cultivate business activity as the economy recovers.”

Lessons for all states
States facing budget crisis have some basic choices on how to handle the problem: cut spending, raise taxes, or do both. Those states that chose primarily to cut spending and not raise taxes seem to stand a greater chance of keeping and attracting business to the state; this will grow the economy over time and eventually boost tax revenues. Why is this concept so hard for some politicians to understand?

2010 is almost over and 2011 is about to begin. With it brings the 112th Congress and a shift in control. What will all of this mean for small business over the next couple of years?

Some changes in Washington to note:

• The new head of the Small Business Committee is Rep. Sam Graves (R-Mo), who five times has been named “Guardian of Small Business” by the NFIB.

• Among the new members of Congress are a number of small business owners. NFIB boasted that 25 members of the 112th Congress are NFIB members.

My small business agenda

Here’s what I’d like to see Congress address in the new session:

• Repeal 1099 reporting that was enacted as part of the Patient Protection and Affordable Care Act of 2010. This law, which is set to take effect in 2012, requires businesses to report payments for all goods and services totaling $600 or more annually; it’s an administrative nightmare for small businesses. Repeal should be completed as soon as possible to avoid the need for businesses to get their accounting systems ready for reporting, an action that would be a waste of money if repeal eventually does happen.

• Enact permanent estate tax law. While the recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides two years of favorable estate tax law (a $5 million per person exemption amount, plus a 35% estate tax rate), the law for 2012 and thereafter is uncertain. The uncertainty means that business owners will continue to engage (and pay) planners for assistance in minimizing estate taxes in order to preserve their business interests for their families.

• Make the research credit permanent. The 20% credit for increasing research activities is highly valued by small businesses that spend money on R&D. The new law extended the credit for 2010 and 2011, representing the 14th time that it has been extended since enactment in 1981.

• Revisit health care reform. To date, the new health care law has done nothing to reduce health care premiums for small business owners. Congress should scrap the massive reform package, weighted down with high government costs (translation, high taxes needed to pay these costs) and find remedies to keep premium costs down. For example, previous suggestions of association health plans should be revisited. Also, allowing self-employed individuals to deduct their premiums as a business expense would save them more than 15% annually (through a reduction in self-employment taxes).

Attitude shift

Congress has paid lip service to the value of small business in the U.S. economy. It’s time for a real shift in attitude that can be reflected in actual change that is favorable to small business.