Small Businesses create the Jobs but Wall Street provides the Campaign Cash

Posted by PITHOCRATES - June 13th, 2011

Small Companies drive Economic Recoveries 

Jobs.  They’re everything.  Without jobs there is no economic recovery.  And jobs don’t come from the big corporations or Wall Street banks.  They come from small business owners.  And things have been looking pretty bleak for them for awhile now (see Small businesses, crucial to growth, face challenges by Scott Patterson posted 6/13/2011 on USA Today).

Through the 12 months ended in March of last year, 505,473 new businesses started up in the U.S., according to the latest data available from the Bureau of Labor Statistics. That’s the weakest growth since the bureau started tracking the data in the early 1990s. It’s down sharply from the record 667,341 new businesses added in the 12 months that ended in March 2006.

Weak start-up growth has dire implications for jobs because small and midsize businesses have driven employment gains in the U.S. for years. Between the recession that ended in late 2001 and the start of the most recent recession in late 2007, businesses that employed fewer than 500 workers added nearly 7 million employees, according to data collected by payroll provider ADP, which tracks employment trends.

Meanwhile, businesses that employed 500 or more cut nearly a million positions over the same period, often because they sent jobs overseas. Smaller companies — think local restaurants, gas stations and mom-and-pop grocery stores — are far less likely to send jobs abroad. That’s why they are crucial to the recovery, economists say.

Small companies drive recoveries.  A lot of which are LLCs or S Corporations.  Which don’t pay corporate income taxes.  Earnings pass through to the owners.  Who report these earnings on their personal income tax returns.  Even if they leave their earnings in their business for a future rainy day.  Or a future investment into the business.  So these owners ‘earn’ a lot of money.  But probably leave most of their earnings in their businesses to grow them.

When people talk about raising the taxes on the wealthy, those earning over $200,000, it increases the taxes on people who aren’t necessarily wealthy.  Such as these small business owners.  Increasing their taxes only hinders their economic growth and job creation.  Fewer jobs mean decreased economic activity.  And prolonged economic recoveries.  So raising taxes on those who make $200,000 or more is never a good thing to do during bad economic times.  You want to cut taxes then.  Not raise them.

A huge concern for small businesses, says the NFIB’s Dunkelberg, is lack of clarity about what will happen in the next year in Washington. With another round of elections coming up and rancorous debate on Capitol Hill, businesses are unsure about what policies will be enacted by the government.

“There’s just a huge amount of uncertainty. And when you’re uncertain, you don’t make bets,” he says.

Small businesses don’t have big budgets.  Or piles of cash.  So they’re very conservative with their capital.  And one thing conservatives hate is uncertainty.  Because decisions they make today will have lasting consequences years later.  Meaning decisions today may require a lot of cash tomorrow.  If they are uncertain how much employee costs will be next year they are reluctant to hire this year.  If they are uncertain what regulatory laws they’ll see next year they will be reluctant to expand their business this year.  Etc.  Increasing uncertainty only hinders their economic growth and job creation.  Fewer jobs mean decreased economic activity.  And prolonged economic recoveries.  So you don’t want an activist government changing regulations and policies during bad economic times.  You want limited government with a ‘hands-off’ approach to the economy.  Where ‘less is more’ should be the government’s mantra.

Bad Government Policies cause Deflationary Spirals

Cuts in the tax rates help because they provide a recurring benefit.  It’s not a one-time tax credit.  A cut in the tax rate decreases uncertainty.  Something business owners like.  And can use to make decisions that can have long-term consequences (see Summers calls for new boost to U.S. economy by Jeff Mason and Caren Bohan, Reuters, posted 6/13/2011 on The Globe and Mail).

Former White House aide Larry Summers on Sunday urged expanded tax cuts on U.S. workers’ wages, warning that America’s economy was at risk of years of Japan-style stagnation without a further boost…

“Fiscal support should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees,” Mr. Summers wrote.

“Raising the share of the payroll tax cut from 2 per cent to 3 per cent would be desirable as well.”

During the 1980s Americans feared Japan.  The Japanese government was partnering with business.  It had a name.  Japan Inc.  And there was huge economic growth.  Democrats pointed to the Japanese and argued that the U.S. needed to reverse Reaganomics and do what the Japanese were doing.  Make an America Inc.  Have more government involved in business.  For when the Japanese did their economy took off to the stratosphere.  They were buying landmark properties in the U.S.  National Lampoon magazine featured a cover with a Japanese CEO who was presiding over the United States of America, noted as a wholly owned subsidiary of the Honda Motor Company.  If America didn’t follow her lead soon there would be no America left.

The Big Government people in America were having a serious case of Big Government envy.  But then the Japanese crash came.  The growth wasn’t real.  It was a bubble.  And what do bubbles do?  They pop.  As it did in Japan.  Where they suffered a deflationary spiral during the 1990s. 

Mr. Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus that was not coupled with deficit reduction in later years, as he warned of the danger of ballooning debt and deficits.

The secret to a healthy U.S. economy had always been home ownership.  So government policies tried to put as many people into homes as possible.  Easy financing and subprime mortgages made the dream come true to anyone who wanted it. And they bid housing prices up into the stratosphere.  Then the dream turned into a nightmare.  The housing bubble popped.  Housing values plummeted.  And they still are.  Many are under water in their mortgages.  Or are going through foreclosure.  So there are parallels with Japan’s Lost Decade.  Including their ballooning debt and deficits.  For the U.S. debt and deficits (as a percentage of GDP) are almost as bad as hers.  And soon will surpass hers.  Making the parallels to the lost decade eerie to say the least.

In the interview, Mr. Summers listed several factors that contributed to the slowdown: the fallout on the global economy from Japan’s earthquake, concerns in European debt markets, high oil prices and a deceleration in China’s rate of growth.

But he also said the U.S. economy is in a “cycle that has some of the characteristics of what happened in Japan” following the bursting of its asset bubble and that’s why it has struggled to regain its stride.

“The economy isn’t as strong as I expected last winter,” Mr. Summers. He said that in post-bubble recessions, such as Japan’s in the 1990s and the Great Depression of the 1930s, there is a tendency to assume any pickup in growth means a return to normal growth but recoveries in those cases take much longer.

Come to think of it, there are some eerie parallels between the current U.S. crisis and the Great Depression.  Another wicked deflationary spiral.  And record long-term unemployment.  You’d think with a couple of wicked deflationary spirals on the books the Americans would have learned a thing or two about monetary policy and government intervention.  But no.  Guess something else even more important must be on their minds.

Obama’s Number One Priority

But we know the president cares.  He has said so.  And is on top of it.  He is working hard with a laser-like focus on job creation.  As we enter our second Recovery Summer with record long-term unemployment.  But the White House is a flurry of activity.  With all that activity focused on the number one priority on the president’s agenda (see Obama Seeks to Win Back Wall St. Cash by Nicholas Confessore posted 6/12/2011 on The New York Times).

A few weeks before announcing his re-election campaign, President Obama convened two dozen Wall Street executives, many of them longtime donors, in the White House’s Blue Room.

Mr. Obama, who enraged many financial industry executives a year and a half ago by labeling them “fat cats” and criticizing their bonuses, followed up the meeting with phone calls to those who could not attend.

The event, organized by the Democratic National Committee, kicked off an aggressive push by Mr. Obama to win back the allegiance of one of his most vital sources of campaign cash — in part by trying to convince Wall Street that his policies, far from undercutting the investor class, have helped bring banks and financial markets back to health.

Yes.  Campaign cash.  His number one priority.  But not just any cash.  Wall Street cash.  Because small business owners just don’t have that kind of cash to buy favors with.  So it’s Wall Street that will get Obama’s attention.  Because they’re important.  Not small business.  The job creators.

Still, there is skepticism. One Democratic financier invited to this month’s dinner, who asked for anonymity because he did not want to anger the White House, said it was ironic that the same president who once criticized bankers as “fat cats” would now invite them to dine at Daniel, where the six-course tasting menu runs to $195 a person.

The donor declined the invitation.

With record long-term ‘Great Depression’ unemployment, it’s nice to know somebody can afford $195 a person six-course tasting menu.  It’s good to know that the worst economy since the Great Depression isn’t so bad everywhere.

Obama’s Policies favor Wall Street, not Small Business

Small business owners are facing uncertainty that is paralyzing them.  While the U.S. is going through a deflationary spiral similar to the lost decade in Japan.  And the Great Depression.  While suffering through record long-term unemployment.  Meanwhile the White House is cozying up with Wall Street again for campaign cash for 2012.  The same people they blame for the subprime mortgage crisis, giving us the worst recession since the Great Depression.  But then bailed them out.  The only people who benefited from QE2.  When Wall Street investors did well investing money they borrowed for ‘free’ from the Fed.  To say this administration is sending mixed messages is the understatement of the year.

And the message to small business owners?  Besides blaming them for the continued recession (for not borrowing money to hire new people)?  We want to raise your taxes.  Nothing mixed about that message.  It’s coming through loud and clear.  Which is why new business startups are the weakest since record keeping started in the early 1990s.  And the worst recession since the Great Depression lingers on.

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