Dear Friends,
It seems to me, a magician directs the audience’s gaze away from the real action, as does a scam artist, to allow something to happen they want to keep hidden. The story the unbiased media and the political class have been telling us, about the poor performance of our economy, is an example of this. It is a red herring. The reality is, that while the fiscal cliff negotiations have some bearing on economic consideration that businesses must make, there are far more important government policies that have a much larger and more direct impact. The tax question is now settled and the new spending ceiling is now being debated. They both are important for the economy to function properly, but their effect is muted, compared to the impacts of Obama care. These are important considerations. Since everyone has a stake in the economy, even those who don’t work or own businesses, are poorly served when the debate about the state of our economy is filled with political rhetoric, misinformation and outright lies.
We see the reality of this in the December 2012 job numbers. More to the point, buried in the job numbers, the BLS put out. In it we see that there was essentially no small business hiring. They have been on a hiring freeze since the 2008 recession and following economic depression. Obama’s depression. Small businesses play a fundamental role in the job economy and especially economic recoveries.
Small businesses generally provide the bulk of new jobs. This is an economic truism. Small businesses not only provide the lion’s share of job creation; those jobs are often introductory. They are filled by people with less job experience, training and education. These jobs, that small businesses create, are the entry level positions that allow teenagers and under served minorities an opportunity to start engaging in the workforce. Larger firms pay better and as a result require more skilled workers. Workers that small businesses have trained to engage in the working economy. This was shown in the job numbers by the extremely high unemployment rate among minorities and young people.
Small businesses are the drivers of economic recoveries. Creative destruction is the term coined by Joseph Schumpeter. It is a theory to explain the growth cycle of economies that use the Capitalist mode of production. In it, a new process, way of organizing, or innovation, increase the efficiency of the economy. These new ways make the older ways less competitive and the outmoded go into bankruptcy. The new means open up better paid jobs that are less strenuous, because they are more efficient in some way. The creation is the new way of doing business and the destruction is the bankruptcy of the old firms using the old ways. Entrepreneurs are the creators of innovation, and so, are the drivers of economic growth. Therefore they are the source of recoveries. Large firms are like an old growth forest, they are mature and so don’t expand, therefore hiring is primarily a means to replace retiring employees. Small businesses are all about expansion; unless government policies get in the way.
Obama care has led to Obama’s depression by creating a universe of negative incentives to small businesses. Many of the provisions don’t kick in unless a firm reaches 50 employees, therefore, small firms have a strong regulatory incentive, to stay under 50 employees. If they are rapping against that ceiling, they do everything they can to stay under it, and if they are just above, they will lay off just enough employees to get back under it. Obama care also creates unknowables in the cost structure of a small business. Uncertainty is a killer of jobs because firms cannot, with any certainty, know what profit they will make from a new hire, or even if the regulations will cause them to loose money, if they employ that new worker. This is magnified, by the annual tranches of Obama care regulation, that will be implemented until it is fully functional in 2016, further increasing uncertainty. Under these conditions, no smart small businessperson would hire new employees, or expand… and they aren’t.
Large firms have the ability to absorb more regulatory costs than a small firm. Large firms have the financial wherewithal to hire lawyers, to get them through a regulatory maze, but small businesses, with their smaller profit margins and dramatically smaller staffs, must use scarce revenues and time to muddle through regulation. Often with disastrous results. Large businesses usually have the ear of several politicians, who will pave the way for them, but small businessmen have no such political favor. This results in larger firms being less impacted by regulation than small firms. This is exemplified in the carve outs that many large firms got under Obama care… like McDonalds. Since McDonalds got an exemption, how can a start up expand and compete, with the large corporation that has a lower cost per employee, due to political favor?
The upshot of all this is, entrepreneurs, the drivers of economic recovery, are being squeezed out of the economy. Every business must get more efficient, to control costs, in the face of the Leviathan of regulation that is steaming down on them, but those very regulations undermine the process. The creation part of creative destruction is hampered, and the destruction is accelerated, by the new costs of Obama care regulation. Regulation that lowers small businesses profits and raises their costs. Because of this, every business person is hunkered down, trying mightily to simply keep his or her business afloat. Smaller businesses more than larger ones. The fiscal cliff negotiations have far less impact on small business, than the tsunamis of Obama care regulation, that will wash the shores of every firm in the economy, for several years to come. The fact that the unbiased media are all abuzz with, the debt ceiling, a balanced approach to the deficit (that is all tax increase and no spending cuts), and political finger pointing, is a sure sign that they are diversions, to keep us focused on the lure, and not the real source of our economic troubles; the democrat’s and Obama’s penchant for regulating, taxing and deficit spending… which is the source of that fishy smell.
Sincerely,
John Pepin
