Building With Kryptonite: Small Business “Bailout” and the Future of the American Economy

January 3rd, 2011 // 4:00 am @ Oliver DeMille

When recessions make things difficult for a lot of people across the nation — especially when accompanied by high unemployment — many turn against markets and seek government solutions to economic challenges.

This is both predictable and understandable.

But one group typically responds in a different way that is surprising to most modern Americans: Many small business leaders and entrepreneurs, instead of seeking government bailouts, turn instead to ingenuity, innovation and flexibility.

Small business people believe in the free market. They believe that when things change in the economy they need to change the way they are doing business to deal with the new realities.

They also believe in free enterprise: the idea that their work, resourcefulness and risk can turn any challenge into a positive.

As one report pointed out, General Electric, Hewlett and Packard, Microsoft and CNN all started (or were brand new and really got going) during recessions.

Small business people have gotten us out of nearly all modern recessions — not by waiting for others to fix things or turning to government, but rather by applying leadership, inventiveness, creativity and originality. They look around, assess the situation and the needs, and put themselves (and others) to work.

Those with little experience running businesses, establishing start-ups or meeting payrolls often think that what small business needs is easier financing terms, government credits or bonuses.

The truth is that what they really need is less government regulation to deal with and lower taxes on their profits (which makes the risk worth the effort).

So why did the Bush and Obama administrations try to boost small businesses by making credit more available but increasing regulations and (in the Obama era) seeking to raise taxes?

“Thanks,” many small businesspeople are saying, “but no thanks. Forget the government credits and loan programs, and just get rid of all the bureaucratic red tape and high taxes which make it hard to build businesses, hire employees and meet our payroll.”

The Problem With Washington

Small businesses need consumers to buy their products, and that means stability from the government — not an on-going agenda of governmental change, change, and more change that creates increasing uncertainty and kills investment and consumer confidence.

They also need investment. As Nobel Laureate in economics Joseph Stiglitz said, there is a lot of investment money globally right now, but as investors are asking where is the best place to invest, the primary answer is “not in the United States.”

The on-going stimulus programs and other over-use of government interventions in the U.S. economy are driving away capital.

Experts say the housing crash hasn’t hit bottom yet and the unemployment rate will increase. The real unemployment rate is actually over 12 percent.

Government intervention is not solving the problems, and in fact the governments around the world that are intervening the most in their economies are struggling more.

It may be argued that these countries obviously have a greater need for remediation; but it must also be acknowledged that government has been the go-to in the U.S., and its sound-bite friendly solutions have been conspicuously shy of either restraint or principle.

When the crisis hit, most experts agree that government intervention helped stabilize falling markets. We are all glad things didn’t get even worse.

Thank goodness for President Obama’s leadership aura at the end of 2008 and the first few months of 2009. We may well have been headed for a depression but for the positive sense of leadership he brought to the nation. It was short lived, it is true, but it helped when we needed it.

The McCain team at that point simply did not have the national support to lead us through that challenge. We needed a president-elect and new president with “the leadership thing,” and Obama had it. I think this is why so many independents supported the Obama campaign in 2008 election.

Now, however, we have now reached a point where, as Treasury Secretary Timothy Geitner said, we need business to lead out in healing our economy.

The best thing government can do now is get out of the way and let small businesses innovate, hire and grow. Unfortunately, this is unlikely to happen unless Washington stops increasing regulations, taxes and other blocks to business growth.

The recent growth of government spending has been drastic, and it creates a drag on growth in the private sector.

For example, Reagan increased government spending by 2.6 percent, the first Bush by 1.8 percent, and Clinton by 1.5 percent.

But since 2000 we have increased spending with Bush at 4.7 percent and the Obama Administration at a whopping 12.7 percent (actually 22.5 percent if you include money approved under Bush but spent under Obama!).

In 2006 and 2008 independent voters swept Republicans out of office as a response to high government spending and a loss of trust in the decisions of the White House. Republican leaders now concede that they “got fired” by independents largely because of overspending.

Now independents are deeply frustrated that Democratic leaders have spent even more. Not surprisingly, given the unpopularity among independents and moderates of massive government spending, Americans now rate Barack Obama and George Bush almost equally — a major change from one year earlier where Obama had a 23 percent lead over Bush.

Only 20 percent of Americans are now pleased with Washington; 80 percent of Americans are disappointed or upset with Washington. Time magazine recently ran a cover report on conversations with Americans across the country.

The reporter Joe Klein noted that “There was a unanimous sense that Washington was broken beyond repair.”

This is not surprising in a nation where every baby born today “owes” the federal government over $43,000 to pay off the debt. For the first time in generations, many [some would say most] Americans are concerned that their children will inherit a worse nation and economy than they did.

The Solution Class

With all this government spending and constantly increasing regulations on business, it wouldn’t be surprising to see entrepreneurs and small business simply giving up; no doubt many do.

Most big venture capital is going abroad to places like Brazil, Israel, India, Britain, etc. All of these places are cutting government spending in order to incentivize small business growth.

Even France, Germany and Sweden are following this strategy. Indeed, France’s financial minister said on October 10, 2010 that unless nations reduce public deficits through reduced government spending, consumers will buy less and producers will produce less.

Nations, including France, who are following this policy are now seeing unemployment rates decrease. And when such a central-control powerhouse as France has an admonishment for us on this point, we ought to take notice.

At the same time that our growth money is going abroad, the U.S. government is increasing its debt to other nations.

For example, China holds 11 percent of our Treasury debt, Japan 9.5 percent, OPEC nations 3.5 percent, Brazil 2 percent, Russia 1.4 percent, there are significant holdings by North American and European lenders, and domestic lenders carry about 52 percent of the government’s debt.

Imagine what would happen to our economy if the government defaulted — and it does happen. In fact, the cost to insure our debt against default has risen 30 percent since August — just two months ago.

In short, the government owes too much to too many, but instead of incentivizing business growth in America it is attacking the very ones who are trying to fix things — small business.

Still, the American entrepreneurial class is fighting to overcome any and all challenges — even those posed by their own government.

Ken Kurson wrote:

“Today’s brutal economy and credit freeze should have most entrepreneurs running for cover, or at last signing up for the 99 weeks of unemployment our Congress has generously provided, courtesy of our kids and grandkids. Instead, many steel-stomached small business people are using this crisis as an opportunity to expand.”

In order to overcome the downturn and slow growth, entrepreneurs are asking what will sell in this economy and going to work providing it.

If past business strategies won’t work in the new reality, they are changing their businesses and seeking what actually will succeed. They see the economic meltdown and its aftermath as an opportunity, not a crisis. Instead of whining about what they’ve lost or asking for more government help, they are tightening their belts and getting to work.

Our New Super Heroes?

But, amazingly, Washington seems determined to make it harder for the very small businesspeople who are most effectively taking on our national economic problems.

Government is rewarding those who are currently the least productive while making it more difficult for those who are actively fixing the problems.

Democrats want to raise taxes in order to avoid cutting hyper-regulatory government problems (and because regulating business is popular in this anti-Wall Street environment), while the Republicans are allowing the tax hikes in the name of facing off with the Democrats.

Democrats claim that only by raising taxes on the top 2 percent of earners can we balance budgets. But “…75 percent of the families that would be affected by this tax hike are making between $250,000 and $500,000 a year…A lot of these people are small business owners, and that would hurt job creation.”

By increasing taxes on the very group that creates nearly all growth in America — small business owners — we guarantee that unemployment will tend to rise. And as the two major parties fight in Washington, taxes are now set to increase for everyone.

Some say that a tax increase is required to pay down debts and balance budgets, but in a down economy the real solution is to leave taxes as they are and cut unnecessary government spending. Neither party seems willing to do this, despite paying lots of lip service to the idea.

And month after month, increased regulations from Washington make business growth, hiring and increased economic success more difficult for small businesses.

In the parlance of the Comic-Con generation, it’s like the government trying to shut down Superman when he is protecting us from the end of the world. It makes absolutely no sense.

This is the crisis! Difficulty getting credit, slow growth, high unemployment, low consumer confidence—these are challenges entrepreneurs can overcome with hard work, smart risk and tenacious teamwork. This is precisely what entrepreneurs do!

But in addition to these major difficulties, Washington is now requiring small businesspeople to fight the government too! Why? In what evil parallel universe does building with kryptonite make any sense?

It’s time for a true small business bailout — a drastic reduction in costly red tape and an easing up on the tax rates for those who pull success out of seemingly impossible circumstances.

We need Superman, and entrepreneurs are up to the task. If only the two major parties in Washington would get out of the way.

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Oliver DeMille is a co-founder of the Center for Social Leadership, and a co-creator of Thomas Jefferson Education.