The challenges facing small business are the greatest I have seen in my lifetime. The National Federation of Independent Business reports in its national survey that some of the top issues are:
• Health care costs (a top issue for 25 years).
• Uncertainty over economic conditions.
• Uncertainty over government actions.
• Unreasonable government regulations.
• Federal taxes on business income.
The Wichita Independent Business Association has been working to address the top issue through the creation of a statewide health co-op and the support of certain state legislation that would help contain costs.
The other four issues are intertwined. Twenty-five years ago, economists from Stanford and the University of Chicago created an uncertainty index. Last year, the Federal Reserve of Cleveland published a study showing that uncertainty had cut small business hiring by 6 percent.
On Jan. 1, Baker, Bloom and Davis, again from Stanford and the University of Chicago, published the most definitive study of the consequences of uncertainty. They found that “(the rise in our policy uncertainty index from 2006 to 2011) is followed by a persistent fall in real industrial production with a peak negative impact of about -2.5% at 14 months.” That is more than the entire GDP growth for the U.S. in 2011. That means policy uncertainty cut the U.S. growth rate by more than half.
While GDP measures the overall production of the country, individuals feel the impacts in jobs.
The study found “there is a persistent fall in aggregate employment following policy uncertainty shocks, with a peak response of 2.3 million jobs after 20 months.” In other words, unemployment was roughly 20 percent higher because of the uncertainty created by political leaders.
The researchers went on to say, “We find a much larger effect on private investment with a peak decline of 14 percent after three quarters.” Since business investment is the factor in our economy that drives growth through the multiplier effect, this is a huge hit to economic growth.
The increases in complexity of regulations and taxes are causing a reduction of small and independent businesses in many sectors. In home construction, homes built by national firms have increased from 25 percent in 1987 to 50 percent. The home mortgage industry has been virtually nationalized, with 86 percent of home mortgages coming through Freddie Mac and Fannie Mae.
A defense contractor reported that to be on the federal government’s best-vendor list, it had to agree to 75 days payable. To become a prime Defense Department contractor, it had to become Defense Contract Audit Agency compliant, meaning that it needed commercial auditors and government verification, and to achieve compliance meant installing a $500,000 new accounting system.
The Department of Labor reports that firms with fewer than 20 employees spend 38 percent more per employee to comply with government regulations than firms with 500 or more employees. Environmental regulations cost the under-20-employee firm 4.64 times more. Tax compliance costs those small firms 3.06 times per employee what they cost the firm of 500 or more.
I have been asked what local government can do to encourage and grow local businesses. First, independent businesses want clarity, predictability and simplicity.
Rules and regulations should be simple and easy to understand. Business, especially small business, does not want to negotiate with a government that holds most of the cards.
Local government needs to create the impression that it cares about local business. One of the best ways it can do that is to contact more local, fast-growing companies to see what they need to grow. I am virtually certain that the answer will not be large subsidies.
With 91 percent of the new jobs in Kansas coming from existing Kansas firms, solving problems for those firms is a much more cost-effective path to economic development than enticing large corporations to relocate to our state.