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Need to Start the Small Business Engines

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Historically, American small businesses have been strong engines for job creation. Since the Great Recession, those engines have either been turned off or idling.

We need to start those engines again if we want to get on the road to meaningful economic growth and recovery. Given the current attitude and the performance of the small business community over the past few years, however, that will not be an easy proposition. Two polls released recently reveal the extent of the problem.

The January Wells Fargo/Gallup Small Business Index painted a more optimistic picture than its November Index which had been at the most pessimistic level in two years. As the Wells Fargo news release notes, "The latest Index improved 20 points to a positive 9 (+9 ... up from a negative 11 (-11)."

In contrast, the National Federation of Independent Business' (NFIB) Small Business Optimism Index released in February was not as bright. The Index gained only 0.9 points rising to 88.9. And, according to the NFIB, "Expectations for improved business conditions increased by five points, but remain overwhelming low - negative 30 percent -- the fourth lowest reading in survey history."

Setting optimism aside, the more important data in each survey relates to job creation -- or the lack thereof. The NFIB survey states, "Actual job creation and job creation plans improved nominally, but still not enough to keep up with population." The Wells Fargo/Gallup survey reports, "More small business-owners say they let employees go than hired them on average over a new hiring index of -10 in January... This is similar to the -12 recorded in November, the -9 a year ago, and the -12 of January 2011, but up from the low of -27 in January 2010."

These negative job creation numbers tell the story behind the country's sluggish economic recovery. Small businesses represent about half of the private sector economy and more than 99 percent of all businesses. In its Small Business Economy 2012 report, the Small Business Administration (SBA) observes that "[w]hile the small business economy is growing, the effects of the most recent downturn are still being felt. The number of business births and their associated employment remain below pre-downturn levels and employment gains have been muted compared with previous downturns."

Citigroup research discloses that in spite of their problems small business still account for 60 percent of job creation in the United States. But that compares to 61 percent in the 10 years through 2007, 65 percent in the decade ending in 1997, and 77 percent in the decade ending in 1987.

As Catherine Rampell notes in her New York Times article, "Small Businesses Still Struggle, and That's Impeding a Recovery," there is a huge "gulf in optimism between large and small companies." That may be explained by the fact as Bill Dunkelberg, NFIB chief economist puts it, "While corporate profits are at record levels as a share of GDP, small businesses are still struggling to make a profit."

"Struggle" seems to be the operative word for the condition of small business today. Is there anything that can be done to help them in that struggle?

First, let's look at what has been done over the past four years. The 2009 stimulus package provided $730 million to the SBA for expanded lending to small businesses. The Small Business Jobs Act of 2010 included a provision of $30 billion in low cost capital for smaller community banks. The Jumpstart Our Business Startups (JOBS) Act of 2012 permits "crowdfunding" and use of the public capital markets for investing in emerging growth companies.

At the beginning of 2012, President Obama made Karen Mills, the Administrator of the SBA, a member of his cabinet, thus elevating the profile of the agency. During her tenure, Ms. Mills who has announced her departure from the SBA pending a replacement, turned the SBA around which according to Businessweek "had languished under the George W. Bush administration."

Under Ms. Mill's leadership, "the SBA supported more than $106 billion in lending to more than 193,000 small businesses and entrepreneurs, including two record years of delivering more than $30 billion in loan guarantees."

That brings us to 2013. Now, let's look at what should be done for small business going forward. First, do no harm. Second, do some good.

We would put the fiscal cliff and the sequestration in the "do no harm" category. The fiscal cliff bill was a mixed bag for small business. It had positive features such as an extension of the R&D tax credit, expensing of up to $500,000 in capital expenditures, and accelerated depreciation of qualified new equipment. On the other hand, as Scott Shane of entrepreneur.com comments "three of its major components discourage small business job creation: the end of the payroll tax holiday, higher marginal tax rates on the wealthy and the increase in capital gains tax rates."

The impending sequestration does not look like a mixed bag for small business. It looks like an unmitigated disaster placed on top of an already gloomy economic forecast. The Congressional Budget Office (CBO) new budget outlook indicates that the U.S. economy is not expected to return to its full potential until 2017. The CBO also sees unemployment staying high for some time: at around 8 percent throughout 2013; declining to 6.8 percent in the fourth quarter of 2015, and not getting down to 5.5 percent until the fourth quarter of 2018.

According to Lori Montgomery of The Washington Post, the CBO estimates that the sequester will "shave about 1.25 percentage points off economic growth this year to cost the nation about 1.5 million jobs." A White House press release states that "the automatic cuts triggered by a sequester would reduce loan guarantees to small businesses by up to $902 million."

At this point, it appears that the sequester will take place and harm will be done. So, the need will be to address its unintended consequences by doing some good. We recommend that the good be focused in two categories: entrepreneurial support; and small business assistance.

The Citigroup research disclosed that the key drivers of job growth are "entrepreneurism and the rapid growth of young firms." It goes on to recommend that "public policy should be geared more toward encouraging small business creation rather than to supporting the small business sector per se." We agree with the need to stimulate entrepreneurship but not to the exclusion of providing relief to the mom-and-pop small businesses who must contribute to the economic recovery by retaining and adding workers in a slow and steady manner.

As The Kauffman Foundation noted in a new report, the rate of entrepreneurship had begun to decline even before the Great Recession. That's bad news. But the good news is that there already significant public and private initiatives underway focused on supporting entrepreneurs.

These include: The Start Up America Partnership created by AOL co-founder Steve Case and The Kaufmann Foundation to provide technical assistance to early stage companies. The SBA's making "strategic investments that focus on increasing access to capital for high growth businesses, strengthening entrepreneurial skills training and building regional entrepreneurial ecosystems (through clusters and growth accelerators.)" The JOBS Act which will accelerate capital formation for start ups and emerging businesses. The need is to reinforce and intensify what is there.

The real question is what to do for the mainstream small businesses that are not growing today and are still threatened by a fragile economy. The surveys of these businesses consistently reveal concerns regarding taxation, regulation and the new health care legislation. They will also be the businesses most negatively affected by any decline in demand or consumption because of the ending of the payroll tax holiday In addition, as Bloomberg reports, these businesses are still having difficulties in securing loans and capital due to the consolidation of the banking industry and tightened lending standards.

These conditions suggest a long-term and short-term course of action. In the short-term, the Congress should pass legislation similar to the Small Business Jobs and Tax Relief Act which would have given businesses tax credits for hiring new employees. In the long term, Congress should request a systematic and rigorous examination of each of the areas which appear to be problematic to determine their actual effect on the small business' bottom line and impact on job creation. This study should be used to develop bi-partisan legislation to create positive incentives and/or eliminate those provisions or practices that are retarding small business performance.

It's not well known but the fiscal cliff bill included a tax break for NASCAR "motor sports racing track facilities." That will ensure that the NASCAR drivers have safe speedways on which to start and run their engines. We need to give the same types of breaks to our nation's small businesses so they can restart their engines. When they do, the American economy will begin firing on all cylinders again.

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