Small Business Commission
Findings and Recommendations for Small Business Growth and Job Creation in Current Economic Environment Principles of Microeconomics

Small Business Growth and Job Creation in Current Economic Environment

A) Privatization of Many Federal Services and Government Worker Pay Reductions:
A recent report conducted by the Government Accountability Office (GAO) regarding duplicative federal programs found what we have all known for some time to be excruciatingly true. The national government and current $3.8 trillion federal budget are filled with duplicated, overlapping programs and agencies. Here are just a few of the many examples. The federal government runs 80 economic development programs across 4 different agencies at a cost of $6.5 billion dollars. When asked these economic development programs could show little, if any evidence of factual results and/or verifiable signs of actual economic development. The federal government runs 20 agencies operating 56 programs dedicated to financial literacy. When asked for actual numbers reflecting the operational costs of these programs the GAO was unable to estimate the cost based on the limited information provided.
Sen Tom Coburn (R-OK) made this statement in regards to the GAO report. “This report confirms what most Americans assume about their government. We are spending trillions of dollars every year and nobody knows what we are doing. The executive branch doesn’t know. The congressional branch doesn’t know. Nobody knows. This report also shows we could save taxpayers hundreds of billions of dollars every year without cutting services. In many cases, smart consolidations will improve service.” The GAO did not provide a specific estimate of the cost of duplication in its report but Dr. Coburn estimated it to be at least $100 billion. Moreover, GAO only examined a fraction of the federal budget and only a handful of missions of varying scope. Dr. Coburn expects future reports will identify even greater overlap, duplication, and mismanagement. (Sen Tom Coburn) Graph taken from The Cato Institute: http://www.downsizinggovernment.org/node?page=1

The U.S. government and American economy are currently suffering a condition that the Merchant Marine and sailors around the world refer to as ice buildup. It is a condition that occurs to ships sailing in colder climates when water from spray and breaking waves turns to ice and builds up on the superstructure and rigging of the vessel. Unless constant vigilance and cleaning are maintained a ship can become top heavy from the added weight of the ice eventually causing it to capsize and go belly up. The Federal government of this great country has become a parasite feeding on the efforts of the common people. At some point symbiotic sustainability is no longer achievable without catastrophic consequences.
In the last decade, while the private sector has been reeling from massive layoffs and corporate merger induced cuts the federal workforce continues to grow in both volume and compensation. “The average federal civilian worker now earns twice as much in wages and benefits as the average worker in the U.S. private sector. A recent job-to job comparison found that federal workers earned higher wages than did private sector workers in four-fifths of the occupations examined. In 2009, federal civilian workers had an average wage of $81,258, according to data from the U.S. Bureau of Economic Analysis. By comparison, the average wage of the nation’s 101 million private-sector workers was $50,462. When benefits such as health care and pensions are included, the federal compensation advantage over the private sector increases even more. In 2009, federal worker compensation averaged $123,049, or double the private-sector average of $61,051.” (Chris Edwards) Chart taken from CATO Institute: http://www.downsizinggovernment.org/overpaid-federal-workers#5

It would behoove us all to remember the words of James Madison in his Federalist Papers written in January of 1788 when the extent of the powers of the federal government over local governments were still being argued in Independence Hall and America’s still adolescent experiment in democracy was evolving.
“The powers delegated by the proposed Constitution to the federal government, are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects: as war, peace, negotiation, and foreign commerce, with which last the power of taxation will, for the most part, be connected.
The number of individuals employed under the Constitution of the United States will be much smaller than the number employed under the particular States. There will consequently be less of personal influence on the side of the former than of the later. The members of the legislative, executive, and judiciary departments of thirteen and more States, the justices of peace, officers of militia, ministerial officers of justice, with all the county, corporation, and town officers, for three millions and more of people, intermixed, and having particular acquaintance with every class and circle of people, must exceed, beyond all proportion, both in number and influence, those of every description who will be employed in the administration of the federal system.” (James Madison, Jan 26, 1788)
B) Privatization of the United States Postal Service:
The United States Postal Service (USPS) as we currently understand it has continually been unable to cover its operational costs and Postmaster General John Potter recently announced that the U.S. Postal Service is facing $238 billion in losses over the next 10 years. With more than 600,000 unionized career employees the Postal Service has the second largest workforce behind Wal-Mart, 85% of whom are covered by collective bargaining agreements. The average compensation for Postal Service workers is $83,000 per year. Compensation and benefits account for almost 80% of the Postal Services costs. Privatization of the USPS has the potential to improve efficiency relative to the current situation with a greater cost savings to the public. With the unionized collective bargaining workforce in place taking 80% of the operational costs there is little room in the current business model for binding arbitration or labor cost improvements. In addition, the improvements in technology and the creation of the internet have dramatic impacts on the USPS demand and service. On the other hand the USPS major competitors, Federal Express and United Parcel Service have continued to benefit from technology with the ability to track packages and arrange for package pick-ups online. Both Federal Express and United Parcel Service have continued to show solid growth and reliability while USPS have posted continual losses and forced price increases that fail to cover the operational losses.
The forces of technological change, increasing competition and government budget shortfalls would all lead one to the conclusion that it is time for privatization of the United States Postal Service. While the impact to the existing USPS workforce would be catamount, 600,000 employees, the long run benefits of open market competition and the immediate creation of replacement jobs through privatization would equalize. This act would also free $238 billion that would otherwise be written off as a loss.
C) U.S. Small Business Administration effective or detrimental?: The Small Business Jobs Act of 2010 was passed with the intent of providing critical resources to potential new small businesses through loan provisions, lending support, and tax cuts. The overall goal was to help drive economic recovery while creating desperately needed jobs at the same time. The Small Business Administration (SBA) loan provisions offered a 90% guarantee of loan approval and reduced banking fees. The Jobs Act loans are reported to have provided more than $12 billion in overall small business lending. The measure was expected to create 500,000 jobs according to a Senate summery of the bill. “Without adequate credit, businesses cannot grow and hire. The bill aims to spur hiring by making credit more available to small businesses. The number of loans has dropped by 17.8% since the second quarter of 2008 and the total value of those loans plunged by $60 billion to $65 billion, according to data provided by the FDIC.” (Catherine Clifford, CNNMoney.com) The catch to all of this is that the U.S. Small Business Administration was not the one actually providing the money to all of these start-up companies. The SBA takes these loan applications, many of which were already rejected by the private financial community, and resubmits them to lenders charging them with a fee for an official SBA loan guarantee. The main SBA program, referred to as 7a, offers a federal guarantee of 85% on loans up to $150,000 and 75% on those ranging from $15,000 to $5 million. The guarantee ensures that banks will get back what they have lent to small businesses if their loans fail, ultimately at the taxpayer’s expense. The process actually encourages the banks to make very risky loans that otherwise would never have come to fruition or passed the initial loan review. Sound familiar? “According to data provided by the National Association of Government Guaranteed Lenders (NAGGL) just avoiding the 3.6 percent of loans made in industries with historical failure rates exceeding 20 percent would have eliminated $168 million in loan charge-offs from 2000 to 2008.” (Scot Shane)
The true question that we need to ask the SBA and the members of congress that passed this act is if a potential start up business fails to have the necessary resources in place to satisfactorily pass the required credit reviews and standard loan process how can we expect this same fledgling business to survive in the tight free-market economic environment we are currently facing? Especially when successful businesses that have been in existence for generations are falling on hard times and being forced to close their doors forever. Could the resources and monetary guarantees currently being passed out to anybody with a business idea by the SBA be better utilized to save the established businesses and their employees who have already put in the time and sweat to build something from the ground up?

D) Current Bank Lending Environment and Its Impact on Economic Recovery:
With the fallout from the mortgage crisis meltdown, government funded bank bailouts, and tightened legislation and regulation the financial lending community is still reeling. As our recovery slowly gets under way and we pick up the pieces a new challenge is presenting its self. Banks still smarting from the error of their mortgage risk miscalculations are being extremely cautious in making new loans to business and consumers. Because of this the flow of cash and finance through the economic model has been restricted to a trickle. Money that is usually spread throughout the different interrelated aspects of our economy and unified with the Credit Market is now being centrally stockpiled and amassed with little outflow to business and households. Graph taken from IEA Macroeconomics.org: http://www.iea-macro-economics.org/circle3.html

One of the biggest hurdles currently being faced by potential investors and small business owners is the banking communities’ reluctance to provide the necessary funds to move forward with any form of capital accumulation or growth. Lending in the third quarter of 2010 is still lower than the numbers from the previous year. “In 2009, venture capital funds received less than half the $35 billion they raised in 2007, and inflows in 2010 are running 27% below 2009 levels. The institutions and wealthy individuals that provide venture capital have less money to invest and are less willing to commit it to chancy firms”. (The Economist: Dec 16, 2010) Even Federal Reserve Chairman Ben Bernanke has openly admitted that, “At present the recovery has so little momentum that we’re not very far from the level where the economy is no longer self-sustaining.” Graph taken from The Economist: http://www.economist.com/node/17633017

E) Penalize for Outsourcing
American companies have created 1.4 million jobs overseas this year. Compare that to less than 1 million jobs created within the United States. According to the Economic Policy Institute, those additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9%. There is a shift in economic power that is going on and will continue. China just became the world’s second largest economy. Is it any wonder that a majority of products being imported into the U.S with American brand names are manufactured elsewhere? David Wyss, chief economist for Standard and Poor recently noted that half of the revenue for companies in the S&P 500 have come from outside the United States for the last several years.
With a continuous flow of manufacturing and service positions being relocated outside the United States there becomes a diminishing number of available jobs within the United States. “I don’t think the U.S. will ever produce low end manufacturing goods again. “said Dong Tao, Managing Director, Non-Japan Asia Economics at Credit Suise in Hong Kong. “Even if all of the factories in China burned down tomorrow, it’s not going to bring the lighting industry back to America.” “All the perplexities, confusion, and distress in America arise, not from the defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit, and circulation.” (John Adams)

Resources:
Adams, John: [Online] Cited March 6, 2011: http://www.brainyquote.com/quotes/authors/j/john_adams.html
Coburn, Tom: [Online] Cited March 6, 2011: http://coburn.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=9f71c934-b926-47ee-a6f8-662d5225517f

The Economist: Bitten, investors turn shy of risk. [Online] Cited March 6, 2011: http://www.economist.com/blogs/freeexchange/2010/12/financial_markets_0
The Economist: Bank Lending, [Online] Cited March 6, 2011: http://www.economist.com/node/17633017
Government Accountability Report on Duplicative Programs: [Online] Cited March 6, 2011: http://www.downsizinggovernment.org/gao-report-duplicative-programs
Government Worker Pay Reductions: [Online] Cited March 6, 2011: http://www.downsizinggovernment.org/overpaid-federal-workers#5
IEA Macroeconomics.org: Investment GDP:[Online]Cited March 6, 2011: http://www.iea-macro-economics.org/how_economy_works.html#C
Long-Term Fix for the SBA Budget: [Online] Cited March 6, 2011: http://www.businessweek.com/smallbiz/content/mar2011/sb2011034_382912.htm
Madison, James: [Online] Cited March 6, 2011: http://www.constitution.org/fed/federa45.htm
Privatize the U.S. Postal Service: [Online] Cited March 6, 2011: http://www.downsizinggovernment.org/privatize-us-postal-service
Senate OKs Small Biz Jobs: [Online] Cited March 6, 2011: http://money.cnn.com/2010/09/16/smallbusiness/small_business_jobs_bill/index.htm
U.S. Small Business Administration: [Online] Cited March 6, 2011: http://www.sba.gov/content/small-business-jobs-act-2010-0