Not Seeing that Small Is Big--and Hurting

Many Americans would probably be surprised to learn that small businesses matter more to the U.S. economy than the corporate behemoths that comprise the S&P 500.

In fact, these sorts of firms account for more than 50 percent of U.S. nonfarm private gross domestic product and employ roughly half of all private-sector workers, according to Small Business Administration data.

Unfortunately, individuals who really should be aware of this fact -- politicians and other public officials -- have persisted in enacting policies that make it ever harder for entrepreneurs and owner-managers to earn their daily crust of bread.

Ultimately, as Charles Hugh Smith, publisher of the Of Two Minds blog and author of Weblogs & New Media: Marketing in Crisis, argues in "Trends for 2009: The Death-Spiral of Local Government and Small Business," their obliviousness will backfire--on them.

State and local governments are responding to shortfalls in tax revenues and spiraling pension costs by raising "fees" (a.k.a. taxes or junk fees) just as the backbone of the economy--small business--is struggling for survival. The more government employees demand "what was promised" in pensions, the more small businesses will fold, cutting government revenues in a death-spiral with only one end: state, county and city insolvency.

I am starting a new series today entitled "Trends for 2009" which will attempt to describe those trends which will be working beneath the MSM-induced "everything's gonna return to 2007 real soon" fantasy.

Let's start with the death-spiral of state and local governments raising taxes and fees to offset their collapsing tax revenues.

Contrary to the illusion created by glossy adverts and a corporate-owned MSM (mainstream media), huge global corporations are not the primary provider of jobs and taxes in the U.S.--that role is filled by small business, which also provides roughly 80% of the job creation and innovation in the economy.

The MSM tries to make a distinction between "marginal small businesses" and "small business," but all small enterprises are marginal in our high-overhead, high-tax, high-fixed cost economy. So guess what happens as revenues decline but fixed costs (rent, business license fees, utilities, health insurance, etc. etc.) stay high? Small businesses will close en masse.

Slump Batters Small Business, Threatening Owners' Dreams (WSJ)

Now put these two together: higher taxes/fees and small businesses on the precipice. Welcome to "death spiral 2009" in which public employee union demands for higher taxes to pay their bloated pension and healthcare benefits will kill off an ever-rising number of small businesses, further depressing tax revenues.

Note to politicos, government managers, public employees and their unions: we don't have to keep our door open. You seem to think we do, but we don't. When we can't pay ourselves and/or we get tired of the endless stress and grind of all your regulations and taxes and fees, then we'll close our doors and issue a big sigh of relief. We'll make do somehow without employees, storefronts, offices, permits, and all the other sources of income you, our governments' employees, depend on for your paychecks.

I have to chuckle (bitterly) when I hear some corporate or government manager complaining of stress. If you have a steady paycheck, you have never experienced full-court stress. (With the exception of emergency medical care staff and U.S. Armed Forces personnel in combat duty, of course; I mean "regular civilian employment.")

Small business owners have to wear more hats than any corporate manager or government employee, and they do so without pay as times get tough. Many tap their own credit cards to pay employees and fill orders for good customers. You want stress? Then do whatever job you do for a paycheck but imagine that you're doing so with only the hope of future paychecks--a hope that dwindles every week that the economy continues its free-fall.

This is why I have predicted that local and state governments are completely ill-prepared for the tidal wave of small business failures which are about to decimate their tax revenues. The average municipal manager is assuming everything will return to normal soon, as all those faceless small-business worker bees will persevere and keep paying their rent, taxes and fees regardless of the hardships, stress and rising debts.

Nobody can operate their business for long when they're losing money. I would guess that over half of small businesses in the U.S. are already marginalized in terms of survivability, and very little separates those from their "if we can just get through 2009 we'll make it" brethren who still have a bit of cushion.

As noted here before, an entrepreneur always has an alternative "Plan B" livelihood : whatever one used to do in a formal, high-cost way, then do it informally from home. Do it for barter, do it for cash; pay no office or warehouse rent, have no employees, pay no business taxes, and whatever net income is left, it will be so low that the income taxes will be negligible.

If the politicos and government employees think they're in trouble now, wait until the end of 2009. When the streets are lined with closed storefronts, the chain stores and malls have been shuttered, and the auto dealerships are weed-filled empty lots, then go ask the survivors to pay more taxes and fees.

Oh, and here's where some state/local tax revenues are going (link courtesy of Cheryl A.): Double-Dipping Government Employees in Florida.

Sadly, there won't be many left to hear your pleading for more tax revenue. But go ahead and raise taxes and fees anyway, and drive the survivors under. Then the last businesses you can try to load up with higher costs will be Wal-Mart and Safeway and the local branch of Citicorp/WAMU/BofA/Countrywide/Morgan/Chase or whatever it will be called.

You can try raising property taxes, but as homeowner net worth and equity continues sliding, you may find some resistance to higher property taxes. You can start charging $10 to use the county park, and guess what, you'll find nobody needs to go there now. You can charge $10 a month to use the library, and guess what, you will either face a citizen insurrection or few will enter what was once considered a sacrosanct civil institution--the public library.

Or you can take stock and realise that government is an enterprise, too; it too needs to live within its means--especially as those means diminish along with the economy which supports you. Unlike the Federal government, you can't print money to pay yourselves or fund your pensions. You might want to focus on helping the goose which lays the eggs--small business--survive rather than devote all your energy to strangling it with higher taxes and fees.

You can either keep the libraries open, or you can fund your pensions. But you won't be able to do both.

The more taxes and fees are raised, the less tax revenue will be collected as the pool of small-business survivors melts under the strain. It's called a death-spiral, and we will all have ringside seats as 2009 unfolds its dark wings.

Lest you think this is just some outlier attitude, please read this commentary from an astute reader. This was written in response to my essayProductive and Unproductive Capital (December 27, 2008), but it resonates with the death-spiral I describe today:

"I compare today to say America in 1832 to 1942, what we did, what we believed, how we lived with mostly independent agrarian life, no distances, no transit, only walking to the homecoming game with your pal and your gal at the school 3 miles away. I keep saying, "does that sound so bad?" Is it so terrible to work where you live, in small, modest shop of our own making small, modest profits?

Your last post was insightful in this, which has a near-absolute effect on people who control and deploy capital. If there's all risk and no return, why deploy it? This single change could probably do more than any other. I am one of those capable of deploying capital, but all my life I haven't even once: the legal maze is incredible, the taxes are near 100% of profits, and the risk is total loss of everything you own, and with liability and garnishing wages, everything you might ever own. This same math drove my father out of small business altogether, and that was the early 90s when the gov't (including Fed debt) was 1/4 of todays' size. Was it too small then?

For example, here in Rochester, NY, there are 12-BR Craftsman mansions, all woodwork, fireplaces, show homes, 20min from the city, already cut into 3 apts for, oh $220,000. That's like giving it away. Replacement cost would be in the millions. You know what? The return on that investment is zero; the rents + taxes + risk would take ALL the profits, every penny: to the state, the bank, and the insurance companies.

That's why the present owner is trying just to sell it at breakeven. He doesn't want it either.

That's what I'm talking about in deploying capital, although laundromats, farms, restaurants, are all the same math. You work entirely for the State. Any profits are more than overshadowed by the additional risk. So I do nothing; and neither does anybody else. Do we get anything for this cost and nuisance? No. At least 30 miles north, in Canada, they GET something for their equivalent taxload: universal health care, and a system that has no personal risk. The dole is easy to get on, and there's no real stigma or bother attached to it. In NY we don't even get good roads.

It's nonsense. Go back to how it was--let the roads go back to dirt for all I care, cancel health care and everything else--despite the promises we don't really get it anyway. Most people out here would agree with me.

If we steal from workers and savers to give to speculators and borrowers, then why should people work for themselves anymore? And I can attest that here in NY, they don't. The farms were economically firebombed years before the rest of the economy. There's now no work people wish to do--although astonishingly there's still a lingering work ethic. So we do nothing, and nothing gets done.

Money won't solve this problem. That's the real point. Only work in the real world will. To get that, we need to reverse the reward structure 180' and reward people who work instead of those who shuffle, actively prevent the work of others, or who speculate.

History shows that will happen and despite recent appearances, it seems this may even happen peacefully, if with great hardship. Time will tell but the American people seem to be avoiding that path by not getting riled even when VERY put upon. They seem to be content with simply playing out all the rope that the present system needs. When it is completely nonfunctional, it will more or less hang itself without our needing to get off the couch. That's unconscious, and it's giving great benefit to the people, but here in the country, people KNOW they're getting screwed into poverty every day--and I mean actual no-heat, lose-the-house poverty. It's not as they say in the suburbs: that people are fat and lazy and don't know. THey seem to know well enough here but still prefer to play out the rope. I think people are more or less terrified of the explosion that might occur if they allowed themselves to get angry and take action. History would show, I believe, that their common sense in this is correct.

I liked the reader who spoke of "living on the land"--he has the relaxed and patient method I wish I had, although he wasn't able to flesh out this important idea so thickly. Living in farm country, thick with turkey and deer I can agree--hunting in a Depression is a dangerous fantasy. It took from 1932 to 1990 for turkey to return here, and only when re-introduced. Deer were virtually wiped out until the late 50s. There are no fish now even in normal times. Imagining hunting might work is an excellent way to get killed. Far better to buy a few hundred in garden seeds and a shovel, something I intend to write on if I can clarify a plan before people are already inside the storm. But you just can't write a 100-word essay on growing food. It's like being a doctor or a mason, it takes decades to learn to do well, everything is a soft-case exceptions, and only experience can teach you.

It seems like that idea that non-edible savings itself is illusionary, and that money is useless compared to real work are ideas that need to be explored. I look forward to seeing what you discover."

Thank you, reader. Here are two ideas to start with: tax the heck out of unproductive capital and unearned income, not just to raise revenue but to drive that capital into productive uses, and lighten the tax burdens placed on small business. The more that survive, the more tax revenues you'll actually gather.

Comments

[roger]

Politicians get big contributions from mega corporations
& enact policies accordingly, huge global corporations
contribute nothing to the welfare of society on the contrary
they destroy small business and given their power the trust
is toward a complete monopoly of the markets & government .
it is very naive to believe that this can be controlled without
a complete change in a system of economic Darwinism.

[Steve]

Well, in France, they got so fed up with the BS they cut their damn heads off...

If you live in/near Rochester then I can see why you're so bummed. That place has been a depression for 30 years, kind of like Detroit.

BTW, $220,000 in Pittsford is NOT giving it away. Lehigh Acres, Florida 3/2 with caged pool $ 49,900 - now that's giving it away. Property taxes are steep but no State Income Tax and you don't have to scrape your car windshield off to go to work.

[Scott Whelan]

Nicely written, dead on and very scary. Is there a silver lining anywhere?

[Susan]

Wow, one of the most accurate to my life posts I've read in a long time. I have a small computer repair, networking and data recovery service in New England. Its me running my lab, my husband doing accounting and I hire subcontractors when I need to. But we also have been paying attention to economics patterns the last few years. And last year we moved my lab to the family farm. And we have plans as detailed as what we will use my computer lab space for if the US economy completely tanks (a cheese making lab, I'm getting better at it every week!). We want not just to *survive* any changes the universe throws at us, we want to be happy and healthy, and have a good place to raise our kids.

Anyways, the sad, sick and scary thing about where the "western"/industrial world has gone lately is that people have become so sheep-like. Whether rabid consvatives or flowery liberals --- most are not very independent. If they lose their jobs, and the grocery stores, gas stations and banks close (or start having limited hours), they are really screwed.

And it looks like that bitch of history is going to show that indeed, like ALWAYS happens. It will happen.

For tens of thousands of years humans kept growing our population, culture and technology without these institutions. But now, frankly, we've become a sissified pansy people. We need to get a good ass kicking by reality to get us back in balance.

And its going to happen . . . regardless of exact details, nobody knows exactly how things will play out.

The only question is will you be clinging to a paycheck, hoping . . . worrying . . . wishing . . . praying. Or will you be WORKING to ensure your families future? Find some land? Return to your roots? Hell, even stake out a good parking and camping place in near rich land where you can squat and at least survive! Because having at least PLANNED that way? Its the only thing a real man/woman would do at this point.

Or, be critical of the small business owner type . . . the individual. And we will watch you from outside your fences and wish you the best. Really, we don't want you to suffer. We are just doing our own thing, please join us anytime!

[Omitted Kingdom]

Isn't there an adage that 80% of new, small business start-ups fail? That's what worries me. As for vacant land, plow it up, start a garden, let people tend it. I live in a ground floor apartment, and in 2004 i started micro-gardening, mulching, and composting, just to measure first hand the work it took to grow food. Believe me, I would have starved a million times over, so I have more to learn.

However, I was delighted to see this past summer that when I compost the cantaloupe seeds from the melons I buy at Sam's Club, my soil is healthy enough that the composted seed volunteers to produce more cantaloupe. The vines twine around my tomato cages, and cantaloupe hang gently in the air until ripe, then they automatically detach and fall to the ground. The vine end smells wonderful. Thomas Jefferson's vision for America was small farmers who would help each other.

[ed smith]

"tax the heck out of unproductive capital and unearned income, not just to raise revenue but to drive that capital into productive uses, and lighten the tax burdens placed on small business. "

Sorry, but this is just more of the same old refrain; "Tax the other guy and get off my back". It wouldn't work for several reasons.

First off, you don't get smaller government or less regulation by raising taxes. Higher taxes are frequently couched in terms of influencing behavior (let's stop those greedy speculators, you say), but the end result is only more government. Once the "speculators" have been sufficiently chastised, the government will look for other sources of funding. Like Willie Sutton, government goes where the money is.

Second, your higher taxes on unearned income would be death for the accumulated retirement savings of the massive baby boomer cohort. The marginal investor becomes a seller of stocks under that scenario. Watch those pension plans implode, insurance companies fold. Despite your disdain for big corporate America, equity in those companies comprises a huge chunk of Americans retirement savings. Go ahead and raise cap gains tax to 50% (or whatever comprises "taxing the heck out of them). See how small businesses fare when all those shareholders no longer darken their doorways.

If you want less government, call for less government. If you think shifting the burden onto someone else is the answer, you'll have a rude awakening.

[RueTheDay]

Great post. I started a blog a couple of months ago to discuss this very thing:

http://www.de-grid.com/blog/

We all need to lessen our dependence on "the grid". Lessen, not eliminate. Complete independence is a pipe dream for 99.9% of people in the modern world. However, we can significantly lessen our dependence on the increasingly interconnected yet increasingly fragile economic system.

There is an enormous tradeoff between efficiency and reliability. That doesn't mean one is to be preferred over the other, it means we have to recognize that the tradeoff exists and strike the proper balance (modern economics is largely an exercises in maximizing efficiency at the expense of all other considerations).

[Cornholio]

tax the heck out of unproductive capital and unearned income, not just to raise revenue but to drive that capital into productive uses, and lighten the tax burdens placed on small business. The more that survive, the more tax revenues you'll actually gather.

OOOOOOOOOOOKAY!

first I'll give you a couple of examples, one a welder and one a Vet, both are taxed 50% between the FED and the state. In order to doge the tax bullet they both have to keep buying more crap they really don't need and taking on more debt they really don't have to other then the fact that they don't want to had it over to the damn thieving government. Now say they don't have to do that any more and they want to save it or invest it. Well now by raising taxes on unearned income they are in the same frigging boat. Want to see a real stock market crash raise the taxes.

[scott]

What the U.S needs to do to be 'fair and just ' economically , is to (in the spirit of checks and balances ) create an alternative economy (instead of having state approved commerce-criminals and a welfare-sustained citizenry )
by establishing an ammendment to the constitution gauranteeing the inhabitants of all states access to the necessary resources that are required to participate in the production and acquisition of the necessities of life , including the right to occupy and use land and natural resources .

These resources should be acquired by the state through direct siezures and or purchases of land by the state which would become available via a huge tax on unproductive/ idle
land ( ala Henry George) .

This coming into effect at any time that the investor class fails to produce an opportunity for a civilised standard of living for each and every given individual, as would reasonably be expected to be acheived through a communistic approach, upon proper petitions by such individual(s).

Hoarding resources should be punished .

The important concepts here would be the definitions of the terms 'necessary resources' and 'necessities of life' and 'civilised standard of life ' !

Or something Like that ? Its the best idea I have anyway .

[Econophile]

Interesting post, but why would you suggest more taxation as a solution? Especially in light of your earlier comments. FDR tried that in the '30s and it deprived companies of their capital base. As you know capital just doesn't sit there unless you put it under your mattress. What about the novel concept of governments living within their means? Spend less.

[Worker]

Well, if the small business will fail, this is just another symptom of the failure of capitalism and its "entrepreneurial spirit" which is just cheap ideology. We do not need a capitalism of "small entrepreneurs" that cry like babies to not pay taxes, thinking they have the right to compel public employees to work hard without having the right to a fair pension.

We need fair pensions to everybody, we need fair wages for everybody, we need a Socialist economy that can provide it. Capitalism (of big or "small" business) has failed.

[Kathy]

I think you put too much emphasis on public employees. What about managers and CEOs whose pay has been exploding? What about professional people whose pay has been exploding. Fair if fair. Everyone should take a haircut. The reason wages for the average employee are tanking is the weakness of unions in the private sector. All that buying power is now gone and there is a huge ripple effect. Also all the manufacturing that has been sent to China. All the jobs and profits gone. Many people have been overpaid. Don't scapegoat the lowest on the totem pole.

[Susan]

Wage/Salary slaves. The point I was making isn't big vs. small business, capitalism vs socialism, or anything in between.

My point is that self reliant people, whom can grow/hunt/build/invent. Who have looked ahead and set themselves up so that even if the rest of the world suddenly disappeared, they might have to struggle hard . . . but likely they would be ok. For those of us in that situation, out of luck & skill . . . our only fear is our fellow citizens. Because if your life depends on the grocery stores, the electrical grid, etc . . . then history shows you ARE eventually screwed. So your only likely recourse will be using force to get what you need. And if America descends into full bore internal violence and strife, then we are ALL in big trouble.

[Dave]

Superb article. I have been self-employed since 1979 as a Radiological Physicist. This year it has been too much of a struggle in attempting to keep at least 45% of the gross while I watch the "pinheads" in Wash.D.C. give our tax revenue away to mega-salary fools who obviously cannot even add and/or subtract. So for 2009, and the promised coming higher taxes, I no longer have the energy to work the days, travel in the evenings, and do reports on weekends. That is assuming I do not have to repair my computers, research client requests, get auto serviced, complete more state and federal tax reports, get my physics equipment calibrated, monitor my melting savings, do accounting, get tax payments completed and sent in every few months, modify my own physics software, etc. No, I have NEVER had a vacation. What is that?
So all of you that have never been self-employed through at least two tax years have absolutely no idea what stress in. Hey Barney "Fwank", ya listening?
In a weird sort of way, I hope to see governments cut their administrative payroll. Yea, I know, probably never happen. No government vacations, no 10 minute breaks, no job descriptions (do it all or LEAVE, find another job!), no medical plan, work week now 58 hrs at the same pay (or LEAVE!) no taxpayer aircraft, cars and fuel, ..... I better stop. I will be making a list until next week.
Yes, just wait until the tax revenue for 08 is whoppingly low. Guess we will then get our paltry savings and devalued homes nationalized for the good of .....hmmmmm, what bail out program will that be?

[Gibbon1]

Unfortunately, individuals who really should be aware of this fact -- politicians and other public officials -- have persisted in enacting policies that make it ever harder for entrepreneurs and owner-managers to earn their daily crust of bread.

Excuse me? That's a feature not a bug. Tax breaks, fees, permits, access to credit, insurance, and regulatory expenses are completely weighted against small business on purpose. Further all of the business organizations and trade associations that could be used to help small businesses rectify that have been hijacked by corporate tools.

It chaps my hide. Democrats bend over small business owners, cause they're businesses. Republicans bend them over because they're potential competition in the game of status, money and power.