Proof that Small Business is Hurting

Here is a kernel out of the latest government statistics as described by Investor's Business Daily:

Entrepreneurial activity [is] fading. The number of startup firms has crashed from pre-recession highs, still near levels previously seen in the early 1980s, when the number of establishments was far lower. Establishments less than a year old... totaled 556,553 .... That's down 26% from the peak of 747,278 in 2006. Meanwhile, the number of employees at startups has plunged, with a greater share of new firms with no employees — one-man shops. Very small startups are less likely to invest or to grow, a bad sign for future hiring.

Just think how bad that really is. Startup firms are the seeds from which small business grows. To a lesser extent, they also are the future of big business, but since nearly all startups never get that big, the focus is properly on small business. And small business is important. Small businesses create about 70% of all the new jobs in America. That means that a 26% decline in the number of new small businesses is a body blow to job creation. Add in the fact that many of these new small businesses are one-person consulting firms opened by folks who cannot find employment elsewhere and you realize that the number of startups that will hire others has fallen by even more than 26%. The real reduction is closer to 50%.

So why have startups declined so drastically during the Age of Obama? There are a number of reasons:

1) Starting a business takes capital. You cannot stock a store on the basis of hope; you need cash to buy an inventory. Two large sources of cash for new businesses have been nearly wiped away. First, loans from banks and credit unions have been blocked to a great extent by the Dodd-Frank bill that Obama and the Obamacrats enacted in 2010. That bill was meant to end "too big to fail" which it did not. Instead, Dodd-Frank created a new category which I call "too small for loans" and it has drastically reduced the amount of cash available to small business startups. Second, folks who used to borrow against the equity in their homes to get cash for startups have lost that ability as their equity has disappeared in the continuing crash of home prices. Much of that crash is due to the extended period of disruption in the home market due to mortgage foreclosures. Obama stepped in to slow the inevitable foreclosures and the market has responded by pricing the homes even lower.

2) Starting a business requires faith in the future. No one will start a business if they fear that the economic future is bleak. Most startups put the life savings of the owner at risk. Few will take that risk if they do not see a rosy future. Say what you want about Obama's policies, but you cannot deny that he has managed to inject enormous uncertainty about the economic future into the economy. What will taxes be next year? We just do not know and Obama has not even proposed a bill that would cover that time period. What will federal spending be next year? Congress unanimously rejected Obama's proposed budget for this year and last year. We do not even know what will get spent this year, and the year ends in September. What will energy prices be next year? Who knows? Will the EPA carry out its threat to outlaw fracking and drive the cost of natural gas through the roof? If so, electric power costs will soar. Will gasoline prices rise to new heights again? There is no coherent policy to keep energy prices down, so those who want to start businesses are left to guess.

3) Starting a business requires the ability to see a path forward. Even if an entrepreneur sees a good future for the next year or so, he or she will not start a business if it looks like there will be problems in two or three years as the business grows. So what is coming in two years? That's right; Obamacare kicks in at that point. Just how much will it cost the new business to cover its workers' health insurance? Since Obama has not managed to even issue the regulations called for by Obamacare more than two years after the law was signed, the future remains cloudy. It may benefit Obama to keep things murky until after the election, but it does not help the economy. Potential business owners are left to guess what the future costs will be, and such guesses are the enemy of economic growth.

We need a change in Washington if the economy is to recover.