Why Small Business Can't Hire

Pundits and politicos promote a magical myth: a coming small business hiring boom. That fantasy is completely disconnected from the harsh realities of private enterprise.

Regardless of their ideological persuasion, pundits and politicos reliably repeat the mantra that "small business is the engine of jobs growth." The mantra is followed by the pundit-politico's belief that a "small business jobs boom is right around the corner."

I have news for the pundits and politicos: ain't gonna happen. Why? The answer cannot be found in the manipulated and massaged Bureau of Labor Statistics numbers (have any real jobs been created, net of jobs lost, in the past year? Who knows?) or in the punditry's Cargo-Cult-like belief in a mythical "small business jobs machine" that they have never experienced and know nothing about.

While a handful of the new crop of politicos are entrepreneurs, most Washington denizens are attorneys, the offspring of wealthy or politically connected families or people who have lived off the government at some level their entire lives. Most have never had a customer or client or had to borrow off a credit card to make payroll. (I have; any pundits who can honestly raise their hands for that one?)

Pundits come in two flavors: the academics, happily making mud pies in the moat surrounding their secure Ivory Tower, and the loud-mouths who have screeched louder and longer than the other media-monkeys. All know less than zero about actual small business.

To understand why small business isn't hiring and won't be hiring, you need to understand the psychology of this era and the systemic pressures on all small businesses which don't live off Federal government contracts. In a very powerful sense, those businesses which live from one government contract to the next are not private businesses at all: they are merely proxies or extensions of the government. Their non-governmental work is either trivial or non-existent.

So when some government set-aside program sanctions $40 million or whatever for "small business," it's no different than opening another government office: the only difference is the employees are not Civil Service. The competition is not between private-sector and government, it's only between rival government contractors.

What pundits and politicos don't get is small business knows the "recovery" is totally bogus. Why hire somebody who you'll have to lay off a few months from now? Laying people off is emotionally painful--you dread it, tire of it, are wearied by it. This is a real human being who is losing their job, not some ginned-up statistic hyped by some think-tank-pundit pulling down $15K a month for dishing whatever flavor of propaganda he/she is paid to churn out.

The Washington establishment--the Fed, the Treasury, Congress, the Obama Administration-- seem to believe they've successfully pulled the propaganda wool over Americans' eyes, and that the yokels actually believe "things are getting better and better every day and in every way."

Only the yokels without clients, customers and payrolls can believe the propaganda.

Meanwhile, back in the real world, small business income is down 5%. Small Business: Still Waiting for Recovery.

According to data from the Bureau of Economic Analysis. Proprietors' income-- the profits of unincorporated businesses such as partnerships or individuals who work for themselves--is down nearly 5 percent from two years ago, while corporate profits have jumped 21 percent in that period.

About 19.9 million partnerships and sole proprietorships with no employees existed in 2008, the latest year for which U.S. Census Bureau data are available. That number fell almost 2 percent from the previous year.

In a private-sector workforce of about 106 million, that's about 19% of all people with a job. Recall that the BLS counts you as employed if you work one hour a week or if you're "self-employed," even if you aren't making a dime.

Only in the Fantasyland of propaganda does nobody notice that self-employed people who are seeing revenues and profits fall do not need to hire someone: they're sinking all on their own.

Only in the Fantasyland of propaganda does nobody seem to notice that for every celebrity-chef restaurant opening to gushing hype in Manahattan, West L.A. or San Francisco, two other restaurants quietly closed.

Small business understands uncertainty is now permanent. That's why 26% of all new private-sector hires are temporary--and if we subtract the bogus phantom jobs created by the BLS "birth-death model," then the number is probably more like a third or even half.

Small business understands that the "recovery" is merely a Federal towel stuffed in the gaping hole in the rowboat's leaky planks, and that it's literally insane to hire workers when your revenues could evaporate next month.

Small business re-discovered it could do more with less. Once businesses trimmed payrolls to survive, they discovered they could make more money for themselves and do so with fewer people. Why add to staff when all that means is transferring your own paycheck to someone else?

Small businesses are closing, not opening. Rents have barely dipped, local government taxes and junk fees have skyrocketed, and the complexities and costs of the new healthcare bill have all added systemic pressures on every small business: it's either adapt quickly and successfully or perish, and many are choosing to close down and quit working so hard for so little payoff.

When leases expire, the doors close, and no one leaps in to pay boomtime-level rents, and heavy business licence and permit fees. The only people insane enough to hire anyone are three guys working in a living room somewhere, trying to hire a few Javascript programmers to finish their app so they can cash out by selling the "company" to some larger enterprise.

The programmers are independent contractors who have to take care of their own healthcare and taxes, or they're young and single so the healthcare insurance costs are modest--if they even bother with buying insurance.

Nobody's hiring for the long-term for the simple reason that there is no long-term: we're either selling the company as soon as we can, or we're waiting for the next dip in revenues to close down before we lose everything.

Local government has grown accustomed to small business being uncomplaining tax-donkeys, silently paying every junk fee and every additional tax the government levies. Only a funny thing happened on the way to local government's plan to fill the shortfalls in its own revenues by taxing small businesses even more: they're closing down.

The reason is simple: why work for free? This is incomprehensible to both local governments, who expect all those "filthy-rich small-business Capitalists" to pay higher taxes and fees, and the safely remote-from-the-real-world pundits and politicos.

These members of the academia-think-tank-media-politico Cargo Cult have a magical belief in a mythical "small business" which is anxious to get out there and create new jobs because "to get rich is glorious," as if "getting rich" is even an option for 90% of real small businesses.

In the real world, small businesses aren't getting rich, they're going broke and closing down to save whatever remains of their sanity and assets. You want high-tech and "clean energy" jobs? Well, how about MySpace laying off half its 1,000-person staff? How about Evergreen Solar closing its Devens, MA plant, laying off 800 workers and moving production to China? Did the pundits honestly think that globalization was over?

Memo to pundits and politicos: you worship at the altar of Capitalist profits driving small business--get real. People will do whatever they have to in order not to go broke.

That's why the three guys or gals aren't renting an office--who needs the overhead? They also don't have health insurance: who can afford $1,000 a month for crappy, confusing "care" young people rarely even need? Better to pay cash.

And they aren't hiring "employees": they're paying their friends with equity shares, or cash, and paying their own taxes is up to each free-lancer.

That is the new model of American entrepreneurship: no office, no overhead, no employees, no health insurance, no business travel. That's the only way any new enterprise can survive.

Everyone who buys into the myth and pays absurdly high rents, junk fees and healthcare insurance will be ground down and bled dry. The only exception are those well-connected enough to run a pipe into the limitless lake of Federal money. Yes, 40% of the lake is borrowed from our kids, but no matter--the "recovery" is real, and this stone with a crudely painted radio dial is in fact a working radio. It's magic. You just have to believe.

Small business can't afford to believe in myths and fantasies. They are dealing with the harsh reality of adapt or die.

Small Business Optimism Index Continues Drop In July

The Index of Small Business Optimism lost 0.9 points in July following a sharp decline in June. The persistence of Index readings below 90 is unprecedented in survey history. The performance of the economy is mediocre at best, given the extent of the decline over the past two years. Pent up demand should be immense but it is not triggering a rapid pickup in economic activity. Ninety (90) percent of the decline this month resulted from deterioration in the outlook for business conditions in the next six months. Owners have no confidence that economic policies will “fix” the economy.

Small Business Sentiment Hits Recorrd Low

from Gallup:

PRINCETON, NJ -- The Wells Fargo/Gallup Small Business Index -- which measures small-business owners' perceptions of six measures of their current operating environment and future expectations -- fell 17 points to -28 in July. This is its lowest level since the index's inception in August 2003. (See full index results on page 2.)

Record Pessimism in Future Expectations
Most of the decline in the overall index came in the Future Expectations Dimension of the index, which measures small-business owners' expectations for their companies' revenues, cash flows, capital spending, number of new jobs, and ease of obtaining credit. The dimension fell 13 points in July to -2 -- the first time in the index's history that future expectations of small-business owners have turned negative, suggesting owners have become slightly pessimistic as a group about their operating environment in the next 12 months.

Small-business owners' future expectations for their operating environment show significant declines in their revenue, cash-flow, capital-spending, and hiring expectations for the next 12 months. Forty-two percent expect it to be "somewhat" or "very difficult" to obtain credit -- no improvement from April and January. One in five (22%) small-business owners expect their companies' financial situations a year from now to be "somewhat" or "very bad."
More Negativity About Present Situation
The Present Situation Dimension of the index declined by a more moderate four points to -26 in July -- the second-lowest rating for this dimension that hit its low of -29 in January 2010.

When evaluating the past 12 months, small-business owners suggest there has been a modest further decline in their current operating environment, driven largely by a significant decline in the percentage of companies having good cash flows. (See full index results on page 2.)
Implications
The sharp deterioration in small-business owners' economic perceptions and expectations in July is fully consistent with Gallup's tracking of a steady decline in consumer confidence over the past three months. So is the weaker-than-expected growth of the U.S. economy during the second quarter, as well as the general expectation of a further slowing of the economy during the second half of 2010.
The Wells Fargo/Gallup Small Business Index seems to be something of a precursor of future economy activity. It peaked at the end of 2006; matched that peak once more in June 2007; consistently declined thereafter as the recession deepened, before bottoming out in mid-2009; and finally, improved modestly until its July 2010 decline.
Small-business owners are the embodiment of America's entrepreneurial and optimistic spirit. As a result, their increasing concerns about their companies' future operating environment do not bode well for the economy in the months ahead. Nor do small-business owners' intentions to reduce capital spending and hiring: 17% of owners plan to increase capital spending in the next 12 months -- down significantly from 23% in April -- and 13% expect jobs at their companies to increase, while 15% expect them to decrease over the year ahead.
Big-firm earnings and global growth may drive profits on Wall Street, but small business is the major source of U.S. job creation. And most small-business owners are unlikely to hire as long as they are becoming increasingly uncertain about the revenues and cash flows of their companies in the months ahead.

Obamacare Worst for Small Business

One of the promises of Obamacare was that it would give folks working in small businesses access to affordable care. Unfortunately, like so much else in the law, it doesn’t look like that’s going to work very well.
To solve the problems small firms have with finding affordable health coverage, Obamacare created a small-business tax credit.  But there’s less to this credit than meets the eye.
A recent study by FamiliesUSA shows that only one in four businesses employing 25 or fewer employees will get the full credit—and one in six will receive absolutely nothing.  Moreover, the credit is reduced whenever a firm adds workers or raises wages—so it actually provides as a perverse incentive not to hire or give raises.
The bottom line, according to Dr. Bob Graboyes, senior healthcare advisor for the National Federation of Independent Businesses:  the credit will do little to help small business.
Other provisions will actually harm small firms.  The employer mandate requires non-insuring firms with 50 or more workers to pay a $2,000 penalty per employee.  New insurance requirements will make it more difficult for employers to offer attractive, affordable insurance options.  And the new requirement to file a 1099 form for every vendor paid more than $600 in a year will sink small-business owners even deeper into the morass of nonproductive paperwork.
In short, Obamacare will be make life far more difficult for small firms and their employees.  At a recent NFIB event, entrepreneurs started talking about how Obamacare will affect their day-to-day operations.
There was Scott Womack, owner of 11 IHOPs.  Currently, he offers his 45 managers health insurance. His restaurants run on 4-7 percent profit margins, so providing health insurance for all employees simply isn’t feasible. Indeed, the Obamacare penalties will exceed his profit margins.  To stay in the black, he’ll have to “minimize the number of actual full-time employees…. It’s going to make it harder for us to hire.”
New Jersey business owner Joe Olivo noted that his health care cost increases average 20 percent a year, yet he’s been able to cover all of his employees and 78 percent of their dependents by setting up high deductible plans with health savings accounts for his workers. Obamacare may make this option no longer viable.
Eric Oppenheim manages 20 Burger King restaurants in the D.C. area. Oppenheim said health care costs for his employees would be two times his net cash flow. Obamacare won’t make it possible for Oppenheim to offer care, but it will cause him to reduce work schedules, cut benefits, and pay the penalties for not providing care.
Obamacare will tie the hands of these and other small business owners.  It’s a lousy way to treats America’s job generators—especially in the midst of a recession, when we need all the jobs we can get.
Joshua Wade and John Scot Overbey contributed to this post.

Employment Picture "Bleak"

Ouch!

from the National Federation of Independent Business:
WASHINGTON, June 3, 2010 — William C. Dunkelberg, chief economist for the National Federation of Independent Business, the nation’s leading small business organization, issued the following statement on May job numbers based on NFIB’s monthly economic survey that will be released on Tuesday, June 8. The survey was conducted through May 31 and reflects 823 small business owner respondents:

“Since January 2008, the average employment per firm has been negative every month, including May 2010, which yielded a seasonally adjusted loss of negative 0.5 workers per firm. Most firms did not change employment in May, but for those that did, 8 percent increased average employment by 2.4 employees and 20 percent reduced their workforces by an average of 4 employees. Small business job creation has not crossed the 0 line in over 2 years. Government (including healthcare and education) and manufacturing (a large firm activity) are providing what few jobs are created.

“The number of owners with unfilled (hard to fill) openings fell two points to 9 percent of all firms, historically a weak showing.

“Over the next three months, 7 percent plan to reduce employment (unchanged), and 14 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, a gain of two points and the first positive reading in 19 months.

“Overall, the job creation picture is still bleak. Poor sales and uncertainty continue to hold back any commitments to growth, hiring or capital spending. Job creation plans have been running far below comparable quarters in the recovery from two other major recessions."

Small Business Bankruptcies Rising

from LA Times:
The Obama administration's new plan to give a boost to small businesses reflects continued trouble in that sector, which is facing new failures even as much of the nation's economy is stabilizing.

As credit lines have shrunk and consumers have cut back on spending, thousands of small businesses have closed their doors over the last year. The plight of struggling firms has been aggravated by the reluctance of banks to lend money, said Brian Headd, an economist at the Small Business Administration's office of advocacy.

"While bankruptcies are up, overall, small-business closures are up even more," Headd said.