Today, the President is hosting a “jobs summit” to find solutions to the current unemployment rate, which is more than 10% and is rising.  A lot of Americans are hurting badly; it is highly likely that everyone reading this article has been touched in someway by the economic downturn.

Many of the President’s political opponents will say that the meeting today is political.  They are partly right.  The President’s advisers can read polls.  They know Americans are worried first and foremost about the economy.  The meeting today is designed to show that the President is “feeling the pain”  of voters.  But good politics isn’t the same thing as bad policy.  Our political officials are supposed to care about what we care about, and we shouldn’t fault them for doing what’s right because it also happens to be popular.  So we should give the President the benefit of the doubt and believe, at least presumptively, that he is holding the meeting because he really does want to know how to get the economy going.

In that spirit, I want to offer some advice to the administration.

Something like 95% of all jobs in America are in the small business sector.  Big businesses tend to make money by finding ways to reduce costs; small businesses do that too, but they are more “entrepreneurial”, by which I mean that the owners of small businesses tend to be more willing to take risks to grow their firms.  Growing firms usually hire more employees.  But no business, big or small, tries to grow for the specific purpose of hiring employees; they grow to be successful, and the free market requires them to define success partly in terms of making a profit, because if they don’t make a profit within a reasonable amount of time, they die.

They don’t have an option on this score.  Private enterprise is not like the government.  The government can, and does, keep failing at something without having to stop doing it.  Business people – I will call them “entrepreneurs” for the rest of this article – don’t have that luxury.  Whether they are running Google or the corner tavern, if they don’t make a profit, their bank will not loan them money and their investors will not keep funding them.

They have to shut down.

Ask Kmart if you don’t believe me.  Remember them?

It is hugely difficult to start or grow a successful business.  A significant percentage of small businesses fail.  Those that don’t live with the constant possibility of failure.

People who haven’t run a successful business can not really know how hard it is.  The President has never done it.  I’ve never done it either.  But I chaired the Small Business Committee in the House of Representatives from 1997 until 2001.  I have spoken with literally thousands of entrepreneurs, and I learned a lot about how they think.

Most entrepreneurs view the government as, at best, a burden, and at worst an enemy.  That’s because the majority of interactions they have with government are negative.  The government is constantly demanding that they spend time and money doing things that have no direct connection to the success of the business.  Many of those burdens are mandates they have to comply with:  environmental regulations, safety regulations, quality regulations, consumer regulations, personnel regulations, trade regulations, building regulations.  The list goes on and on.

These mandates come from every level of government at the same time  They are constantly changing, and they are often difficult to understand.  So the entrepreneurs not only have to spend money to do what the government wants; they have to spend money figuring out what the government wants, and if they are wrong they pay the penalty.

I’m not saying that these mandates are necessarily bad or stupid, though often they don’t make a lot of sense.  I’m saying that they usually make it more difficult for the business to be successful.

Here is an example.  The current health care legislation contains a provision requiring restaurants to put information about the caloric content of their food in their menus.  That sounds simple, and most of us, understandably, want more information to consumers.  But for a restaurant, it could mean altering all of their menus, or if they are a fast food restaurant, their menu boards, both in the restaurant itself and in the drive through lanes.  The law is not clear about what information is required and how it must be posted.  So the restaurant has to hire lawyers, pay to change their menus or menu boards, and take the risk that if they get it wrong the government will fine them or someone will sue them.

If you run a restaurant chain – say 100 stores – you may have been hoping to make an after tax profit of 100,000 dollars per restaurant, and that would give you 10 million dollars in profit.  Perhaps you were planning to open 10 new stores with that money.  But if the new law costs you 25,000 dollars per store, you have just lost one quarter of your profit.  If that happens, will you be more or less likely to build those ten new stores?  And if you don’t build the stores, then you are not bringing new franchisees into the company; you are not hiring new district or restaurant managers; you are not giving new business to the construction firms that build your stores; you are not buying more product from your food suppliers or the people who supply your soda machines or your packaging.

In short, you are not hiring people or growing the economy, because the government has made it more likely that you will lose money if you do.  Remember that losing money has the same impact on an entrepreneur as losing a job has on you or me.  It represents failure, and it could constitute a threat to the well being of his family.

That was a small example.  Take a bigger one.  The proposed “cap and trade” legislation, which has already passed the House, will mean tens of billions of dollars in extra costs to businesses in energy intensive industries like manufacturing, construction, or agriculture.  It will take years after such legislation is passed for entrepreneurs to even determine how much the law will cost.  Does the prospect of such legislation make it more or less likely that entrepreneurs in those sectors of the economy will grow their firms?

And all of this doesn’t even count taxes.  Businesses that make a profit pay income taxes.  The income taxes usually come from both the federal and state governments, but many local governments levy income taxes as well.  Entrepreneurs have to pay a host of other taxes as well – sales taxes, use taxes, franchise taxes.  And nationally they have to spend hundreds of billions of dollars per years just trying to figure out what they owe because the tax laws are so complicated.  Even failing businesses pay taxes – like the payroll tax.  Every business that hires a new employee has to pay 15% of that employee’s wage or salary to the federal government in payroll taxes, regardless of whether the business is making a profit..

Does that make it more or less likely that they will hire new employees? Remember that firms don’t grow for the purpose of hiring people; they grow, in part, because they think that expansion will turn a profit.  The more taxes they have to pay, the less profit they get by growing, and the more certain they have to be that expansion is a really good investment before they will decide to make it.

So in an atmosphere of increasing government mandates, and increasing taxes, entrepreneurs become more cautious.  They don’t make marginal investments.  They don’t grow their businesses – or  they don’t grow their businesses in the United States.

It’s easy for public officials to  get angry at that.  But there are very few politicians who will cast a vote that they think will cost them their career.  They shouldn’t expect entrepreneurs to be any different.

Entrepreneurs are bigger risk takers than politicians, but they have their limit.

So here is some simple advice for the President.  If he wants to create jobs, he shouldn’t spend more money on a new “stimulus”.  Government borrowing is part of the problem, not the solution.  Instead, the President should announce that, until the economy is growing, at say 3-4% per year, and unemployment has dropped below 6%, he will not approve new taxes, or any new mandates that are not clearly necessary to the public health and safety.

I’d like him to actually reduce taxes and regulations.  Given his philosophy that probably won’t happen.  But he could at least make clear that he is not going to make the burden on business bigger until the economy is back on its feet.

That would be a shot in the arm for the economy.

We can get by with a government that doesn’t grow.  We can’t get by with an economy that doesn’t grow.  If the job summit convinces the President of that, then unemployed Americans will have some hope, for the first time in a long time.

This entry was posted on Thursday, December 3rd, 2009 at 4:40 pm and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.