PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

2022 Policy: A Pro-Entrepreneurship, Pro-Small Business Agenda

By at 30 December, 2021, 12:22 pm

SMALL BUSINESS INSIDER

by Raymond J. Keating –

Americans and our economy, along with the rest of the world, were hit by what proved to be a deadly pandemic in early 2020. That was nearly two years ago, and more than 821,000 lives have been lost due to COVID-19 in the U.S. alone (according to the Johns Hopkins Coronavirus Resource Center as of December 29, 2021). Perhaps now might be a good time to start advancing constructive policies that will actually support economic, income and employment recovery and growth.

Private Investment and Business Growth are Critical to Recovery

As we continue to work to regain some true normalcy, entrepreneurship, business and private investment have played, and will continue to play, central roles in this effort. But you might miss that if you just paid attention to our politics. Indeed, even during a pandemic, it’s kind of been politics as usual, and sometimes in the worst, most divisive and pandering sense.

Among the strange undertakings by politicians have been efforts to impose higher taxes and to increase regulatory burdens, including price controls on pharmaceuticals and radical antitrust actions against leading technology firms.

These tax and regulatory actions are billed as being focused on big business – by the way, that doesn’t make them any less harmful to the economy – but entrepreneurship and small businesses most assuredly would be damaged, including due to the fact that investors would see reduced opportunity for returns on investments that rank high in terms of risk and uncertainty.

Other counter-productive measures include protectionist trade policies, which only serve to raise costs for U.S. businesses (after all, nearly all imports are inputs to U.S. businesses) and consumers, while also reducing global opportunities for U.S. entrepreneurs, businesses and workers.

And then, of course, there’s been a major push to jack up government spending. While many problems exist with such spending escapades, ultimately shifting resources away from the private sector to government is a recipe for more waste and inefficiency, and slower growth.

Finally, the Federal Reserve has been running loose money without precedent since the summer of 2008, that is, for more than 13 years. But now as we face red hot inflation, the Fed still seems to hold little interest in doing its primary job of maintaining price stability.

This is a policy mix seemingly designed to restrain or undermine our recovery.

Policies Must Work to Support the Private Sector

In recent congressional testimony, I offered a framework for a very different direction on economic policy. Here is that agenda as outlined:

Avoid tax increases and provide tax relief.

Talk of tax increases seems to everywhere of late. So, why not raise taxes? Well, let’s consider the fundamental problems with tax increases for the economy.

First, taxes drain resources from the private sector so they can be used in government. The problem here is that when resources are taken and used by government, it means they are being spent according to political incentives – such as being subject to special interest lobbying, being doled out according to the preferences of politicians, often being spent in ways that undermine work and risk taking in the economy, and being utilized to enhance power, staff and budgets in government. This, of course, means resources are being used far less efficiently than in the private sector – which in contrast is disciplined by prices, profits, losses, competition and consumer sovereignty.

Second, taxes affect incentives. Most troubling are taxes that affect incentives for the undertakings that drive economic growth, as has been emphasized here, entrepreneurship and investment, as well as working and saving. So, taxes that raise the costs and reduce the returns on such activities tend to be the most economically destructive taxes, and these include income taxes and capital gains taxes.

So, higher taxes always come with economic negatives. But raising taxes as entrepreneurs, businesses, investors and workers struggle to leave the pandemic economy behind, and get us back on a track of robust growth, is particularly misguided.

The policy focus needs to move away from counter-productive efforts to raise taxes, and instead look to providing substantive, permanent tax relief, in particular, reducing taxes that directly impact entrepreneurship and investment, namely, income, capital gains and death taxes. Again, it must be kept in mind that increased taxes on investors wind up being negatives for the entrepreneurs who need investment.

Emphasize regulatory relief, not imposing additional regulatory burdens.

While individuals, in many ways, pay the ultimate price for excessive regulation through reduced choices and higher costs as consumers, reduced incomes as earners, and fewer opportunities as workers, those costs tend to be hidden. That is, while a person can see the burden of taxes when they look at their pay stubs and see how much is drained away via income taxes; when they buy a product and pay a sales tax; or when they receive their property tax bill or note the property taxes portion of their mortgage payment, there are no obvious ways to see how regulations burden each and every one of us.

Meanwhile, large businesses most certainly see and have to directly deal with regulatory burdens. However, large firms, up to a certain point, are better able to deal with the costs of regulations, including by having staff deal with such matters, such as the legal department, or tapping legal/regulatory experts on retainer. For good measure, there are instances where large businesses actually become advocates for – or at least not opponents to – increased regulation, given that such regulations will deter new business formations in the industry and the costs will fall more heavily on small businesses. In this sense, regulations can serve as a means for protecting long-entrenched businesses, while deterring upstart competitors.

It is, in fact, small businesses that pay the heaviest price when it comes to dealing with regulatory costs. As summed up in an SBE Council report (“Regulation: Costs, Incentives and the Need for Reform”): “Assorted studies make clear the significant costs imposed by the U.S. regulatory system in terms of lost GDP, costs imposed on small businesses, declining entrepreneurship, reduced job creation, and reduced or restrained investment and productivity. Studies over the past 25 years have consistently found that the cost of regulatory compliance disproportionately affects small firms.”

It also must be noted that small business owners, perhaps better than anyone else, understand the cumulative burdens of regulation. It’s not just about the current regulation under consideration, but it’s also about all of the previous regulations imposed and then adding new burdens. Hence, any discussion of imposing a new regulation on entrepreneurs and businesses must be put in proper context, that is, recognizing the burdens that already exist.

Indeed, as is the case with higher taxes, increased regulations always come with increased costs, but inflicting such added burdens during a period when the economy is working to emerge from the pandemic woes, again, is misguided and counter-productive.

Rather than emphasizing all kinds of ways to increase regulatory intrusions, entrepreneurship and investment would be aided by serious efforts at regulatory reform, such as sunsetting rules and regulations so that Congress is required to re-evaluate regulations after a certain period of time; and requiring congressional approval of rules and regulations to establish full responsibility for regulating to Congress.

Advance free trade by reducing government barriers.

Free trade simply means reducing government-imposed barriers and obstacles to trading across international borders. These barriers include, for example, tariffs, or taxes on imports, and quotas, or limits on certain imports. In summary, free trade reduces costs through enhanced competition and lower trade barriers; expands choices and lowers prices for consumers; keeps U.S. firms competitive; opens new markets and opportunities for U.S. goods and services; reduces costs for U.S. businesses; expands economic freedom; and feeds economic growth.

Indeed, contrary to assertions from various political corners, trade is a positive for U.S. businesses, workers and our economy. And keep in mind that total trade (exports plus imports) accounted for 30 percent of GDP in 2014 and 27.5 percent in 2018, before falling to 26.4 percent in 2019 and 23.5 percent during the 2020 pandemic year.

A vital, dynamic, growing economy is one that is open to trade, providing benefits to consumers, entrepreneurs, businesses of all sizes, and workers. We’ve known this since Adam Smith wrote his seminal Wealth of Nations in the late 18th century. On the policy front, the U.S. needs to move away from protectionist measures and aggressively move to advance free trade on all fronts. Indeed, the U.S. needs to reclaim the global leadership role it had in advancing free trade since the end of World War II, but recently abandoned.

Immigration Matters to the Economy … in a Good Way.

A constructive pro-immigration policy agenda – that is, improving and expanding avenues of immigration for those who wish to contribute by working and starting businesses while also enhancing security to keep out terrorists, et al – would make a difference in the long run in terms of meeting labor needs and advancing entrepreneurship.

Contrary to political claims, immigration is an economic plus. How so?

First, immigration allows market demands for both low-skilled and high-skilled labor to be met. That demand comes from businesses that ultimately serve consumers. As labor markets grow tighter, for example, expanded immigration is needed.

Second, other workers, including the native born, benefit as immigrants do complementary work, thereby enhancing the productivity of all workers. By the way, immigrants have higher labor force participation and employment rates than the general population.

Third, given that immigrants are obvious risk takers (leaving for another country is serious risk taking), it’s not surprising that immigrants have a higher rate of entrepreneurship than do the native born. If we want more entrepreneurship – and we do – then immigration is a great source.

Fourth, it also follows that more immigrants in the workforce mean more consumers.

Richard Vedder, a distinguished professor of economics emeritus at Ohio University and leading thinker on issues relating to economic growth, summed up the economic role of immigration this way: “It turns out that periods of dynamic economic growth and change have roughly coincided with surges in immigration. In part, of course, immigration responds to improved economic conditions. But the evidence strongly suggests that the reverse is also true: Growing immigration has added to the nation’s economic vitality and entrepreneurial spirit and has propelled the nation toward higher rates of economic growth.” Vedder also made the critical point that when assessing the impact of immigration, one cannot stop at the immigrants themselves: “The children of immigrants are the most productive generation of all, typically with income and wealth exceeding that of the general population.”

Focusing on the economics, as opposed to the political rhetoric, it’s clear that immigration is another example of American opportunity that benefits the entire nation.

Smart monetary policy.

Toss in a Federal Reserve that focuses monetary policy on sound money, and this amounts to a policy agenda that actually would support entrepreneurship, business, private investment, innovation, and economic, income and employment growth.

This is a time for bipartisanship in the best sense of the word, that is, for both sides of the aisle to come together to implement constructive and productive policies that provide a sound foundation for economic recovery and expansion.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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