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Small business expert sheds light on fiscal cliff, growth issues

By Joyce M. Rosenberg, Associated Press

StanglerHO59T.Em.56Dane Stangler is in a position to understand the challenges facing people who own small companies.

Stangler is the director of the Research & Policy department at the Ewing Marion Kauffman Foundation. His job is to help the foundation determine how it can encourage and mentor entrepreneurs. His department conducts research and surveys and analyzes studies done by researchers at other institutions. So he is familiar with the issues that entrepreneurs and small businesses face.

The Kauffman foundation was started in the mid-1960s by Ewing Marion Kauffman, founder of the pharmaceutical firm Marion Laboratories and baseball’s Kansas City Royals. Part of the foundation’s mission is to foster entrepreneurship, something it does through grants and research.

The foundation draws what Stangler calls a blurry distinction between entrepreneurs, the people who start companies or run young enterprises, and small businesses, which Kauffman sees as companies that have made it past their early years. Some small business issues, like income taxes, aren’t a problem for entrepreneurs whose businesses may not be making a profit, Stangler notes. But small companies of all sizes face some of the same problems — the weak economy and the prospect of federal budget cuts.

Stangler spoke recently with The Associated Press as Congress was haggling about the fiscal cliff. Economists have warned that if Congress doesn’t prevent tax increases and budget cuts from going into effect, the country will be at risk of going into a recession. And it’s believed that small businesses would suffer the most.

Q. How important is government policy for small business owners?

A. If you are a business owner, your primary concerns probably have to do with your business. Policy impacts at the margins but I still think that for most entrepreneurs and for most business owners, their top concerns are still customer demand, because consumer spending is still making its way back. Households are still deleveraging. Policy is very important, but getting sales, getting customers, running your business, dealing with employees, probably still dominate the daily thinking of a lot of business owners. Policy obviously impacts that, but not always centrally.

When you do get into policy concerns that either are, could be, or should be at the top of a business owner’s mind, I think tax policy is probably the biggest one because tax rates are about to go up and that’s important because so many small business are taxed at personal income rates –- like S corporations and sole proprietors.

There’s a lot of disagreement in the literature, both academic and nonacademic research, about the impact of tax rates on business owners. We worked with a company called Thumbtack.com on a survey of 6,000 businesses and individuals. One of the things our researchers dove into was the impact of taxes. And we released a paper in October that said it’s not necessarily the level of taxes (that’s the problem). That doesn’t matter, because no one expects to pay no tax. It’s the sheer complexity of dealing with taxes. So it’s not necessarily the rate, it’s just the burden.

Q. What is the biggest issue with the fiscal cliff?

A. The fiscal cliff is not only about the tax code. It’s just the uncertainty. I know that’s a catchall term that everyone uses, but it’s for real this time. Everyone always says businesses hate to deal with uncertainty, and it kind of has a hollow ring to it because just the nature of running a business, you’re always dealing with uncertainty. But at times like this, when politicians have manufactured a crisis, this is serious uncertainty, because no one knows how it’s going to change. If we do go over the cliff, we’re sort of going to get whipsawed because the Internal Revenue Service is preparing for the government going over the cliff, putting in place all the new tax forms, and then, six weeks later, when they reach a deal, we’re going back to the way things were. That uncertainty and that expectation of being whipsawed back or forth is really a serious issue.

Q. Is there any long-term damage done by this kind of situation to small business?

A. There’s very few people who would bet against the U.S. in the long term.

Q. No matter how the cliff is resolved, it’s expected that eventually, there will be billions of dollars in cuts to the federal budget? What will be the impact on small business?

A. It’s probably finally dawning on lots of people, especially on the political right, what a large portion of the economy government spending is. In say, the 1960s, (a percentage of) government spending was what’s called productive spending – the highway system, universities, infrastructure and entitlements. What could be classified as consumptive spending – entitlements (like Social Security) then were a small share. Now it’s radically different. Entitlements are a gigantic chunk and productive spending is really decreasing as a percentage. Nonetheless, that decreasing share of productive spending and even that consumptive spending on entitlements, that’s still a massive chunk of the U.S. economy. And there are tons of U.S. businesses dependent on the government.

Inc. magazine every year does a list of the fastest growing companies. Government services dominated the list in the last decade. Washington D.C. is the top metro area for Inc. 500 companies since 2000. If a substantial of that is cut, you’ll have a massive effect not just on small businesses, but innovative, fast-growing companies. History certainly shows that government spending has certainly played a very important role in innovation and economic growth. National Institutes of Health-funded research at universities is hugely important. Small Business Innovation Research grants at federal agencies are hugely important.

Q. What kind of chance does a young company have to sell a product or service to the government in this climate?

A. There are still government programs that mandate that a certain percentage of government contracts have to be given to small business. Those percentages are probably not going to go away. But it does mean the dollar amount probably declines. It’s not just a federal issue. State government budgets have been seriously affected the last few years. They’re getting healthier but they’re certainly not back to where they could be or should be.

Q. Is this a good time or a bad time for someone to start a company?

A. My own personal view is that it’s never a bad time to start a company. There are good cases to be made that starting in an economic expansion is great because consumer demand is high and people will spend money. There’s arguments to be made that starting in a downturn, whether it’s a recession or a bear market or a sluggish recovery is also a good time. If you’re a tech startup for example, the demand for technology has been pretty constant the past few years. There’s also schools of thought that say if you start up in a recession, it’s sort of a trial by fire. If you start up in hard times, and you survive, there’s less competition and you come out of it stronger.

A few years ago, we did a count of Fortune 500 companies, and over half of them were founded either in recessions or bear markets. That’s not simply a reflection of, well, they started in a recession, therefore they’re better. I think it’s a reflection of, if you have an idea or if you create an opportunity or if you’re in a university and you’ve stumbled across some discovery, there is that entrepreneurial drive … and the macroeconomic environment doesn’t matter if you come up with that idea.

Q. Given what has happened in the economy the last five years, is it going to be harder to be a small business owner and expand your company in the next five to 10 years?

A. Yes, in some sectors. Take retail. There’s the Wal-Mart effect – you’ve seen huge consolidation in retail. 
You’ve seen a huge consolidation in the information technology sector. We’ve sort of entered a “you eat or be eaten” atmosphere.
Investment banks and especially the (stock) markets in the retail and information technology sectors simply aren’t welcoming anymore toward small innovative
companies. You either have to get big fast by being an acquirer or you have to be acquired.

Look at the employment distribution over the last 20 years. The percent of employment in giant companies – those with 10,000 or more employees – has risen and it’s correspondingly falling in small businesses. That’s obviously points toward something.


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