Small Matters: Small businesses: Uncertainty hurts hiring

CHUCK LIDDY / (Raleigh) News & Observer Occupy supporter Nick Wood was among protesters in Raleigh, N.C., where Wells Fargo chief John Stumpf was speaking.
CHUCK LIDDY / (Raleigh) News & Observer Occupy supporter Nick Wood was among protesters in Raleigh, N.C., where Wells Fargo chief John Stumpf was speaking. (CHUCK LIDDY / (Raleigh) News & Observer)
Posted: December 05, 2011

So, what is standing in the way of small-business hiring and growth?

If you said poor market demand, you would agree with 35 percent of the small-business owners in a recent National Federation of Independent Business survey of 750 owners with under 250 employees selected from Dunn & Bradstreet files.

However, 41 percent cited "uncertainty over business conditions" as their major impediment to expansion. Of those, 51 percent said "political uncertainty" was the source of some or all of their concerns that prevented them from expanding their businesses. Each "impediment" was ranked on a scale of 1 to 7, the percentages presented here are based on the percent of owners selecting the top 2 severity ranks.

Resolving our political stalemate and adopting a plan that would get our spending under control and reduce the size of our debt and deficit relative to gross domestic product (GDP) could be a major source of stimulus. A significant share of the small-business population would move forward with expansion if political uncertainty was resolved.

Unfortunately, 36 percent of the owners see uncertainty on the rise; 16 percent of them see uncertainty "rapidly increasing"; 30 percent see no change in the current level of political uncertainty, a major impediment to spending and hiring.

So, impediment No. 1 is uncertainty about the future and No. 2 is poor sales. The third most-cited impediment was "lack of finance," according to 30 percent of respondents.

Only a quarter of the owners depend on bank loans, most - 53 percent - use internal cash flow to finance investments in their business. Profits were badly damaged by the recession, and the weak recovery has not restored profitability, leaving the pool of funds to support business spending depleted. To a significant degree, this explains why capital spending is at near record-low levels.

If the so-called Bush tax cuts that we have lived with for a decade expire, taxes on the incomes of most of these small firms will go up, leaving even less to reinvest in the business.

Legal and regulatory issues were assigned the two most severe rankings by 25 percent of the owners. Eighty-two percent of those reported that government regulations were the major obstacle to growth. Thirteen percent reported canceling a project as a result of the regulations; 19 percent postponed spending; 11 percent suspended planning;and 20 percent proceeded with their investment, but incurred higher costs due to the regulations.

Who to blame? The federal government's regulations were the reason, according to 53 percent surveyed. Seventeen percent blamed state regulations and 7 percent said city regulations. Multiple jurisdictions were blamed by 12 percent.

The Small Business Administration estimates that the cost of complying with regulations totals more than $1.5 trillion each year. These results suggest the cost might be much higher in terms of abandoned projects that would have created new jobs and spending.

In 2010, regulatory proliferation set a new record with 3,573 final rules in the 2010 Federal Register, and proposed rules were up by 20 percent. With so much to keep track of, it seems likely that every owner is in violation of some obscure regulation every day of the year.

Regulatory uncertainty is definitely on the rise despite President Obama's call to reduce the regulatory burden, and there is little "coordination" among the various levels of government in the regulatory process. That produces much confusion and redundancy.

Other impediments include lack of skilled employees (16 percent), lack of good management (8 percent), family demands (12 percent), and lack of technology (7 percent).

When asked to pick just one single major impediment, 25 percent chose weak sales, 22 percent cited market or political uncertainty, 16 percent picked lack of finance (mostly poor profits), and 11 percent chose legal and regulatory issues.

With "government" observably the source of most major obstacles to achieving desired size, it is understandable that dissatisfaction with government policy is at record levels.

Consumers have also lost confidence in government. The University of Michigan's consumer survey in October showed a record level of households gave government policy a "bad" rating.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg.

 

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