Tuesday, November 22, 2005

What makes the economy tick?

Some people think that they know what makes the economy tick, or some think that they know what to look for when evaluating where an economy is going.  But everyone who says that has a different set of indicators when compiling their analysis.  

Inc.com had an article that laid out the Democratic Party’s indices, which they claim are to test the waters of small business health.  But when you are looking at Health care costs, retirement and savings, Employee compensation, you are evaluating the health of the employment market, not the small business market.

As Jeff Cornwall, Belmont Univ. Center for Entrepreneurship, points out, some of their other indicators don’t tell you much about small business health either.

      Many of the factors that they load into their index are macro economic variables that have never been shown to really have much a direct impact on small businesses, including balance of trade and federal deficits. While there may be legitimate reasons to be concerned about these types of measures, there is no evidence that they have any direct impact on small business start-ups or growth.

      Other variables that they include are inconsequential or even meaningless for small business:
      - They include the Russell 2000 index, which is a measure of stock prices of smaller public companies. The vast majority of small businesses employ fewer than 20 people and they are not publicly traded.

      - They include venture capital activity. While this is an interesting factor for some discussions, VCs fund only a small fraction of one percent of businesses.

      - They include a broad measure of commercial credit, rather than the more specific measure of small business credit reported by the SBA that most recently showed a 5.5% increase in bank funding of small business.

      Probably the most important reason to be skeptical about the Democrats' SBI is what it does not measure. The cost/scope of regulation and tax rates have been proven in studies from around the world to be the two most important predictors of entrepreneurial activity. While the Democrats' SBI does include cost of regulations as one of their seventeen variables, they do not include a single measure related to taxes or tax rates.

      Why don't the Democrats want to include tax rates in their index? Could it be that it does not fit their agenda?

I noticed one thing in the article Cornwall linked to.

      With a perfect storm of rising interest rates, energy prices, and health care costs, the health of the nation's small-business climate is at an eight-year low, according to Congressional Democrats.

      Combined with the impact of hurricanes Katrina, Rita, and Wilma, these conditions have "hindered the ability of entrepreneurs across the country to start and grow their businesses," Rep. Nydia Velazquez (D-N.Y.) said in statement.

Hurricanes hinder the ability of entrepreneurs from starting and grow businesses?   If you view the market as static, then this might make sense, but the market, and the small business world is very dynamic, and a hurricane might hit the market of a particular area hard, but open and free markets are designed to come back from things like that on their own.  Free Enterprise minded people will look upon events like that as opportunities, and lacking any official or devious inhibition, they will create jobs and investment on their own.

Which brings me to my point, that the only two things that “hinder” small business development in this country are un-ethical anti-competitive strategies by large corporations, and the government.

Not in that order.

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