Investors will find that in the United States businesses are not being created as fast as they are now closing. This phenomena is a first for the American economy since the Carter era in the late 1970s. The rate of failure is not really the issue as much as the lack of business creation.
A study by the Brooking Institution has been looking at the rate of business creation and destruction since 1978. It indicates that the American economy is much less entrepreneurial now then it has been in the past few decades.
Overall new business creation as measured by all new activity within a year has declined by half from 1978 to 2011.
This lack of economic dynamism might be one reason why annual job growth rates are not moving above 2%, despite the American government insistence that the economy has recovered from the Great Recession. It could also explain why many Americans feel that the country is still in recession. There are simply a lack of new jobs.
The steep drop began in 2006 and has not reversed itself. More troubling is that the decline is not isolated to particular industrial sectors or firm sizes. If one travels across the United States, the diminution has been documented in all 50 states and all but a few metropolitan areas, have realized the drop in business creation.
Increasingly individuals and firms are more risk adverse in the present economy. Successful businesses are maintaining their cash reserves rather than in investing in expansion.
However, the main problem is that far fewer people are launching new business ventures. More Americans are becoming content to hold on to the supply of increasingly scarce good paying jobs. This is also beginning a slow down in the geographic movement of the American worker.
It needs to be stated that small businesses actually provide more employment overall in the American economy, then larger companies do. Half of the country’s workforce is employed with small businesses. Two out of every three new jobs in the country are generated by small business.
It is also important to realize that smaller businesses have different challenges then larger corporations in order to stay in operation and solvent.
An investor in the American economy will wish to know why is this happening in the United States? The answer may be rather simple. One can assume it is competition from overseas and higher wages in the United States. However the research does not bear that out. The two main reasons for what ails the creation of business in the United States are government regulations and taxes.
The unintended consequences is that all government mandates and rules are much more cumbersome on small businesses than larger ones. Smaller concerns have less resources to absorb the ever increasing regulations coming from local, state and federal governments. Larger business entities possess the assets necessary to hire personnel to deal with these issues and find ways to mitigate some of the costs. Often it is an increase in meaningless paperwork, that a smaller establishment finds difficult to manage and maintain.
Smaller business concerns also do not have the time and resources to lobby political officials for help with the many consequences of new regulations. Although they vastly outnumber larger companies in number they are far less likely to have influence in the carious levels of government.
A number of studies have concluded that the cost to comply with all government regulations fall much harder on a smaller business than a larger one. The average cost to a small business for each worker is continuing to increase. If one factors in unemployment insurance, workers compensation insurance, and all the other government mandates a typical employee will cost a small business between $10 and $12 thousand USD ( United States Dollars) or higher, depending on the geographic area of the country. This is an average regulatory cost that is 36% higher for a small firm than a larger company.
Now one must consider the eventual impact of new government ideas. These would include mandated paid sick leave. Although it sounds worker friendly, the idea that a worker should be paid regardless if he or she is on the job, can hurt a small business enormously. Another is mandated retirement plans. This is an idea that a number of states are embracing. Legislators wants businesses to fund the retirement of their employees. It is not unlike the defined pension plans of the past, but small businesses usually did not offer these incentives. Why? The reason being that they are not cheap to fund.
Next in line is the Affordable Care Act. This financial burden has been delayed for small businesses for now, but must eventually come into force if the law is to be upheld. Larger and medium sized companies have often provided medical coverage for their employees. Although costs will be higher overall, larger companies can negotiate better rates of health insurance. It is estimated that smaller companies pay an average of 18% more in insurance premiums. Smaller companies that did not offer such benefits in the past, will now be forced to pay insurance premiums or a government penalty of $2,000 USD for each employee.
To be fair businesses with fewer than 25 full time workers may qualify for certain tax credits. However, the average yearly compensation at the company must below $50,000 USD and the company must contribute more than 50% of the cost of health insurance for their employees.
Health care rules are different and more costly for those companies that have 50 or more full time employees. So there is an advantage for businesses to keep below this number. This has the perverse effect of stifling small business expansion and growth. Again, the end result? Fewer jobs being created in the economy overall.
Another issue is the expected increase in the federal minimum wage. The hourly rate has already, or is in the process of being raised in a number of states. One can argue the merits or detriments of such an increase on the economy on the whole. On the other hand, one cannot dispute the fact that it will mean higher costs to small businesses (as well as larger ones) and fewer jobs across the board. The more expensive labor becomes the less jobs that will be created. Higher wages will particularly make unemployment among young people higher.
Then there is the corporate tax rate. The rate in the United States is the second highest in the world. At 35% it is absolutely punishing for small businesses. Although it can be argued that tax loop holes, can often lead to real rates of an average of 27%, the world average is only 20%. Besides it is the larger companies that often have the time, expertise, and manpower to take advantage of these tax benefits. As with most issues, larger companies can more easily pay the cost to hire personnel to process the needed paperwork to achieve these tax savings.
While a small business is struggling to deal with the above litany of issues in comes the EPA (Environmental Protection Agency). This government entity is about to issue a number of new regulations, that will severely impact numerous small businesses from many different angles.
Government regulations are increasing at an enormous rate in the United States. In the years 2009 to 2012 alone it has increased 13%. The end result is devastating to small businesses. From the years 2008 to 2013 government regulations have gone from the 4th largest problem, (after insurance, taxes and sales) to the first problem effecting business.
Government bureaucracy has practically become a 4th branch of government. It justifies its existence by continuing to grow regulations, mandates and new conventions. That they are wiping out swaths of industries and businesses with new rules of operation, seems to escape them. For some it is by design to be sure. Witness some of the more recent moves made by government agencies against some types of energy producers. An example of this is the coal industry.
While politicians will give lip service to reforms and reductions in business regulation, the trajectory for more constraints continues unabated.
What American voters need to understand, is that many of their political leaders have very little knowledge of how businesses start and stay in operation. Elections in the United States do have consequences. The seemingly anti-business attitude of many of the political elite is virtually removing any incentives, that entrepreneurs might have to invest in the American economy. What citizens in the United States need to realize as potential job seekers, is this class of people are unlikely to await for reform. Many entrepreneurs will simply take their expertise and business elsewhere. The new location will be overseas, outside the country.