How To Foster the Starting of New Businesses

The only government program that I have seen that really ever seemed to do any good as far as creating new businesses and new jobs was the plan that allowed people to take their unemployment compensation and use it to start a new business. I am sure that most of those businesses failed because most new businesses fail, but some surely succeeded and employed people. Everything else I see coming out of the government really is not much help to the really small business person.

First, the government needs to stop doing things that get in the way. In particular, the government needs to stop getting in the way of new businesses trying to raise capital. For example, the changing of a “qualified investor” was made five times as stringent during the last year of the Bush administration. Maybe it was time to do this if you believe that the old law made sense because inflation has surely changed the notion of what is a comfortable nest egg, but the old law limits the right of ordinary Americans to be capitalists as much as any law on the books.

Making this law more stringent is a huge case of Nanny-state. You can’t foster new businesses, i.e. encourage people to take risks, by saying that they are unqualified to take them. The government does far more to prevent people from investing in legitimate new businesses that should have a beneficial effect for the whole society than it does to put people like Bernie Madoff out of business. Whether or not you believe that protecting people from themselves is a legitimate role of government, you have to conclude that the current rules and processes do not do everything they can to promote new business. Let’s take a look at what else they could do.

Create a Special Tax Break for Providers of Start-Up Capital

Should the guy who makes a hundred grand betting on Joe’s Widgets pay the same tax as the guy who made a hundred grand on Bank of America? Not if you want people to be eager to participate in new ventures. Is this fair to Bank of America, Microsoft, and IBM, to name a few? Not really, but they don’t need start-up capital. The cost to them is small and likely is a less than appropriate tax on their hugeness. Do you want create more small businesses or cater to the status quo? If you want a vibrant economy, you better not be catering to the status quo.

I’d like to see the first hundred percent return on such investments be tax free. That is, if you put up a million dollars to get Joe’s widgets started, you would not pay any tax on the first two million you took back out after Joe hits it big. That is, you don’t get taxed on getting your money back, and you don’t get taxed on the first matching win. I’d go even further and tax only fifty percent of the next hundred percent, and only seventy-five percent of the next hundred percent.

I don’t think that this is overly generous since most new businesses fail without ever making a profit for the investors, but it is a heck of a lot better than the deal angel investors get today. (They call them angels because they require so much faith.) The only way to get more money into these operations is to change the risk/reward profile. Most investors are not math-impaired.

Should investors pay a higher tax rate if they made their money from an organization that got bailed out by the government? They should, and actually they already are because the government is taking a big cut.

Problem/Opportunity Funding

Our country faces many problems and many opportunities. There is even occasionally some degree of consensus on what is a problem and what is an opportunity. I think the government and/or private agencies need to be able to support new businesses that can demonstrate that they are solving a problem for the community or opening an opportunity that will increase the prosperity of the community. The problem with such programs are that they disrupt the status quo, but a healthy capitalist economy is one that fosters change. Change is always going to come, and it will run you over if you are not ready for it on every level.

Foster Competition

It was a sad day when Packard went out of business, but it wasn’t devastating. Packard was just one of many auto companies, and they failed all the time. I’m not sure how much GM and Chrysler ended up with, but we could have started hundreds of new car companies at one hundred million dollars a shot. Wouldn’t that be a better use of our money than giving it to people who have proven they can’t manage a company? Wouldn’t that provide more jobs for auto workers? Wouldn’t that ensure that we would offer the world a broader choice in automobiles? Wouldn’t that mean that all cars would get better. The answer to all of these questions has to be yes if you believe in capitalism.

The auto bailout is exactly the wrong thing to do if you want to solve the problem. If it works, we end up with companies that should have failed and which are almost certain to face the same kind of problem in the future. If it doesn’t work, we are out billions and still have the same economic problems we were trying to prevent. A future with fifty car companies is a future far less prone to economic stresses than a future with three.

Redefine Small Business

A Company with $250 M in revenues is not a small business that needs help from the government. By the time a company is generating $10M a year in revenue, it should be able to stand on its own and raise capital on its own. A company needs the most help when it is just a business plan, or a business that is attracting attention and needs a little help to get to the next level. These are the companies that will increase employment, but they are also the companies that have the hardest time getting money from the banking industry. We need a government-guaranteed loan program that focuses on really small businesses that need to get to the point where they can inspire faith.

The most explosive growth of business in the micro-capitalism sphere, and there is a huge gap between that level and the level where the government will even recognize you. We either need to come up with a private solution to this, or the government ought to jump in.

Conclusion

I believe that we can make American business young again with just a few simple changes in our tax law. If we let everyone use their own judgment about these bets, it will help even more.

The government shouldn’t need to participate beyond that, but if it does stick its nose in, the focus needs to be on solving the problem, not in protecting the status quo – the path of least resistance that government always follow.

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Let’s Get Small

We should have listened to Steve Martin forty years ago.

The biggest, most powerful lobby in Washington, D.C. is the lobby for Big Business.  True, no one is registered as a lobbyisst for BIG, Inc., but there are still a lot of lobbyists working to help the big guys and crush the little guys.

In fact, almost every lobbyist is working for a big company, a big union, or a big trade organization.  Small is distinctly unrepresented.  Small is not a source of campaign contributions and future income for politicians so even if small had their own lobbyist, that lobbyist would have a hard time getting in front of the people that make decisions.

Our politicians say over and over again that most of the jobs in this country are created by small businesses, yet again and again they give out billions of tax dollars to big business.  The midwest is not the rust belt because of small businesses; it is the rust belt because big businesses have failed.  We didn’t have a systemic melt down because small businesses posed a systemic risk; we had a systemic melt-down because big business and their lobbyists were able to convince the government to throw out the regulations that had protected the system since the Great Depression.

Not to belabor the obvious, but small business is not too big to fail.  AIG was not a small business, GM was not a small business, and CitiBank is not a small business.  The first two have already failed, and all three have been among the many very large corporations that needed lots of help from the government.

By the way, if too big to fail is a problem that poses systemic risk, why are we not only allowing unrestrained growth but actually fostering it.  The solution to the failure of a huge bank like WAMU is to sell it to an even bigger bank.  The failure of a huge brokerage like Merrill=Lynch is to combine it with a huge bank. Why is it that nobody has much to say about that?  (Actually, Matt Taiibi has pointed that out in his excellent Rolling Stone article on the crisis.

GM just recently asked for thirty billion dollars to help get it through the bankruptcy process.   It looks like we are going to give it them even though I think we have already given them at least that much.  In fact, I think if you count GMAC, GM and Chrysler have already gotten nearly $100 Billion dollars.

Let’s say that it is important enough to the USA to have serveral domestic automobile manufacturers.  If we took that $100 Billion dollars, how many automobile companies could we create?  I’ll bet there are a lot of guys who could make a successful automobile with $100 million dollars.  We could fund a thousand of them with that bankroll.  If five percent of them made it, we would have fifty car companies.

I’m not sure that we want fifty car companies, but having three huge mega-companies has not been a good idea either.  The point is that the money goes a lot further in the hands of small businesses than in the hands of mega-companies.

Four thousand dollars doesn’t get you very far these days, but there are lots of successful businesses that have been started with less.  Every adult in the United States could get four thousand dollars to start their own business if you broke up a hundred billion that way.  Forty thousand is a great start for a lot of small business enterprises, and one hundred billion funds two and a half million of these.

Like most problems, we should have been working on the solution long before it got to a cirisis.  We could have done something other than blandly buying into “What’s good for GM is good for America.”  This was a crackpot idea back in Eisenhower’s time.  Ike even took time to notice that the problem went far beyond GM to the whole military-industrial complex, but he couldn’t do anything about it.  Neither, apprently, could anybody else.

Here’s an idea.  Let’s put a systemic risk tax on Big.  Once you get to a certain size, you should have to pay increased taxes or divest.  The bigger you get, the stiffer the tax would get.  If they do get “too big to fail” and fail anyway, we could use the Big tax to cover the costs of breaking them up.

The advantages of this are many.  Instead of crushing small businesses in the mode of today’s Big, successfull companies would maximize their profits by fostering lots of partnerships and spin-offs.  No company would allow itself to grow so large that they would face a crushing tax burden.  Small businesses that actually create jobs and competition would spring up all over the place.

I think this is a good idea, but I realize it doesn’t have a chance.  Big owns the world.  They own the Democrats and they own the Republicans.  If we get a new party, Big will own them too.