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William J. Dennis, Jr. Senior Research Fellow NFIB Research Foundation October 27, 2005

Public Policy Toward Small Business and Entrepreneurship –The American Approach OECD Workshop – Understanding Entrepreneurship: Issues and Numbers. William J. Dennis, Jr. Senior Research Fellow NFIB Research Foundation October 27, 2005. Approaching Policy Change.

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William J. Dennis, Jr. Senior Research Fellow NFIB Research Foundation October 27, 2005

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  1. Public Policy Toward Small Business and Entrepreneurship –The American ApproachOECD Workshop – Understanding Entrepreneurship: Issues and Numbers William J. Dennis, Jr. Senior Research Fellow NFIB Research Foundation October 27, 2005

  2. Approaching Policy Change A Typology - "Start Point" for Policy Change Policy Unfavorable Favorable Favorable Culture Unfavorable

  3. Assessing Policy A Typology of Public Policy toward Sm. Bus. Impediments High Low High Direct Assistance Low

  4. Policy Options A Typology of Public Policy Objectives and Means Policy Means Direct Assistance Eliminate Impediments Economic Policy Objective Social

  5. The American Approach – A Competition, Not an Entrepreneurship (or SME) Policy • The Policy – • Vigorous (if not vicious) competition • Few impediments (relative) • Little direct assistance (relative) • Creeping social policy • A supportive culture • Continued growth of social and environmental regulation

  6. Why a competition, not an entrepren- eurship or small business, policy? • No policy for entrepreneurs has been announced nor is there a structure to coordinate disparate policies that impact them. • The introduction to the Small Business Act of 1953 emphasizes that the primary purpose of the Small Business Administration (SBA) is to enhance competition. • Entrepreneurs and small-business owners exhibit notable interest in policy impacting markets and notably little in direct support (evidence by survey, meetings such as White House Conferences, and trade associations).

  7. Why a competition, not an entrepreneur- ship or small business, policy? (cont.) • Relative Importance – policy actions shaping markets vastly more important than direct assistance, e.g., • Finance – govt. financially supports 1-2% of employing businesses each year; a negligible number of non- employing businesses. Over 8 million small-business loans per year. • Advice – govt. offers mgmt help to about 2% of employing business each year; though to a significant number of non-employing/nascent businesses. Contrast – 59% ask an accountant for advice, 39% a lawyer, 29% a banker, etc.

  8. Impact of Competition Step 1 Exits Entry Competition Incumbent Entry Competition Incumbent Exits

  9. Impact of Competition Step 2 Exits Entry Competition Incumbent Entry Competition Incumbent Exits

  10. Major Areas of Economic Deregulation in the United States • Transportation; the economists were right! • Financial Services; last vestiges of the Depression. • Energy; more than Enron. • Retail; Wal-Mart isn’t alone. • Telecommunications; from AT&T to the new world. • Competitive Sourcing; a $400 billion industry. • Trade; NAFTA, CAFTA, WTO and occasional backsliding.

  11. Major Areas Partially Deregulated • Agriculture; • Regulated, e.g., dairy, cotton, most grains, citrus • Not regulated, e.g., beef, pork, vegetables • Immigration; increasing – legal and illegal? • Labor; world markets change labor realities

  12. Major Areas Not Yet Deregulated • Health Care; the best and worst side-by-side. • Elementary and Secondary Education; the American Achilles heel and a national disgrace!

  13. Financial Deregulation Helping Entrepreneurs as Consumers, Too • Deregulation of Banking • “Prudent-Man” Rule • Credit Scoring • Securitization • "Junk Bonds"

  14. Number of FDIC-Insured Community Banks, 1985-2003

  15. Change in Competition for Small Business’s Banking Business

  16. Equity Capital

  17. Moderating Tax Rates: Highest Federal Marginal Income Tax Rate by Year

  18. Taxes – Salient Issues • Graduated Corporate Income Tax • Expensing • Capital Gains – special treatment • R&D, R&E tax credits • State preferences • Taxation of Internet sales

  19. Novel Approaches to Small Firms • Small Business Innovation and Research Act (SBIR) • Direct Assistance • Regulatory Flexibility Act (RFA; modified by SBREFA) • Removing Impediments • Graduated Corporate Income Tax and Expensing • Some of both

  20. Traditional Direct Assistance • SBA loan guarantees – 115,000 loans • USDA-RD loans – 8,000 • HUD – tax credits for designated areas • MBDA – 30,000 contacts/clients, advisory assistance • State & local economic development - $50 bill. • SBA counseling/training – 1.2 mill. contacts/clients

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