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Prescription Is Clear for Waning Small Business Confidence: More Stimulus

Are we all Keynesians yet? Count small businesses -- which account for roughly two-thirds of new jobs in this country -- among those who think the U.S. economy is headed back into the tank.

A large majority of smaller companies don't plan to do any hiring over the next three months, according to the National Federation of Independent Business; only 13 percent of these firms expect to staff up (click on below chart to expand). And why should they? Retail sales are slowing. Consumers are hibernating. It all adds up to a summer of discontent for small business owners -- and for the broader economy. Says the NYT:

While big companies are buoyed by record profits, many small businesses, which employ half of the country's private sector workers, are still struggling to break even. And if the nation's small companies plan to further delay hiring -- or, worse, return to laying off workers, as they now hint they might -- there is little hope that the nation's 14 million idle workers will find gainful employment soon.
Small businesses also report concerns about inflation, with a growing number of merchants raising prices in recent months, and continue to hold back on equipment purchases. As result, the NFIB's confidence index has fallen three months in a row.

The trade group's chief economist, Bill Dunkelberg, blames Washington for "throwing misdirected policies" at the flagging economy. If he's referring to our political leaders' fixation on deficit-reduction, fair enough. At the same time, however, Dunkelberg claims that "people will flee in terror" if the government announces another round of fiscal stimulus. And he cites the usual bogeys in explaining why small businesses are losing heart, including the federal deficit, fear of higher taxes, government regulation and the impact of health care reform.

The trouble with that, notes economist Jared Bernstein, a former adviser to Vice President Joe Biden, is that taxes have fallen during the recession. The White House is also now considering cutting payroll taxes for employers. The Obama administration last year also passed the HIRE Act, a jobs bill that allowed small businesses to write off equipment purchases, among other things. Meanwhile, small businesses with fewer than 50 employees are exempt from the employer mandate under the Affordable Care Act. And there's little reason to think concern over the federal debt is what's keeping consumers from hitting the mall. Bernstein says:

This is not a comment about whether taxes and regs are at some optimal level. Certainly they're too high for some people's liking. But they haven't changed. What's changed is a housing bubble that burst and whacked the stuffing out of over-leveraged consumers.
Right. The main problem afflicting small businesses is the same one hurting the entire economy -- slumping demand (as Dunkelberg acknowledges, to be fair), coupled with declining household wealth. Our woes are less a result of "misdirected policies" (although it's true tax cuts for the wealthy do little for the economy) than a lack of political will to double-down on them. Small businesses wouldn't "flee in terror" from stimulus if it sent consumers back to the stores; they would clutch it like a lifeline.


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