Why Small Business Isn’t Hiring

At the Volokh Conspiracy there was a post about why small business was not hiring. The blame was laid by one academic to the collapse of the housing bubble which in-turn made it hard for business owners to use the equity in their homes to get bank loans.

I question this reason. The government and academia seem to be fixated on business borrowing, as if extending credit to small businesses would cause these business owners to go into debt to hire and expand – despite a stagnant (or worse) economy. Business owners don’t go into debt for the purpose of hiring more people or buying a bigger building. The small business people that I know are hoarding their cash and hoping to survive until the economy improves; in other words, until they see an opportunity to expand without the serious risk of going bankrupt. Running a small business is inherently much riskier than running a large corporation. The small business owner’s skin is in the game, his family’s food, the mortgage payment and his retirement are all tied up in his business. If he fails, there are no severance payments, no golden parachutes. The last failed small business owner I ran into is selling cars at a Hyundai dealership.

The discussion became a back-and-forth between academics (one a professor at Harvard) and several small business owners explaining why they are not hiring. Academics simply don’t relate to small business owners and their concerns. It’s all macroeconomics and theory from people who have a lifetime job guarantee.

As someone who has worked for large corporations most of my life and recently started my own small business, I understand these people because I ‘m one myself. Most outsiders consider small business owners as risk takers, and we are to some extent. But once we’re in business we work very hard to minimize risk, knowing that a big mistake or some external issue over which we have no control can destroy the business that we have poured our life’s savings into and there is no one to bail us out. The economy can ruin us; technological change can ruin use; costs can spiral out of control and ruin us; regulatory agencies can close us down; taxes can take away our profit margin; if we depend on bank credit the bank can call our credit line; major customers can leave us; vital suppliers can disappear; and note that I have not even spoken about the competition who would like to take our customers.

So when the Federal Government decides to change the tax law, the health care laws, the environmental rules and the regulatory environment all at once while demonizing small business people who make over $200,000 per year on top of an economy that stinks and a stock market that fluctuates wildly only an academic who has never had a life outside Cambridge can tell us that we’re all wet. We should be going out and hiring, borrowing and investing because their economic models tell them that Obama’s got the US economy on the right track.

And the tone of voice is pitch perfect. It’s Obama talking down to the “bitter clingers” who are too stupid and bigoted to understand.

Her's Marcus who thinks it's a Republican conspiracy:

Actually, he’s wrong on all counts. Small businesses are not hiring because they don’t know whether people making over $2,000,000/year will be able to keep their tax cuts. I heard Boehner, or McConnell, or one of those other economic genii (Yay, Shakespeare!) say so.

On a slightly less snotty note, why is there no pressure brought to bear on the banks? They got their bonuses then closed their wallets. Is it because the poor banks were so brutally victimized by poor people that they are gun-shy, now? I mean, it’s time to let go, BigBanks. The people with no money and no power can’t hurt you anymore. At least until your next shady business practice blows up in your faces, that is.

And why are the Republicans, despite all of their best non-efforts to keep our economy in the tank until (and likely after) election day, reasonably expecting to be rewarded for their treacheries? Is it because, “Shut up, Obama’s a socialist, that’s why?”

David Welker opines:

This point about “uncertainty” is nothing more than another right-wing talking point. Or, to be more precise, the issue is not that “uncertainty” (also known as risk) is not a cost, but that there is an awful lot of selectivity about when those with right-wing inclinations decide that “uncertainty” is THE problem of the day. For more, see this excellent post on this topic by Brad DeLong here.

Right-wingers are kind of like used car salesmen. They will say anything to make the sale.

Anyone else amused about how right-wingers are so selective in invoking certain ideas? Anyone else amused how the right-wingers always invent a new talking point of the day (now it is uncertainty) that somehow always leads to the same preordained conclusions? Buy this lemon!

Here's from LN:

Nobody here is actually explaining how current Congressional actions are preventing them from hiring. Instead we get “well it makes absolutely no sense to hire in this economic environment, and I think Republicans are more favorable to small business owners on issues of taxes and regulation.” But I could have told you that and I’m merely somebody who works at a large company.

Duracom responds:

Here is an explanation of how the actions of obama and the democrats are causing small business to not hire.

Small business not expanding or hiring is basic economic self preservation in the face of tremendous uncertainty regarding government regulatory and tax policy.

The negative impact of obama and the democrat’s actions ripples through the economy. The guy below is not spending money because of uncertainty which means his vendors will have less money to spend on employees or expansion.

To which LN replies:

I understand that uncertainty makes life harder for people managing a business. This makes perfect sense. And in a competitive market profit margins are often quite small and very sensitive to changes in the prices of inputs and outputs. Yes yes.

What I don’t see in these testimonies is an honest consideration of the baseline. Life is always uncertain, there is always government regulation, there are always taxes, and profit margins are rarely that large.

I also don’t see much consideration of the fact that if you are affected by new taxes and regulation, it is very likely that your competitors are also affected by them.

What LN fails to appreciate is that my competitors are the least of my concerns. He believes that if all my competitors face the same burdens, it's no problem. But that's simply not true. My much bigger competitors can spread the cost of increased regulation over many more people and much more revenue. It's not like GE and Siemens both having to hire lawyers to explain the new regulations. A billion dollar business can afford a few lawyers. A million dollar business can't.  That's what people who have no practical idea of what small business does to stay in business don't understand.  It's a totally alien concept to them.  Need a lawyer?  Hire one!  Do you know what lawyers charge?  If you don't go out and hire one.  Mine charges $700 an hour, even when he's talking to his associate in his office.

I wish there was a pithy ending to this, but there's not.  People talking past each other.  Both side agreeing that small business isn't hiring but the ones wearing Team Obama colors think that small business owners are either stupid or part of a broad Republican conspiracy.  Business owners trying to give reasons why they're not hiring because not only is business bad but they don't know what costs the government is going to impose on them next.