Public Policy Toward Small Business and Entrepreneurship

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
Entrepreneurial Repressed (Bottom up)
Led (Top down) Stagnant
Favorable
Culture
Unfavorable
3
Assessing Policy
A Typology of Public Policy toward Sm. Bus.
Impediments
Low
High
Compensating Nurturing
Limiting Competing
High
Direct Assistance
Low
4
Policy Options
A Typology of Public Policy Objectives and Means
Policy Means
Eliminate Impediments
Direct Assistance
Targeting High Potential People/Firms Competition
Targeting Underrepresented Groups Confined Competition
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 isnt alone.
• Telecommunications from ATT 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 Businesss
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
• RD, RE 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