>As of 2006, the last year for which statistical compilations are available from the SBA, there were 48,569 firms in Nevada classified as small business, i.e. they had fewer than 500 employees. There were 174,492 “non-employers” in 2007. These numbers do, indeed, illustrate the importance of small businesses in this state, especially when we note that as of 2006 there were only 2,088 firms employing more than 500 people in the entire state of Nevada. [SBA pdf] Given these figures, it seems relatively obvious that anyone advocating on behalf of Nevada small businesses should be pursuing policies which advance the interests of firms with from 0 to less than 500 workers, if we are to do “the greatest good for the greatest number.”
While the hospitality and food service industry was the largest overall employer in the state, the construction industry had the largest Small Business employment numbers in the Silver State as of 2006. In 2007 there were approximately 11,000 “non-employer” small businesses in the Nevada construction industry; as of 2006 there were 4,600 small construction industry firms with from 1 to 19 employees, and another 5,800 firms with over 19 but less than 500 workers. [SBA pdf table 1] Also related to the housing sector, the “real estate, rental and leasing” segment of the Nevada economy had 30,300 “non-employer” firms in 2007, and 3,700 of these firms in 2006 reported from 1-19 employees; another 3,900 companies in this category reported having from 20 to 499 employees as of 2006.
Not to put too fine a point to it, but these small businesses were not well served by economic and monetary policies that created a bubble in the housing industry. Nevada’s certainly had its share of experience with boom and bust economics — the mining industry that currently supports several small communities is the self same industry that gave us Hamilton, Rhyolite, Silver City, Tungsten, Belmont, and other ghost towns. However, construction and real estate aren’t intrinsically limited to the extent of an ore body, these sectors were formerly thought of in terms of more stable economic growth. The housing boom of the 2000’s looked ever so much more like the efforts of the suit-case farmers who launched their operations in the Great Plains prior to World War I than the result of sustainable economic growth under older, more stable, policies.
Rather like the artificially high wheat prices that created a boom for the suit-case farmers, the construction contractors and independent workers were functioning in a period of artificially high real estate values pumped up by (1) very low interest rates, (2) very high demand from the investment banking operations for mortgages from which to create asset based securities like collateralized debt obligations and related derivatives, and (3) a highly deregulated business environment in which neither the mortgages, nor the derivatives therefrom, were subject to appropriate scrutiny. When the bubble burst it splattered all over the 4,600 small construction firms in Nevada with less than 20 employees, all over the 5,800 companies with more than 20 employees, and all over the 11,000 independent contractors.
Here’s the rub. According to the academic theory of free markets as propounded by the free-marketeers in the Club for Growth and the U.S. Chamber of Commerce, deregulation was supposed to “create competition,” and “bolster economic growth” by allowing more “choice in the marketplace.” In practice, what Nevada got was the blunt force trauma from the explosion of the housing bubble.
Under the comfortable umbrella of financial deregulation, Wall Street was perfectly free to create “innovative” financial products, products which depended upon an ever increasing number of mortgages to pour into the churn producing an ever increasing number of asset based securities; most of which were of highly dubious value. Let’s review for a moment: This wasn’t the fault of Fannie and Freddie, the mortgage twins. Not that these two institutions covered themselves in glory — they didn’t, but they were late to the party — institutions like Lehman Brothers, Merrill Lynch, and Goldman Sachs, etc. on Wall Street were clamoring for more mortgages long before the Mortgage Twins came to the game. The unceasing pressure from the Wall Street investment houses for more and more mortgages from which to create more and more derivatives put pressure on the Mortgage Twins to reduce standards, on the local lending institutions to reduce their former standards, and also gave rise to disreputable firms whose sole purpose it was to crank out mortgages as fast as the Wall Street houses could consume them.
If one’s definition of “economic growth” is that some people should make a killing while pumping up a bubble (tulips, land speculation, wheat production, or commercial and residential mortgages), and that we should sit by confirming this volatility to be a natural product of the business cycle, then there’s nothing to do but wring one’s hands and feel remorse that The Sand States, Nevada included, have to suffer so that the financial sector might grow.
There is always going to be some tension between the advocates of a totally “free” market and the advocates of sustainable economic growth. For the former, a totally “free” market assumes a boom and bust cycle as a natural part of our economic universe – some will be enriched, others will be bankrupt. “The market” will decide. This would be a rational position IF the market were rational. However, “the market” isn’t now, nor has it ever been, a mechanical process free from human manipulation.
The free marketeers assert that a theoretical representative agent having all the information necessary to make a rational decision about what economic investments and purchases will be in his or her best interests is the best model for economic progress. We can see where this is going. First, to make this model work we have to assume that we will all behave in the manner prescribed for the theoretical representative agent. But, we are not “theoretical representative agents.” We don’t have the same needs now we had during our adolescence, nor the same wants. Our families grow. Our family diminishes. Our children have needs, wants, and these needs and wants change over time and experience. In truth, the free marketeers’ theoretical representative agent isn’t really representative of anyone…not in reality.
The free marketeers contend that value can be assigned to any product if all parties have all the information necessary to derive a theoretical equilibrium price. That would be nice if at any time in any human transaction everyone on both sides of the trade had every last bit of information necessary. This doesn’t even work when considering the price of a half gallon of orange juice. What we just paid at the grocery for the orange juice is in part determined by the futures market in which someone is betting that there will be (a) a big crop (b) a small crop (c) a mild winter (d) a harsh winter… in other words, the price is at least partially determined not by what we know about the production of oranges, but by people factoring in what they don’t know.
Another problem with the free marketeers’ mechanical model of the economic universe is that it is perfectly possible to buy and sell a product the value of which is actually unknown. We just experienced an unfortunate example of this notion. No theoretical representative agent with all the information necessary about both sides of a trade would have ever purchased third generation synthetic collateralized debt obligations? Obviously, some people Thought the synthetic CDOs had some value, and that value was determined by the demand for them. The demand for the synthetic CDOs was no more rational than in former bubbles when there was a demand for tulips, Mississippi real estate, Enron stock, or synthetic CDOs. The reality is that we are not automatons. Emotions — hope, fear, enthusiasm, panic, also play a role in our economic lives.
If the free marketeers’ mechanical theory of the economic universe doesn’t square with the real universe of producers and consumers in a human economic environment, then how does one sustain a capitalist system in which there is sustainable economic growth?
We could start by requiring that our political leadership admit the obvious. Our version of capitalism works best for the most people when we acknowledge that we’re human.
We have greater economic stability when we admit that we aren’t mechanical or robotic in our economic decisions. There was no collection of “powers accumulated by some invisible hand” that created the housing bubble — that was a collection of investment institutions filled to the brim with human beings deciding that synthetic CDOs were a great way to make lots of money very quickly. Once we get beyond blaming our problems on theoretical specters with invisible hands, we can address the reality of bubble manufacturing, and take steps accordingly.
We can have less volatility, less boom and bankruptcy, when we decide we aren’t powerless before those specters with the invisible hands, and determine that adult supervision is a good thing, even when dealing with people who profess to be adults. The stock market works better for more people when we don’t allow insider trading, blue sky stock sales, and pump and dump schemes. Our equity markets can be even more profitable for even more people if we decide that letting some conflicted rating agency artificially inflate the value of a bond isn’t a good idea. Our financial sector is far more secure when we decide that the stock market should function as an equities exchange and not like a bucket shop.
In short, we can secure a better economic environment for small business owners and entrepreneurs when we decide that it is better to work towards long term rewards for most people rather than short term bonanzas for a few.
There are 48,569 small employers and 174,492 self employed in Nevada who could stand to benefit IF:
1. Politicians and economists would stop assuming that if tax cuts are awarded to the top 2% of American income earners, they money will trickle down — eventually — to their businesses. As if rewarding 2.5% of Nevadans will necessarily support them? The entire trickle down theory is simply an ideological statement in search of a supportive theory. If national statistics can be extrapolated, then we know that only 2% of Nevada’s small business owners would be affected by ending the Bush Tax Cuts for the top 2% of American income earners — most of whom don’t derive most of their income from small business activities. It’s perhaps high time to start giving priority to the needs of the other 98% of Nevada’s small business owners.
2. Politicians and corporate lobbyists would stop obstructing the passage of legislation designed to make credit more readily available to small businesses. Passing H.R. 5297 would be a good place to start. If politicians would stop sloganeering about “Son of TARP” for a few precious moments and read the bill they’d discover that this is anything but the progeny of the Bush Administration’s attempt to stop a meltdown on Wall Street. The bill would create, or should create, a fund to backstop loans to small businesses primarily from small community banks.
3. Politicians would stop pandering to the interests of Wall Street over those of Main Street. The agendas of major lobby groups like the U.S. Chamber of Commerce, the Club for Growth, and the National Association of Manufacturers aren’t generally in line with the interests of small businesses and the self employed. The U.S. Chamber of Commerce may tell me that they’re “Fighting For Your Business,” but when they oppose the Shareholder Protection Act, they aren’t doing anything for my interests — rather they’re supporting the interests of multi-national corporate managers and their associated corporate directors. And, when they issued this statement about their opposition to H.R. 5297 : “However, the Chamber is concerned about increasing the penalties for failure to file information returns. In 2012, virtually every business and non-profit will face greatly expanded information filing obligations with the IRS. Increasing fees at this time could be counterproductive;” they certainly weren’t thinking of the interests of most small businesses that would NOT be subject to this loophole closing provision, instead addressing the needs of those who abuse tax shelters. They’re worried about “virtually every business,” which isn’t the same as “really every business,” and “could be counterproductive,” which is a far cry from “will be counterproductive” for most large corporations.
It took some massaging to get the National Association of Manufacturers’s position on product safety to sound benign: “Because of our commitment to product safety, the NAM and its members are concerned about the implementation of the Consumer Product Safety Improvement Act (CPSIA). Its timelines for new testing and certification and its labeling requirements for children’s products are unrealistic and inflexible and its overly broad reach harms consumers, manufacturers and importers alike.” Consider for a moment the needs of a small retail firm selling children’s goods and clothing. Is that small retailer likely to be more concerned about the “unrealistic and inflexible” rules for manufacturing children’s products, or about the liability the store might incur if it sold unsafe products to its customers?
The statement by the Club for Growth on safety regulations might also be of concern to our hypothetical retail store owner: “Establish the purpose of safety and health agencies as the identification of opportunities to improve safety and health at costs that are much less than the market value of the benefits.” This appears to be a statement of “cost-benefit” analysis. If a regulation isn’t “cost effective,” then it should be repealed? So, how many infants would have to suffocate in an unsafe model crib before it would be cost effective to impose regulations on crib manufacturers?
It’s about time some of the major business lobbyists admit that while some of their proposals would constitute advocacy for the self employed and owners of small businesses, most of their agendas are tilted toward advocacy in the interest of large multi-national corporations and the Wall Street firms that bankroll them.
4. Small local businesses are dependent upon customers having sufficient discretionary income to make purchases that support their profitability. Tax schemes that bestow the greatest reward on the highest incomes aren’t in the “could be counterproductive” category — they demonstrably are counterproductive. Flat tax schemes that place the greatest burden on those least able to pay take money out of the pockets of “average” income earners who comprise the clientele of local businesses. Reliance on regressive taxes, like the sales tax, also place a higher burden on those earning less, and on the small businesses with whom these people trade.
“The number of small employers in Nevada was 48,569 in 2006, accounting for 95.9% of the state’s employers and 44.2% of its private-sector employment.” [SBA] If we are to do the greatest good for the greatest number, then obviously our leadership needs to pay more attention to the Main Street small business interests in Nevada and less attention to Wall Street and its legion of advocates.
Desert Beacon 