INTRODUCTION
Charles Hugh Smith put up another two-part analysis on his website “Of Two Minds” (http://www.oftwominds.com/blog.html) concerning why U.S. Small businesses are not hiring and will likely not be hiring in the future.
The phrase “structural unemployment” is sometimes used in misleading ways in many opinion pieces around the Media. Some writers use “structural” as in there are too many workers not trained for the jobs available, or that technology has replaced them in great numbers. Taken to one extreme, some argue there is nothing society or workers can do except get retrained or leave the workforce.
Earlier this year, a high-tech manufacturer of advanced solar panels closed its new Massachusetts plant and laid off 800 well-trained employees. It decided to relocate to a new site in China, thanks to heavy subsidies from that government and lower employment costs. Somehow saying these workers are not sufficiently trained in the latest high-tech manufacturing process would by ludicrous and facetious. They simply make far too much money compared to Chinese workers. American policies for the past twenty years have promoted outright neglect of our workers and massive tax subsidies and financial incentives for businesses to relocate overseas.
Technology and the specific skills needed by most employers have not changed significantly over the past 5 to 10 years. However, there is an overall desire to increase productivity from existing workers, reduce overhead and labor costs, perpetually increase profits every quarter by any means necessary, and not take any risks expanding operations when overall demand from consumers, other businesses, and governments are flat or contracting.
The U.S. now sees massive unemployment across all fields among a wide variety of workers of all ages, sexes, races and educational backgrounds. Governments are perpetually “finessing” unemployment numbers to make them appear much better than reality. Most objective sources put the real unemployment rate closer to 18% of the workforce when adding in all the types of people official counters decide not to include in creating the artificial current official rate of 9.2%. Furthermore those underemployed in part-time work or in positions far below their skill levels are also disregarded by government statisticians in order to prop up the corrupt and bankrupt status quo.
Even in China, advanced technology and weak internal and global demand for many types of manufactured consumer goods are also threatening the employment prospects for a majority of their citizens, workers and consumers, along with growing inflation in basic living expenses. Globally, we have been, are, and will be facing a glut of manufacturing capacity and a glut of available workers.
Large global corporations can move operations to the lowest-wage and highest-subsidized locations. As a result, both workers and consumers (real human beings) plus local communities who don’t own or manage these enterprises, suffer tremendously. Ultimately societies suffer because there is little overall demand for goods and services from low-paid and unemployed people – depressing the corporate earnings of most businesses and increasing their reluctance to hire more people.
In the U.S., a dangerous coalition between big business and big government is putting the squeeze on new and smaller enterprises. As a result, the great engine of prosperity and employment in the U.S. is now broken.
WHY SMALL BUSINESS IS NOT HIRING – OF TWO MINDS
[7/11/11 PART ONE] * * *
The reasons why small businesses aren’t hiring are structural; the dearth of jobs is not temporary, and this is not a “soft patch,” it is quicksand.
The low job growth in the U.S. isn’t a “soft patch,” it’s a sea of quicksand. In a nutshell, here’s the situation: 2/3 or more of all job growth comes from small businesses starting up and expanding; only a third or less of new jobs come from Corporate America or government expansion.
As recent reports have shown, Corporate America has been on a hiring spree–overseas. From the point of view of globalized Corporate America, why hire anyone in a slow-growth market like the U.S.? It makes sense to hire new employees in fast-growing markets where the corporation is reaping its growth and most of its profits.
As for government hiring: the game of expansion based on explosively rising debt or Federal stimulus spending is over. To live within their means, local government and related agencies will have to shed jobs, as labor accounts for 80% of government expenses.
That leaves any future expansion of jobs up to small business. But small business isn’t hiring, and won’t be hiring, for these structural reasons:
1. The high costs of cartel healthcare, a.k.a. “Sick-care” in the U.S. Corporate America and small business share one millstone: the absurdly high costs of healthcare in the U.S., which have been pushed onto the employers more as a historical accident than out of rational policy.
…[W]e spend twice as much per capita on healthcare as our developed-economy competitors. Countries from France to Australia to Japan (three different systems) spend about 8% of their GDP on healthcare, and the U.S. spends 18% (17.6% in 2009, and of course “Sick-care” costs leap up every year regardless of who’s in office).
…[Five] 5 percent of the population is responsible for almost 50 percent of all healthcare spending. At the other end, half of the population accounts for just 3 percent of spending.
That 8% of “extra” money our nation squanders on paperwork, fraud, profiteering, needless procedures, useless drugs, $250,000 spent on the last few months of very ill patients’ lives and all the rest of the insane sick-care system comes to $1.25 trillion. That is a “tax” on the economy which is paid mostly by employers, the self-employed and taxpayers via the monumental waste in Medicare and Medicaid.
The vast majority of small businesses are marginal, and they cannot afford to hire employees when the already crushing costs of healthcare continue rising. The healthcare insurance for an employee with a family can easily exceed $1,000 per month, and more if the worker is over 50. Add in workers comp insurance, disability and unemployment insurance, and the employer’s share of Social Security and Medicare (7.65%) and the “overhead” costs for hiring a new worker can equal or exceed the employee’s salary.
2. Politicos and employees don’t understand small business. How many politicos started a business from scratch and are still running a small business of 25 or fewer employees? Basically none. How many employees understand what it feels like to be skating close to the edge of emotional and financial collapse, month after month?
Employees wonder why their pay isn’t rising, but the employer’s compensation costs have been steadily climbing for decades thanks to “Sick-care” and other systemic costs. As I have often said here: you’d have to be literally insane to hire anyone in this economy unless that employee will pull in so much new business that the costs are justified. Unfortunately, that is a rare circumstance.
Out-of-touch politicos think that trimming the employer’s share of FICA (Social Security) 2% is going to make a measurable difference in a 100% labor overhead (i.e. you hire a worker at $2,000 per month and the overhead costs $2,000 per month)–what a joke. Great, my overhead per employee dropped to 98% from 100% while my Sick-care insurance leaps by 10% a year.
3. Local government views small business as tax donkeys. Local government sees small business as one thing and one thing only: a captive source of extra revenue via higher licensing fees, junk fees, permits, surcharges, etc. Local government thinks small business is captive, but the local politicos and fiefdoms are forgetting every small business owner has an option: it’s called closing down, and opting out of the rat-race of higher taxes and costs.
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4. Litigation nation. Employees and others can take a turn at the lawsuit lottery wheel, and if they “win” then you lose. The stress alone is deadly. I know many employees think the owner is exploiting them, and that is a reality for undocumented workers and others. But the number of business owners who are trying to do right by their workers far exceeds the exploiters. Meanwhile, the cost of “protection” against lawsuits keeps rising, too.
5. The “flexible, free-lance/ independent contractor” model of employment which has been lauded for the past decade as the key to America’s rising productivity has some serious downsides. I should know, as I’ve been a free-lancer for 20 years.
The basic “innovation” here is to offload that 100% overhead expense onto the employee via paying them more as an independent contractor or free-lancer. But that model has numerous structural weaknesses.— I.C.s (independent contractor) [do not] qualify for unemployment, so when they lose steady work there is no backup income. There is no 6 or 9 months’ grace period where the free-lancer can work on Plan B–they’re relying on savings the moment they cash their last paycheck.
— We free-lancers pay our own taxes quarterly. Once your income drops then it’s dangerously tempting to short-change that next quarterly payment or skip it entirely. Yes, you will owe less because you’re making less money, but those with formal jobs don’t realize we all pay 15% FICA (self-employed Social Security) on every dollar earned. Toss in state and Federal income taxes and even supposedly low rates (15% Federal, etc.) quickly add up to 35% or more. That means big tax payments, and big tax problems if you fall behind.
— Free-lancers’ income can drop sharply but that won’t be reflected in any employment statistic; it will only show up in declining tax revenues.
— Laying off I.C.s and free-lancers is the low-hanging fruit for enterprises cutting back. Based on what I’ve read and heard, most of these initial “easy” cuts to head count have already been made. So the next wave of lay-offs will be formal employees.
— The number of I.C.s and free-lancers in the U.S. economy is simply enormous– semi-official estimates put the number at 10 million but I would guesstimate the real number is more like double that: 20 million, or about 15% of the entire U.S. workforce of 139 million.
Many of these are facing zero income, others are scraping by with a few temp gigs and favors from old employers. None show up in official statistics. So when you read that 14 million people are officially unemployed, add in 14 million under-employed (barely scraping by) or totally unemployed I.C.s and free-lancers.
— Many of the industries which supported I.C.s and free-lancers have been reduced to mere shadows of their former glories, and they won’t be coming back. The print media industry supported tens of thousands of free-lance writers, editors, marketing types, ad agency temps, etc.–that industry is toast. The “creative” industries like music and film have also suffered huge cutbacks; as the Web has creatively destroyed income streams, then the number of jobs those industries can support shrinks dramatically.
– “Consulting” is now a synonym for unemployment. Enterprises and government agencies which handed out consulting contracts like candy at Halloween in the good times have slashed consulting contracts to the bone. Many of these consultants had grown accustomed to pulling down $200,000 or more a year; with their incomes now essentially zero, that’s a lot of business-class airline seats and fancy restaurant meals which will now go begging.
— As regular employees get laid off, some will join the already overflowing ranks of I.C.s and free-lancers in the hope that they can transport their skills and contacts into a free-lance income. Some will, but most will be disappointed; principals are trying to maintain their own income and the only way to do so is not hire and not subcontract out any labor except what is absolutely necessary.
Conclusion: don’t expect small business or independent contractors to create new jobs–they’re trying just to hang on to whatever they have, not expand headcount.
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[7/12/11 PART TWO]
Continuing our exploration of why small business isn’t expanding and hiring: here are four more deeply pernicious structural dynamics crushing small business.
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1. The real estate bubble completely mispriced/overvalued commercial real estate. The Federal Reserve’s policies of maintaining super-low interest rates and flooding the markets with easy-money leverage has distorted and poisoned the U.S. economy in multiple ways, one of which is the elevation of commercial real estate valuations to absurd heights.
Here’s how the dynamic works. Landlord A bought his building back in the dog days of the early 1990s for $1 million; his tenants were struggling in the lingering recession and so he kept rent increases modest, or even cut them to keep tenants in a low-demand market.
Along comes the Fed-fueled credit and housing bubble, and suddenly his building is worth $2 million. Based on standard multiples of income to value, Landlord A calculates his building’s rents are now grossly underpriced. With the economy bubbling along, demand is rising for premium commercial space; hey, isn’t his restaurant tenant doing gangbusters business every night?
So he raises rents, and the small business tenants eat the increase. Business is getting better, and so they pony up the increased rent with a sigh.
As the bubble inflates, Landlord A gets an offer of $4 million for his building. Landlord A has no trouble accepting the offer from Landlord B, who raised the money for the purchase by leveraging another building of his to maximum debt levels and taking out a short-term loan on his new acquisition.
At the $4 million purchase price, the rents don’t even cover the debt and expenses, as property taxes shot up along with the building’s value. Landlord B nearly doubles the rent, and a few of the marginal small-biz tenants bail out for cheaper space elsewhere or just close shop.
Then the recession hits. The restaurant’s traffic plummets to a shadow of its pre-recession level, and the other tenants are suddenly running negative cash flow, too. Meanwhile, Landlord B’s other property–the one he maxed out to finance the purchase of this building–just lost its anchor tenant and he’s deep in the red every month.
When the restaurant closes, that’s the end of Landlord B’s mini-empire. He turns both buildings over to the bank, who hires a realtor to find a new buyer.
The problem here is that the inflated $4 million price tag has become the “real value” and the inflated rents are the new benchmark. Thus the building is listed at the “bargain” price of $2.5 million, and rents are notched down a bit, but not to where they should be, i.e. 2/3 lower.
Adjusted for inflation, the building is “worth” no more at $1.3 million, and rents should be about 35% higher than the 1995 rent, which was a mere 1/3 of the top pre-recession rent.
All of this increase in value and rent is the result of super-low interest rates, which enabled speculation and leverage that drove up valuations, which then drove up rents as landlords raised rents to pay their bloated mortgages and property taxes.
The net result is commercial space is completely overvalued and thus rents are sky-high. Thanks to the Fed’s misguided policies, small business has little left after paying rent, and over-indebted landlords struggle to pay the gigantic bubble-era mortgage and property taxes: most of the income from small business flows to the “too big to fail” lender.
2. Financing is cheap to global Corporate America and costly to nonexistent to startups and expanding small businesses. If you’re the CEO of a global Corporate America firm, borrowing $1 billion to acquire a smaller competitor is cheap, no problem: Corporate America has floated hundreds of billions of low-yielding bonds in the past year to fund buyouts and whatever else they want to do with cash.
If you’re a startup or new firm seeking $10 million to expand–forget it. Your only chance is to give most of your company to a vulture capital firm and hope you end up with a slice at the end, after they window-dress it for sale or IPO.
The eventual buyer: global Corporate America, of course.3. Crony capitalism doesn’t like competition. It seeks monopoly or a shadow cartel, imposed and maintained by the regulatory agencies of the Central State. The naive and sentimental view of Capitalism is that it thrives on competition; this is incorrect.
Capitalism actually thrives on monopoly, as that’s what it takes to skim fat, low-risk profits. Competition mucks everything up, which is why Corporate America arranges for regulatory strangulation of small-business competitors via its partner, the Central State (Federal regulatory agencies).Since government bureaucracies are a priori delighted to extend their reach, power and budget, it doesn’t take much persuasion for them to tighten the screws on potential competitors with absurdities like “food safety” regulations, which require hit-teams of government agents to descend on criminal conspiracies such as organic dairies.
Meanwhile, back in the real world, food-borne epidemics only spring from Corporate America’s own agribusiness “factories,” not from the small producers which the Federal government has tagged as “enemies of the State.” It would be comical if it wasn’t so tragic.
This game is transparent: cartels and monopolies lobby politicos and agencies to crush small business (potential competition) with overlapping regulations so onerous and costly that compliance alone will drive the small businesses under.
Take a look at the Sick-care “insurance industry” for an example. Ours is supposedly a “free market” system, yet there are never more than two providers in any market. That’s the definition of a shadow cartel.
4. Overlapping regulation designed to suppress competition; benign neglect/hostility from government bureaucracies obsessed with self-preservation and lack of financing make it impossible to scale up a successful business in the real world.
No wonder young entrepreneurs crowd into social media; it’s the only space where startup costs are low, office space is a luxury (your living room will do just fine), regulation is light to nonexistent and you can scale up ideas and enterprises without jumping through dozens of costly regulatory filings and hoops where your Corporate America Overlords are sharpening their regulatory knives to eliminate any competitors before they get a chance to scale up.
Where are the real-world Facebooks and Googles? It’s not that there are no opportunities; it’s that there is a near-zero chance of raising enough money and political muscle to escape the regulatory and financial black holes imposed by cartels and their yes-men in regulatory agencies at every level of government.
Concentrated financial and political power stagnates the economy by suppressing new enterprise in favor of the Status Quo. That’s one key reason why there are so few new small businesses that scale up; the forces of Cartel America and the government are arrayed against such threats. Protect the Status Quo at all costs and you’ve made lobbyists and their agency lackeys happy (“we did our job, the dangerous miscreants at the organic dairy were punished”), but you’ve fatally undermined the real economy.
A FEW CLOSING THOUGHTS
In addition to providing extensive debt relief to most consumers, homeowners, citizens and residents to increase aggregate national demand; and enacting comprehensive income tax reforms to raise revenues, make tax compliance simpler and fairer, and reduce huge societal income and wealth disparities; we could change the dismal current status quo for smaller U.S. enterprises by instituting some of the following:
(1) Enacting a nationwide universal single-payer non-profit health insurance entity completely separate from the U.S. government and all employers to effectively remove healthcare costs and administration from private companies and public entities. Individual participation would be voluntary not depend upon employment or marital status, age or current medical conditions. An wholly independent centralized authority needs to rethink “healthcare” for the entire country apart from the corrupting influences of the private healthcare business cartels in order to promote the most efficient and humane ways possible of taking care of all citizens and residents. Half of the members of this non-profit health insurance entity would be elected by U.S. citizens and the others appointed by the President & Congress. All employers would contribute some statutorily-set monthly amount to help fund the system based upon a fixed percentage of total payroll. Every resident and citizen between the ages of 22 and 64 would also contribute a minimum monthly amount to fund the system. The providers of healthcare (i.e. hospitals, physicians, clinics, and drug and equipment companies) would remain private or non-profit entities but all would have to negotiate for and abide by nationwide fixed rates for services, equipment and medicines plus meeting overall health goals for their patients.
(2) Beginning a comprehensive nationwide review of all federal, state and local laws and regulations upon businesses to identify ways to reduce needless paperwork, duplicative and high compliance costs, remove conflicting rules and jurisdictional overlap, and promote overall consumer and worker safety, and make U.S, businesses more competitive domestically and internationally.
(3) Creating a national public investment entity with federal, state, local and private funds to invest in start-ups, expansion and growing businesses via mixes of seed capital, grants and loans. Up to $10 million could be allocated to any one enterprise. Funds would be available to start-ups and small businesses with gross annual sales of under $10 million. These funded businesses would be advised, monitored and financed by local groups of retired small business owners, current accountants, attorneys and financial advisers, and members of the general public with business experience, half being appointed and the other half being elected to such posts to serve each metropolitan region in the U.S. The public investors would work with various private investment groups to protect the best interests of citizens and communities. The initial total amount of the nationwide fund would be around $100 billion. The owners of the public investment company would be all U.S. citizens and residents, on an equal per-capita basis.
Global environmental, business, social and ethical considerations should require us to reflect on and redefine the very concept and desireability of perpetual “growth,” the meaning of “work” in the future, the paramount rights of individuals and communities over fictitious legal and commercial entities, and the ethical responsibilities of all business enterprises to sustain human societies and our global ecosystem for future generations.
Posted on 7/13/11 by Marc Pascal in Phoenix, AZ. The two fully-quoted selections from “Of Two Minds” were reprinted with written permission from Charles Hugh Smith.