Small Business Labs

Will Obamacare Lead to Lots More Small Businesses?

The Wall Street Journal's Will Health Care Law Beget Entrepreneurs? suggests that once fully implemented, the Affordable Care Act (a.k.a. Obamacare) could lead to a substantial increase in new small businesses.

Key quote:

The Obama administration has touted a boost for entrepreneurship as one of the health-care law's key benefits. The Kauffman-RAND Institute for Entrepreneurship Public Policy in Santa Monica, Calif., says the law could increase the number of new U.S. businesses by as much as 33% over several years.

The reasons for this forecast is Obamacare reduces health insurance related job lock, which is the term economists use to describe the reluctance of workers to leave their jobs because doing so would mean losing fringe benefits, especially health insurance.

Obamacare reduces job lock because people going out on their own will be able get health insurance through mandated state or federally run insurance marketplaces. 

We covered this topic earlier in the year in our article Obamacare, Job Lock and Freelancers. We agree that the Affordable Care Act will reduce job lock and likely increase the number of people starting small and solo businesses.  

But having said that, a "33% increase over several years" is quite large. Depending on how they are defining small business (I couldn't find a source for this forecast except for the WSJ article), this could mean as many as 2-3 million more small/solo businesses over several years.  

As we point out in our article, studies on job lock vary in terms of their view of its impact. But I haven't seen a job lock study showing this big an impact.

Also, we've done a lot of work on the decision process people go through prior to starting a small or solo business. While health insurance related job lock often plays a role, it's but one of many factors people consider.  

I hope they're right, but this seem too optimistic to me.  My guess is we will see an increase of 5% - 10% over this time frame.  

I also hope the mandated state and federal exchanges offer decent health insurance at a reasonable price.  We'll start finding out over the next few months as more coverage and cost details emerge.

Our advice to small businesses and solopreneurs (and to those considering it) on this topic continues to be the same. Spend some time coming up to speed on the status of the mandated exchanges in your state and monitor their progress.  

A good place to start is the Health Reform section of the Kaiser Family Foundation.  The information is a bit deep for most of us, but they have good summaries and calculators, as well as news feeds on new information.

Are Small Business Owners the New Left?

That's the claim of The Nation's article Meet the New Left: Small Business Owners.  Key quote from the article on what you will hear if you listen closely to small business owners: 

"you will hear jarring expressions of distinctly liberal opinions. And they express salty disgust for the US Chamber of Commerce and the National Federation of Independent Business, which claim to speak for the little guys on Main Street. Actually, these little guys accuse the US Chamber and the NFIB of identity theft."

The article goes on to discuss liberal leaning small business associations and their work. The featured groups are the American Sustainable Business Council, the Main Street Alliance and the Small Business Majority.

Not surprisingly, if you do some digging you will find all three of these groups have links to the Democratic party and various progressive groups. In other words, these groups are not non-partisan and they pretty much line up in lockstep with the Democratic party on policy issues.

But don't get me wrong, I'm not criticizing them for being partisan. As we've pointed out in the past, there are few non-partisan policy oriented think tanks or trade associations. That's just how DC works.  

Other examples of this partisanship include the two best known small business trade associations - The Nationa Federation of Independent Businesses (NFIB) and U.S. Chamber of Commerce. They both lean right politically and tend to line up lockstep with the Republican party on policy issues.

We like and respect all of these groups and the work they do. But we also understand they are partisan and their work often reflects their support for their political party of choice. 

Our advice to small business owners when dealing with these group is:

1. When you read policy positions or research from these groups understand that their political orientation has likely had an impact on their work.

2. When choosing a group to join or support do some research and make sure you join or support a group that reflects your values and/or the values of your business.

3. Get used to hearing multiple voices with very different messages claiming to be "the voice of small business" in DC.

BTW, the answer to the title question is no; small business owners are not the new left. Surveys consistently show small business owners are more likely to be Republicans or lean Republican than be Democrats or Democrat leaning. 

For example, 46% of the respondents of a recent small business poll by the left leaning Small Business Majority said they were Republican or lean Republican. 35% said they were Democrats or Democrat leaning.

But more importantly, pretty much all small business owners are pragmatists when it comes to government policies that impact their business. Because of this, they are not ideologues. They will support policies from any party that they believe will help their business thrive.  

The Rise of the Underground Economy

Last year we suggested growth in the underground economy is likely a key reason workforce participation has fallen so much in the U.S. 

Others are starting to also suggest this.  Noted author James Surowiecki's New Yorker article The Underground Recovery points out:

Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more.

One indicator is retail sales, which have held up quite well given the high level of unemployment and historcially low workforce participation rate.  Key quote:

Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you’d expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we’re stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. 

The Washington Post also looks at this topic and cites an academic study on the size of the underground economy:

Is there any hard data on the underground economy? Some. A 2011 by Richard Cebula and Edgar Feige estimated that as much as “18-19 percent of total reportable income is not properly reported to the IRS.” That’s as much as $2 trillion in underground economic activity, with about $500 billion in taxes that aren’t being paid to the government.

For obvious reasons data on the underground economy (also called the informal economy) is hard to come by.  But it's becoming increasingly clear this segment of the U.S. economy is growing.  

The Growing Numbers of Not Working

The most recent BLS jobs report showed that almost 500,000 Americans left the workforce in March, resulting in the workforce participation rate falling to 63.3%.  This is the lowest its been since 1979.  

There's a pretty active debate over what's driving this decrease. We covered this last year in our article Workforce Participation: Where's Everyone Going?

We now have more data than last year and the answer is people are leaving the workforce for a variety of reasons, including:

• Younger Americans are staying in school longer
• The number of people on disability is up substantially over the last past decade
• Aging baby boomers are starting to retire
• The number of people on food stamps and other government support programs is up

Even more troubling than the overall decline in the workforce participation rate is the decline among people aged 25-54. These are the prime work years when people generally aren't in school, retired or disabled.  

As the chart below - from the always informative New York Times Econmix blog - shows, for this age cohort the reduction in the unemployment rate is almost fully explained by the decline in workforce participation.

   

This is a huge problem for America. Not only does lower workforce participation mean lower economic growth, it also raises government spending on support programs and leads to greater participation in the informal (meaning illegal) economy. It's also bad for the people who aren't working.

Unfortunately, there are no easy answers to this problem. 

Jim Demint and the Rise of Thought Leadership

South Carolina Republican U.S. Senator Jim Damint surprised Washington by announcing he's leaving the Senate to become the President of the Heritage Foundation.

For those not familiar with Heritage, it's one of the leading conservative Washington D.C. think tanks.  

I was watching CNN's Wolf Blitzer interview Demint on his decision and Blitzer was clearly stunned that a sitting U.S. Senator would choose to go to a think tank.

But it didn't surprise me.  

This move nicely illustrates the growing power of thought leadership. As Demint explains in an earlier interview on CNN:

After this last election it's apparent that we need to do more as conservatives to convince Americans that our ideas and our policies are going to make their lives better. The Heritage Foundation is the premier think tank research organization - the premier idea group for the conservative movement. This will give me the opportunity to help take our case to the American people and to translate our policies into real ideas.

In other words, Demint thinks he can get more done and create more change through thought leadership than he can by being a powerful, sitting U.S. senator.  

A pretty clear signal on the growing importance of thought leadership. 

Healthcare for Freelancers

Good article in Businessweek on the Freelancers Union new health care clinic for freelancers. The 6,000 square foot clinic is in Brooklyn and will provide free care and wellness programs to freelancers who have a Freelancers Union health insurance plan and choose the clinic’s doctors as their primary care physicians.

According to the article, the costs of the insurance are quite reasonable:

"Monthly premiums range from $225 for a high deductible plan to $603 for the most comprehensive plan, or from $630 to $1,687 for families. Even those on high-deductible plans can get primary care for free if they join the clinic."

So if you're a freelancer living in Brooklyn (or nearby) check it out. If not, keep following the Freelancers Union site. They're planning on expanding to other areas if the first clinic is successful.

Is the World Really Awash with Money?

Evidently so.  Or at least that's the view of two fascinating articles: A World Awash in Money, from Bain and Company, and A Capitalist's Dilemma, from Harvard Business School professor Clayton Christensen. 

The basic point of both articles is capital used to be a scarce resource. Because it was scarce, our management methods and metrics are designed to minimize its use.

But both argue that today capital is both cheap and plentiful. Key quote from the Bain article:

... the relationship between the financial economy and the underlying real economy has reached a decisive turning point. The rate of growth of world output of goods and services has seen an extended slowdown over recent decades, while the volume of global financial assets has expanded at a rapid pace. By 2010, global capital had swollen to some $600 trillion, tripling over the past two decades. Today, total financial assets are nearly 10 times the value of the global output of all goods and services.

Both also argue that we need to rethink how we manage because of this shift.  

As Bain puts it, a major impact of the shift to capital becoming abundant has been "...to paralyze, confuse and distort investment decisions."

Christensen says abundant capital means the rules of business and government have changed, but how we manage hasn't.  He says "... we’ve never taught our apprentices that when capital is abundant and certain new skills are scarce, the same rules are the wrong rules."

To be honest, we're still trying to figure this trend out, and particularly what it means for small business.

But given who's talking about this - one of the world's top strategy consulting firm and one of the world's top business gurus - we think it's worth being aware of.  

The Polarization of Jobs

The Trend is the Cycle: Job Polarization and Jobless Recoveries is an academic paper, but very approachable and well worth reading. The key finding is the job market is becoming more polarized, with job growth becoming concentrated at the high and low wage ends of the spectrum.

The study authors crunched through a mix of government data, breaking jobs into 3 broad categories:

1. Non-routine cognitive jobs: These are managerial, professional and technical workers - in other words highly educated and skilled knowledge workers. These jobs tend to be higher paying.

2. Routine cognitive and manual jobs: These are jobs that are accomplished by following defined processes and procedures. Many clerical and manufacturing jobs fit in this category.  These jobs tend to be good paying, middle class jobs that haven't required high levels of education.

3. Non-routine manual: These are service jobs and include such things as bartenders, home health aides and others that are manual in nature, but require flexibility, problem-solving or human interaction skills. These jobs tend to be relatively low paying.

As the chart below (from the study) shows, over the last 3 decades the percent of jobs that are non-routine cognitive and manual have grown, while the percent of routine jobs have fallen.

  

The good news is the number of high paying knowledge jobs has rapidly grown over the last 3 decades, moving from 29% of jobs to 39%. The bad news is routine jobs - the backbone of the middle class - are going away due to automation and foreign competition.  Their share of jobs has fallen from 58% to 44%.

The other bit of bad news is we will likely continue to lose routine jobs. This hollowing out of middle class jobs is one reason median household incomes have fallen over the last decade.  It's also one of the reasons unemployment and under-employment are so high.

The well known VC Mark Andreesen says these shifts are resulting in two types of jobs: (1) jobs where people tell computers what to do; and (2) jobs where computers tell people what to do.  Needless to say, the jobs where computers tell people what to do are not going to be high paying.

We think the future of jobs is more nuanced than this, but it's a great sound byte.

We'll have more on this in the coming weeks. For those interested in this topic, The Polarization of Job Opportunities in the U.S. Labor Market is another approachable academic paper.  

Workforce Participation: Where is Everyone Going?

Ugly is only way to describe the August job report.  Non-farm payrolls grew by an anemic 93,000.  

And if you look under the hood at the new jobs, you find the greatest gains came from the food services and drinking sector.  This means it was an OK month if you're looking to be a bartender or wait tables, but not much else.

But the big problem is 368,000 people gave up looking for work in August.  This resulted in a workforce particaption rate of just 63.5% - the lowest in 31 years. The chart below, which is from a Washington Post article on this topic, shows the sharp decline that has occurred due to the recession.

    

The question is, where did all these people go?  The Washington Post article says it's a combination of discouraged workers waiting out the recession and retiring baby boomers.  

A recent study by the right leaning Heritage Foundation agrees with the Washington Post article, but also adds growing disability roles and an increase of people in school.  

We agree with all of these reasons, but we're also starting to wonder what's going on in the U.S. informal economy.  The informal economy is a nice term for businesses that are illegal, or choosing not to report income and pay taxes, or business activity done on a barter basis.   

Our guess is it's growing.  

For obvious reasons, there's not a lot of data on the informal economy.  But given the steep decline in the number of Americans working in the formal economy, it's time to starting figuring out how to collect it.

Small Business Owners Supporting Romney

According to a recent survey by Manta, 61% of small business owners plan to vote for Mitt Romney. Only 21% plan to vote for Barack Obama.

This comes as no surprise.  Study after study shows that the majority of small business owners are Republicans.  Our own work over the years has been pretty consistent on this topic. We find about 60% of small business owners are Republicans or lean Republican.  

The Manta survey found that the key political issues for small business owners are health care (21 percent), tax policy (20 percent) and government regulation (16 percent).  

This is similar to the results of a recent NFIB study, which listed health care as the #1 problem facing small business.  Government regulation came in 5th and taxes 6th. BTW, this understates how small business owners feel about taxes - it is listed in 5 of the top 10 problems.  

Both parties try hard to look like they support small business.  But on the political issues small business owners care about (taxes and regulation), the Republican party is simply more aligned.  

We often interview small business owners that used to be Democrats, but switched once they started a small business.  We rarely interview small business owners that have gone the other way.