We were having a decent discussion on the Larry Kudlow show tonight when Larry and Ron Kruszewski had to go all taxes and regulations on me.
I’ve always thought that neither the logic nor evidence provided much support for that claim, especially compared to…oh, I don’t know…the worst demand slump since the Great Depression!
When something changes, in this case, optimism or confidence among small businesses, you first look for something else that changed. Did taxes go up in the recession? To the contrary, the Recovery Act cut taxes by almost $300 billion and many more tax cuts followed (many, like equipment expensing and the HIRE Act—an employer-side payroll cut—targeted directly at small biz).
Did regulation increase? This is a cue for the small biz lobby to fret about the Affordable Care Act, and I have heard actual business people raise legit concerns. But the Act exempts small businesses (with less than 50 employees) from the employer mandate.
This is not a comment about whether taxes and regs are at some optimal level. Certainly they’re too high for some people’s liking. But they haven’t changed. What’s changed is a housing bubble that burst and whacked the stuffing out of over-leveraged consumers. (When trying to understand what’s going on in this economy, never forget that it is 70% consumption—in Europe, that share is about 55%…very big difference.)
So that’s the logic. What about the evidence? The most recent National Federation of Small Business Confidence Survey starts out like this:
“The proximate cause [of the decline in small biz optimism] is the fact that 1 in 4 owners still reports weak sales as their top business problem. Consumer spending is weak, especially for “services,” a sector dominated by small businesses.”
To be fair, in plowing through the data, I did find a smidgen of evidence to support Ron and Larry. The second figure shows that the share of respondents citing poor sales (i.e., weak demand) as their biggest problem soared in the recession and the series remains at the highest levels in the charts. The tax series is by no means elevated, sitting right within its historical range.
The first figure, however, shows regulation on an upward trend, so there’s something there. But it’s about back to where it was in the latter 1990s, while the “poor sales” indicator is still up in uncharted territory.
So, if must cite regulation and taxes, don’t cite taxes, and please put regs in line well after weak demand.