Two economists–one for and one against the stimulus–sound off on why small businesses are getting a bad deal.

Often, economists can only agree to disagree, and on the subject of the economic stimulus, they are particularly divided. In fact, a few weeks before the American Recovery and Reinvestment Act of 2009 was signed into law, 200 leading economists lent their signatures to a full-page ad in The New York Times and Wall Street Journal decrying the proposed legislation. That same week, a letter supporting the bill was sent to Congress–also signed by approximately 200 venerable economists.

But when Entrepreneur spoke with Raymond Keating, chief economist of the Small Business and Entrepreneurship Council, and Jeff Rosensweig, professor of international business and finance at Emory University’s Goizueta School of Business, about the stimulus (Keating is against and Rosensweig pro), they thought in common: there should be more done for small business.

What are your thoughts on the stimulus package?
Keating: I’m against it because if you really want to get entrepreneurship and investment moving again, you need tax relief that’s not targeted and temporary. Investors and entrepreneurs need [permanent] changes that will really improve the profitability of taking risks in the expansion or startup of businesses.

On the spending side, I think most entrepreneurs understand that these resources the government is tossing around…don’t materialize from nothing. The economy would benefit from leaving those resources in the private sector rather than putting dollars in the hands of politicians and their appointees to decide where they are going to be spent.

Even economists who think this is a good idea will acknowledge that it’s just an effort to throw as much money as you possibly can at the problem and hope that something good comes out of it. Is it better than nothing? Yes. Is it enough to really get our economy moving? I would say no. It falls way short.

Rosensweig: I’m for it, but with caveats because of its approach to small business. Without a stimulus, I fear our economy could slide into the abyss. I spend a lot of time speaking with business owners, and I just don’t see a lot of growth occurring. No one is hiring to offset the downsizing.

In normal times, I wouldn’t like to see a lot of government spending, but these are far from normal times–we need anything that can create jobs. I also think it’s important to balance tax cuts with spending increases, and there is some of that in the stimulus.

What are these caveats?
Rosensweig: What worries me is that the tax breaks for small business are temporary. Small business has been ignored in the bill, and I think the criticisms of many of us did lead to a better focus on small business, but I still think the package could go further in letting small business immediately expense all their capital expenditures and making that more permanent so that entrepreneurs see less risk. People are held back not just by the uncertainty of the economy, but also the uncertainty of tax policy.

Have you seen the impact of any “stimulus” yet?
Keating: Unfortunately, there probably won’t be an impact for the average business owner. There’s a lot of talk around about how this money’s going to be spent wisely, but  what generally happens is a great deal gets wasted.

From an economist’s perspective, you just have to understand the incentives at work: If you’ve got a business owner trying to keep things afloat, they have every incentive to keep a close eye on things and keep costs under control and to make the best investment they possible can. If they fail, they get punished and they go out of business.

In the public sector the incentives are completely different. In the public sector, it’s not your money; it’s somebody else’s money. The spending is driven by political and special interests. You’re not going to get the best bang for your buck by any means. And the other thing is, when you fail in the public sector, it seems you usually wind up getting more money for it!

Rosensweig: The stimulus hasn’t hit yet. I’m not seeing jobs created here, even in a top 20 business school. We’re very worried about our graduating students getting jobs, and people who have job offers are having them rescinded. In past years, most of our students already had a job lined up [before graduation]. After making a big investment in an MBA, it really hurts. And it’s even worse at the undergraduate level.

But the stimulus still costs taxpayers.
Keating: Yes. For most entrepreneurs and small business owners, the benefits are going to be nil. But a good number of them are going to see taxes increase from the proposal President Obama has put forward. You just have to worry about how we are going to pay for all of this spending and debt.

Rosensweig: It’s costing almost all American taxpayers, even the ones who are getting the tax cut in the stimulus bill. That’s a tax cut now, but the gross federal debt is going to go from $11 trillion now to $18 trillion in four to five years, and that means there’s going to be a lot of interest paid down the road.

Small-business owners will face a two-edged sword. On the one hand, I want serious tax cuts for small business so they can help get the economy growing. But on the other, many have taken risks and worked hard enough that they won’t be the pit bull getting tax cuts, and later on they’re going to be paying more income taxes, more social security taxes, maybe even sales taxes or consumption taxes.

But it’s the best we can do right now. I think the only thing worse … is what President Hoover tried to do, which was to balance the budget at the time of a deep recession. That was a very effective way to fall out of the recession and into the Great Depression.

What measures do you think could improve the bill?
Keating: I think we would have some certainty if our elected officials said, “Those tax increases that are looming at the end of 2010? Forget about those. The tax measures that were passed earlier this decade are permanent.” That would be number one. Then make estate taxes go away, bring tax rates down for businesses and make expensing [allowances] an option for all businesses.

Rosensweig: I think we need some way to stimulate job creation in the private sector as well as the government. For example, we raised the minimum wage–which is good–but the minimum wage could make it hard for some people starting a business to hire unskilled workers. There should be ways to [help] an entrepreneur in a bad economic environment subsidize the difference between the worth of an unskilled worker and a decent minimum wage for a hardworking person.

What I mean by that is that … the actual entrepreneur who hires people should get a subsidy because there could be a gap between what employees need to be paid and what the entrepreneur can pay. Obviously that subsidy should go away in a couple years of being on the job because the person can learn and become more productive and be able to justify earning the wage, but the main thing is to build up work habits.

I think another option … is for the government to provide a lot of free retraining of displaced and downsized workers so that they can [learn] the specific skill sets that an entrepreneur might need. So a business owner can go into their state’s Department of Adult Education and say, “I can grow my business if I can find people who can do X. If you can find people and you train them at your expense, I’ll hire them.”

What is the Small Business and Entrepreneurship Council doing to push for changes? 
Keating: We’re working on all fronts to get the word out and lay out the economics of the situation, the impact that it’s going to have on small business, entrepreneurs and investors and try to make the case of what does work and what doesn’t work.

We raise questions about some of the concerns we have about the President’s budget and [economic policy]. Should we be raising taxes on capital gains or should we be looking to provide tax and regulatory relief so entrepreneurs can grab and build businesses and create jobs?

How open is the administration to amending the legislation to allow for some of these improvements?
Keating: In the short run, these measures will not come to pass. But I think it’s critical that these ideas stay in the policy mix. When we see that our economic recovery is lackluster and we’re losing our competitive edge in so many areas, people are going to hopefully come to realize … what we’re trying right now isn’t working. Then they’ll ask what we should do, and having these ideas in the debate means people can say, “That makes sense.”

Rosensweig: I think the administration is very open to changes. President Obama knows that someone of his race being elected will leave a wonderful legacy, but that he will ultimately be judged on whether the economy turns around; and therefore he is open to doing whatever it takes. Personally, I think he’s open to learning more about the small business job-creation machine that has promoted the American Dream.

When the stimulus finally plays out, what do you hope will happen?
Keating: I think there’s an “at-the-very-least” scenario. The best case is that the stimulus doesn’t do any damage. There’s just a massive increase in size of government, and that tends to not go away.

I do expect that even with a lot of problems, the economy will start to recover late this year. The problem is it’s going to be a recovery that doesn’t feel like much of a recovery, and there’s still going to be some real problems going forward: higher spending levels on the proposed budget, looming tax increases, questions about cap-and-trade in energy policy, healthcare. Unfortunately, the list is far too long.

Rosensweig: I’m hoping that we can go back to roughly where we were, which is with most investment decisions and most job creation and most of the price-setting in the economy done by the private sector.

However, the shenanigans on Wall Street mean there’s going to be more regulation for the foreseeable future. The important thing is that the government steps in because it’s needed, but then gracefully steps out of this when the economy is growing again. The U.S. can only succeed in this century driven by private-sector initiative.

What I’m afraid now is that the business cycle and production are L-shaped. We’re coming down very rapidly. Let’s say we hit the bottom in the fourth quarter. I don’t see a rapid rebound–more of a muddling along the bottom, slowly rising in 2010, and well below average growth in 2011. This means continued strain on entrepreneurs and those heavily indebted, and it also means the job market is going to be a very difficult place for jobseekers for quite a number of years.

Do you have a parting message for readers?
Keating: Sometimes people like to separate entrepreneurs and small-business owners from investors and capital markets. It’s critical not to do that because for small business owners and entrepreneurs, the biggest challenge they face is access to capital.

They need those investors willing to take the risks and put up the money to help their businesses to start up and grow and create jobs and all those things we want to happen.

If people with resources to make investments are seeing signals on all fronts that there’s a major shift in [big] government … it just feeds the uncertainly and turns around and affects small business.

Rosensweig: Every economist … knows that what makes the American economy go is the job creation thanks to entrepreneurs. I think one thing that might appeal to President Obama and Congress is that small business is a great and fair creator of opportunity for diverse Americans. Women and minorities have often had great opportunity to grow and to help their families … and to get started on the capitalist American dream.

I think if the Obama administration and the Democrats in Congress realize that, they’ll realize that small business is a way to reach their social goals as well as their economic ones.

http://www.entrepreneur.com/money/article201932.html#ixzz0JDAlfAR9&D

Flexibility of the little guy is king during a recession. Small companies and entrepreneurs have an opportunity to be flexible and move quickly. Large companies with multiple layers of decision makers and share holders are not able to move as quickly reacting to swift changes in theirs communities.

Our stock markets today are proof positive that smaller healthy companies have the agility to survive. Stock values of big companies continue to fall while smaller company stock begins to soar. It is a good time for entrepreneurs because the rules are changing and their audience is growing because investors that once looked primarily at the big companies now have the incentive to look at them.

Not everyone has the same experience during a recession. For example a 3 percent drop in aggregate income does not mean that peoople’s salaries with drop by 3 percent. Unfortunately, some will lose their entire paycheck, others will remain the same remaining at the status quo and then there are the fortunate few who will gain.

If you look back to during the 80’s when we experienced our last deep recession you will find that many prosperous companies were born during those years. Those that dreamed of their own business, a new product or service had a perfect time to test fulfill their dreams because many were unemployed themselves. Their incentive? Their passionate desire to jump in and give it a go.

The meaning of an entrpreneur is one who takes risks to create a business. An individual who looks for opportunities amongst the weeds. It is not easy but these times do present opportunity to act immediately on ideas and win.

If one looks around you will see that practically everything is on sales. Airline ticket, furniture and even Botox. If an entrepreneur wants to open a store, rent is more affordable then ever, if you are needing employees people are looking for work at lower wages and more businesses are considering marketing collaboration relationships.

Entrpreneurs are helping us to round the cycle to better times ahead.