“Small businesses are normally a major source of jobs but they have been particularly reluctant to hire lately because of weak sales and uncertainty about the pace of the recovery.” says this Reuters article, which is typical of a lot of reports on the U.S.’s anemic labor market. I happen to be involved in a small business, a Massachusetts flight school with about 30 aircraft, including two helicopters.
Let’s start with investment and bank lending. We have not invested in new aircraft or other capital equipment recently. Is it because the bailed-out banks won’t lend us money? I don’t think so. Most of our aircraft are between 2 and 11 years old. Airplanes can be operated safely and economically for at least 30 years. As evidenced by all of the 50- and 75-year-old planes that came to the Oshkosh, Wisconsin fly-in last month, even a 30-year-old plane may have quite a bit of life left. We will buy new engines and overhaul kits for our machines, but pay for those out of revenues. If we could not pay for the overhauls out of revenues it would mean that we were operating at a loss and that it would be smarter simply to close the doors. Our capacity is ample for the current customer demand. In fact, even if every other flight school in the Boston area were to shut down, our school’s existing fleet of aircraft is large enough to satisfy the total regional demand. Not everyone would be flying at 9:00 am on a prime summer weekend, of course, but everyone would be able to fly as many hours per week as desired.
Federal and state governments offer a lot of subsidies and incentives for businesses, or so we’re told, but we never have more than one admin person working the front desk at any given time. We don’t have qualified staff ready to go looking for government programs to tap into. We know how to serve private customers, but not how to get money from the government. This puts us at a disadvantage compared to big companies that can afford to spread the cost of a full-time “getting money from the government” employee.
A government that consumes a larger percentage of the GDP is a government that makes lobbying more fruitful. In a lobbying war, however, the small will inevitably lose out to bigger enterprises. For example, the Boston Red Sox, along with other professional sports teams, lobbied Congress and the FAA for years trying to get them to forbid banner-towing airplanes flying over stadiums during games. They did this in hopes of preventing anyone from advertising to fans other than themselves, thus enhancing their billions of dollars in revenue. The FAA refused to hand over airspace to private owners, but Congress forced them to do so after 9/11, arguing that a 3 nautical mile ban around stadiums was necessary for security. Because this taking of public property was done under the guise of security, it was sufficient to ban only banner towers; all aircraft were banned except for those owned or operated on behalf of the sports team. The security value of the ban is negligible. A terrorist in a jet would fly through the 3 n.m. ring in about 1 minute. There would be no time to evacuate the stadium. It isn’t even clear that there are procedures in place for FAA controllers to inform stadium owners that someone has violated this security zone and therefore there would be notification to fans that it was time to duck.
What’s the result of the government having grown a bit larger to serve the needs of the Boston Red Sox? Some additional air traffic controllers are required because their work has expanded from just separating aircraft from each other to also making sure that aircraft don’t impinge upon the new privately owned airspace. So all taxpayers become slightly poorer. How about the effect on small business? The banner towing guys have suffered a huge loss in business. Our flight school suffers a substantial loss in business because we can’t fly helicopter tours during games. We wouldn’t want to fly over Fenway Park, especially, but the 3 nautical mile zone covers nearly all of downtown Boston. We also need to pay staff to check the Red Sox schedule every time a customer calls wanting to schedule a tour. We’ve had tours where we ended up having to turn back to the airport because the Red Sox schedule had changed due to a rained-out game earlier in the week and games were added that did not appear on a schedule printed earlier.
You might think that we’d be doing well because the government has decided to put more money into education. The new funds, however, generally can only be used at degree-granting institutions. Once enrolled in a “bachelor’s of aviation” program, the spigots open up for the student’s tuition, housing, and food. This is great for established large colleges and universities because, even though they may charge 50% higher prices than our school, it works out to be cheaper for the student. Our prices are lower and our instructors are more experienced, which gives us a competitive advantage when dealing with privately-funded students. In a world where most of the new students are government-funded, however, we are inevitably out-competed by the big schools.
The bigger the government gets, the worse our small business does both in absolute terms and in terms of our competitive position. Anyone else out there running a small company (other than one set up specifically to contract with governments) with a different story to tell?
Many of my customers are small businesses who are dealing with the paperwork arising out of winning their first government contract. They typically do not have the capability to kill trees the way that larger government contractors can. Some have said they wouldn’t do it again, but I talk to them when their frustration with the paperwork is at its worst.
These first time contractors may be “competitive” in the sense that they underbid others because they underestimate the amount of paperwork involved. In the long term, they probably find it harder to compete with larger companies since they can’t carry the expertise necessary to churn out the paper.
Of course, many of my customers in the exact same situation are dealing with large private sector companies.
Mr. Greenspun, I first want to say I especially like your statement “A government that consumes a larger percentage of the GDP is a government that makes lobbying more fruitful. In a lobbying war, however, the small will inevitably lose out to bigger enterprises.” I’m not really into the small vs big government discussion, I’m more of an “effective government” type of guy, but your quote framed it very well because I think everyone can agree that we don’t need more lobbyists, much less most of what we already have.
However, your main point was about viability of small business in an era where there are many government policies in place that favor bigger and large business, multinationals, etc. I would like to put forward the reality that there are companies out there in the private sector (think of your “full time ‘getting money from the government’ employees” except in separate companies) that recognize this problem and are out there helping small businesses win contracts and funnel what the government is spending towards them. They do this by being knowledgeable about what various government agencies need and what their clients can provide so they can do some matchmaking (and some marketing) and also offer to do most of the paperwork.
This framework has many benefits. First, it is the symbiotic relationship of private sector helping private sector. The small business can continue to focus on what it does best, while another small business can help them grow by directing some money that the government was going to spend anyway towards it. Second, in many cases it can make the business more sophisticated by honing and/or expanding its capabilities, in addition to the value that government work can add to its portfolio of past performance that will be viewed by future potential clients. Lastly, a private company providing all the legwork of finding the contracts and doing the paperwork saves the original business valuable time, effort, and other resources, so it can be a very cost-effective arrangement.
One point I want to make about government contracts is that there is often a lot of competition that drives costs down and results in a value for the government (aka, taxpayers since it’s their money). There are also specific regulations and policies that favor small business because 1) the government must choose a small business for a project over a larger business if they are both relatively equal in terms of capability and price, and 2) there are actually many contracts that are exclusive to a specific business designation; these include minority-owned, veteran-owned, service disabled veteran-owned, small disadvantaged business, and Historically Underutilized Business (HUBZone). There is a common misconception, I think, that the government just arbitrarily throws money away and for inflated prices. I just want to say that from my experience this is not true, and that this is a good example of the private sector and the government working in tandem to help drive work to small businesses. It may not have affected you yet, but it may in the future.
@ Garlock
I work for a small business, and because a non-veteran, fully functional, white male owns the business and we are located in a town with mostly white inhabitants, we are discriminated against by government contracts. Have you ever bothered to try and get “help” from the Small Business Association? Every other word on the SBA website is ‘minority’ or ‘disadvantaged’. Those are classifications established by government for government. They are vote buying schemes. It’s crap.
We would love to buy some new equipment, but with the government sucking away all of our capital it makes little sense to risk viability on expansion. This whole myth of a lack of bank loans is well debunked in Phil’s blog post. It makes no sense to borrow money if you can’t pay it back, unless you’re trying to buy an overpriced home and want the taxpayers to cover the losses that the GSE’s FREDDIE and FANNIE take. We typically borrow during our off season to cover payroll because some of our products are seasonal, but the purpose of that borrowed money is to keep our cash reserves high so that we could grow and expand. With Dear Leader out there touting all these lending programs he wants to put in while he steals all of our actual cash, it just serves as a reminder that the man has never had to make payroll or buy a piece of capital equipment.
Please don’t pretend that you want a minimal government. No honest person could start off a post like that and then finish touting the greatness and efficiency of government…the most inefficient and wasteful entity that exists in America today, by a long shot.
Todd: Whoa. Tell us how you really feel!
The point of my original post was not to address the targeted stuff that government supposedly officially does for small businesses, but rather to open a discussion about the subtle and unexpected effects of a larger more powerful government. I’ve been kind of surprised at all of the ways in which bigger government has inadvertently made it more difficult for our small business to compete.
I run a small business up here in Canada. If you do R&D you can apply for SR&ED (pronounced “shred”) tax credit of 35%.
http://www.cra-arc.gc.ca/sred/
The program was once advertised as doing R&D in Canada at Mumbai rates 🙂
The forms are relatively simple to fill out and I have found that the government employees were very helpful assisting with the application. These types of programs are quite good because any business can apply for them and you do not need a lobbyist in Ottawa, which is good for small business.
But that’s the nature of the beast, Phil. Left alone, freely contracting individuals would agree to do something a certain way. When government comes in, it says NO, you can’t exercise your choice, you have to do it MY way or go to jail. This use of government force is the source of so many economic dislocations and so much destruction. Everything in the economy is interconnected; you can’t tinker with one area and not have effects that redound elsewhere.
It’s not just the problem of small business growth. Look at the crises in housing, banking, health care. The industries doing the worst are those MOST regulated. Why isn’t car insurance going up at 10% a year like health insurance? How come there’s no car loan crisis as there is with mortgages? Why do some people have to wait longer for health care at a hospital than animals at a vet? These aren’t coincidences.
I cannot say that our competitive landscape has changed due to bigger government, but I will say there is negative “bureaucratic factor.”
All lawmakers and bureaucrats must “make their mark” with legislation, reporting, programs, etc. In California there is a never ending stream of new rules and laws we have to comply with.
I have to employ an HR attorney to keep up with the changes and let me know what I must do to avoid penalties and lawsuits. One nice new one is that if we place an ad in the paper, and a Spanish only speaking person appears in our office with the ad, we are required by law to hire an interpreter to conduct an interview. We are not allowed to use his lack of English in our determination of whom to hire. Despite the fact that a person without English could not make any contribution to our company (a software business).
There are dozen of these zingers coming down the chute each year from the elected and appointed goofballs.
The endgame is that business move to “harassment free” states. It’s a pity.