SMALL BIZ TEXAN

INTERVIEW WITH DR. JEFF CORNWALL - "THE ENTREPRENEURIAL MIND"

My August newsletter interview with Dr. Jeff Cornwall, the Jack C. Massey Chair in Entrepreneurship and Director of the Center for Entrepreneurship at Belmont University.  He is also the author of the popular business blog, The Entrepreneurial Mind. 

1. In your opinion, what (if anything) is different about this economic cycle and its long-term impact on small business? 
 

DJC: We are in uncharted territory right now.  This is not a typical cycle due in large part to policy decisions that have not recognized the importance of small business in our economy and the critical role they play in almost every recovery.  With higher taxes, more mandates, increased regulation, and weakening property rights, entrepreneurs are hesitant to take risk.  Because of this, I believe that the best case scenario is a long period of time with economic stagnation that could last for several years.  If the economy actually begins to heat up, we will likely enter a period of high inflation due to the current policies of the Fed and due to our sky rocketing deficits.  We could see inflation that has not been experienced in this country for generations.  Another possible outcome is one that would be caused by another shock, such as the one we experienced on 9/11.  Our economy is too fragile to absorb the impact of such a shock and the outcome will be another steep economic decline.

The good news for small business is that there are still opportunities out there.  But, it is essential to minimize risk – keep overhead low, pay down debt, and build up cash.  Prudent and calculated risk will be rewarded, as we are entering a period of entrepreneurial Darwinism.  Only the strong and well-managed businesses will survive any of the three scenarios I outlined above.

2. In your opinion, what has Texas done well to build/maintain its standing as a leading business destination? What has it done poorly? 
 

DJC: Keeping taxes low and protecting property rights have been key to the success of states like Texas.  The fact that Texas is standing up to the federal move toward socialism has enhanced its business-friendly reputation.

3. If cap and trade legislation passes the Senate as it was in the House, what impact will it have on entrepreneurship and small business?  
 

DJC: The impact would be devastating.  It would lead to a drastic increase in taxes and regulation.  With much higher tax rates the rate of entrepreneurial activity will plummet.  We have already seen this happen in other countries that have tried to implement Cap and Trade.

4. What impact would the proposed healthcare legislation have on entrepreneurship and small business? 
 

DJC: It would also devastate small business.  We have been presented with a false choice in this debate.  It is not a choice between capitalistic healthcare versus socialized healthcare.  The level of governmental intervention in healthcare and health insurance is what has caused the current “crisis”.  We need to deregulate healthcare payment, not hand over lock, stock and barrel to the same government that has created the mess we are in now.  The higher marginal income tax rates needed to pay for this will punish small business owners for any success they may achieve along the way.

5. In your opinion, is small business positioned to “lead the way” in an economic recovery or will the recovery come from someplace else over time? 
 

DJC: Entrepreneurs in America are always ready to lead the way in our economy.  My fear is that the roadblocks being put in our way may inhibit our ability to build the new economy.  What should be of concern for everyone in this country is that if entrepreneurs are not allowed to help rebuild our economy, no one will. 

INTERVIEW WITH KENNETH GRONBACH OF "AGE CURVE CONSULTING"

Kenneth W. Gronbach - Author of "The Age Curve: How to Profit From the Coming Demographic Storm"

1. In your opinion, what (if anything) is different about this economic cycle and its long-term impact on small business? 
According to Mr. Gronbach, small business is uniquely positioned for a “reinvention” of the business climate. Big business will struggle because they have built on the “cheap and deep” model on the assumption that the market will remain the same. As the largest generation of children ever born into our country is coming upon us (Generation Y born between 1985 and 2004) and appear to be “selection consumers”, baby boomers (born 1945-1964) who have sustained the current model are retiring at a rate of every 8 seconds. Researchers indicate that the bridge between the two (Generation X – born between 1965 and 1984) was too small at the critical mass to sustain the country in previous years and the substantial immigrant population (specifically Latino) filled the footprint.   Between the maturing and selective Generation Y, the established immigrant population, and declining baby boomers, small business creation should boom in future years. 

2. In your discussions with business leaders, what is the general attitude about the current business climate and the next five to ten years?
Mr. Gronbach quipped that he "had to do CPR" before a speech in Detroit recently.  Attitudes are just OK right now.  But the good news is that the United States is positioned well demographically.  We are the only industrialized country in the world who is still having children.  For instance, in the last 30 years, China has eliminated more than 400 million children - more than the entire population of the United States and Canada combined (more on China below).  If demographics and the vast informational knowledge of the coming generational tsunami is taken into account, attitudes are better.

3. As someone who has interacted with successful leaders of every age, can you compare and contrast the various generations (Boomers, Gen X, Gen Y, Gen Z) in terms of attitudes, beliefs, and other key qualities?
Mr. Gronbach compared (positively) the Baby Boomers and  Generation Y.  In his work, he has found commonality between the two in terms of beliefs, attitudes, and work ethic.  He indicated that nothing will drive the need for Generation Y to work hard "like the need to eat".  They'll start new businesses and find new ways to do things.  There is a leadership shortage that needs to be filled, in his opinion, and will be by a changing Generation X, the new Generation Y, and the emerging immigrant class.  Small business is definitely the place to be.

4. Competitively, how does our country compare demographically in terms of birth rates and anomalies with China, Russia, and others? 
As previously discussed, the United States is the only industrialized nation still having babies.  We also have our own resources.  In the work of other researchers he has visited with on this topic, China could potentially be on the cusp of disaster in several years because they have killed their labor force through one-child policies.  They have too few women and have created a "lopsided" demographic profile as a result.  Russia is one of the worst disasters on earth demographically.  They are losing significant population each year (500,000-1 million) through low birthrates and high incidences of early death.  Mr. Gronbach cites that a 16 year-old Russian male has about a 50% chance of making it to 60 years of age.  He commented that it would be a good time for Americans to visit Italy and many other European countries as they are in danger of supporting themselves for the long-term.  According to Mr. Gronbach, the European Union is trending Muslim and it will soon be the dominant culture in many of the countries.

ANOTHER REASON SMALL BUSINESS MUST LEAD

Happy Independence Day and special thanks to those who serve in our military. 

Small business leaders and entrepreneurs are well-positioned to lead the nation's comeback for many reasons.  We employ more than half of the nation's workforce and by virture of our living, understand the risks, rewards and responsibilities that make our nation great (and unique).  And according to this Rasmussen poll from earlier this year (via Chief Executive), no one has greater support with the American people. 

Favorable Ratings for Professions
	Fav	Unfav	Rating
Small Business Owners	92%	4%	+88
People Who Start Own Business	88%	12%	+76
Pastors and Religious Leaders	72%	22%	+50
Bankers	44%	52%	-8
Lawyers	41%	53%	-12
Stockbrokers and Fin Analysts	37%	56%	-19
Journalists	38%	57%	-19
Members of Congress	26%	68%	-42
CEO's	22%	73%	-51

Source: Rasmussen Polling

MY INTERVIEW WITH RAYMOND J. KEATING

From our Haley Nelson Associates June 2009 newsletter...

Mr. Keating is the Chief Economist at the Small Business and Entrepreneurship Council in Washington, DC.  For more information about SBE Council, visit the group's website at http://www.sbecouncil.org/.

HNA: If health care reform takes the form currently presented by the Obama administration and Congress, what would be the immediate impact on small business?
 

RJK: The impact would be felt by small business owners and their employees on several fronts. For example, new mandates and regulations would raise costs, and reduce competition and choice in the health insurance market. New government health plans would mean increased and/or new taxes. All of this intervention by government through more regulation, mandates and spending will mean diminished quality of health care. The bottom line is that there is no free lunch when it comes to government intervention in the economy. Small businesses and their employees will pay one way or another for increased government control of health care.

HNA: Could you describe the concept of "play or pay"?

RJK: The "play or pay" mandate means that employers either have to provide health coverage for their employees, or pay a tax so the government can do so. Either way, businesses face increased costs. The assumption behind this kind of mandate is that small business owners do not want to provide health care coverage for their employees. In reality, of course, many businesses simply cannot afford to provide such coverage. Government imposing a "play or pay" mandate does not change this economic reality. As a result, such a mandate will mean that many businesses will have to reduce other types of compensation, cut employees, cutback plans for investment and expansion, or simply go out of business.

 

HNA: The Senate Finance Committee recently released a list of potential tax increases to pay for the program.  Which, if any, would directly impact employers?

RJK: The tax hikes floated by the Senate Finance Committee as possible means of paying for health care reform most certainly would impact the entrepreneurial sector of our economy. In a recent analysis, I noted some problems with these measures:

• Limiting the tax deduction for employer-provided health care plans was one option. That, of course, could wind up increasing costs for employers or workers, depending on how it would be structured.
• Also on the list was limiting or eliminating itemized tax deductions for medical expenses. That wouldn't work out too well for individuals and families with high medical expenses.
• Health savings accounts - tax-free savings accounts linked to traditional, high deductible insurance plans - are the type of consumer-controlled measures needed to help redress the third-party payment problem in health care. Yet, increasing taxes on HSAs was in the mix.
• Assorted beverage taxes were on the agenda as well. Existing taxes on alcoholic beverages could be increased, along with a new tax on "sugar-sweetened beverages." That new tax would hit nondiet sodas, fruit and vegetable drinks, energy and sports drinks, iced tea, iced coffee, and flavored milk and dairy drinks. Those tax increases would raise costs for consumers and mean lost business - and along with it fewer jobs - for the various industries and firms targeted.

HNA: In your opinion, is it possible for private carriers to compete with a public health care program as is being proposed?

RJK: Given the power that government would wield over health care, it's hard to see how private carriers could survive against a government plan. Private carriers would face a wide array of mandates and regulations - including coverage mandates, plan design and operations dictates, as well as price controls - while the government plan would be subsidized courtesy of the taxpayers. In the end, that will mean enormous costs for taxpayers, and rationing of care for patients.

HNA: In your opinion as an economist, how might the concept of health care rationing benefit or hurt the quality of care available?

RJK: There is absolutely no upside to health care being rationed by government. It's important to understand this process. As government gets more involved in running and funding health care, costs will explode for two main reasons. First, neither the health care provider nor consumers have any reason to be concerned about utilization and prices. Second, politicians and government bureaucrats are spending other people's money, which is a surefire path to waste and higher costs. As costs mount, government responds by rationing care. That means politicians and their appointees will decide what kind of care is being dispensed and how quickly that service is provided. Long waiting lines are the norm, not the exception, in nations that have adopted socialized medicine, as are denials for certain treatments.

And make no mistake, the policies being discussed and debated right now would place the U.S. firmly on the way to socialized medicine.

THE CATALYST PROJECT

The more I hear and read about this idea, the more I like it.  Entrepreneurship comes from inspiration and perspiration with a healthy dose of mentoring thrown in.  Churches are a fantastic resource for this and a worthy host for such a forum. 

If you are in the area, swing by Trinity Episcopal Church.  A friend has advised that the guest list is outstanding and it should prove a great template for future events. 

SEARCH FOR AMERICA'S MOST PROMISING COMPANIES

Via one of my daily must-read sites, The Entrepreneurial Mind:

Forbes is searching for America's Most Promising Companies.  Forbes is using a free comprehensive self-assessment survey to determine how fundable an emerging company really is. All companies receive a free, 12-category qualitative assessment upon completion of the survey. Select companies however, will receive a spot on the list to be printed in Forbes, fast-track status for a funding term sheet with TVA Capital and its funding partners, along with other benefits.

The companies that Forbes is looking for are:

•       Less then 5 years old (Incorporation date)

•       Have sales less then $10M per year

•       Have less than 50 employees

•       Have assets less than $1,000,000

Click here for more information.  The survey ends June 30, 2009.