Do Governments Really Care About Small Businesses, Or Is It All Hot Air?

With all the rhetoric by the presidential candidates regarding small businesses during the 2008 campaign it is only natural to ask "Do governments really care about small businesses, or is it all hot air?" The answer to this question is an unequivocal yes, they care. It is perhaps more important to ask why.

Governments have a substantial interest in small businesses. A simple web search engine query will generate a plethora of web links to state and federal government resources available to small businesses. Two notable federal government sites, www.business.gov and Small Business Administration contain volumes of information to help start-up and ongoing small businesses with topics ranging from sales and marketing, to import and export, and workplace health and safety issues. The latter of these two websites promotes the activities of the Small Business Administration (SBA). The website provides access to financial assistance, business and marketing planning, SBA sponsored events and seminars, and links to resource partners providing mentoring and counseling to small businesses. States provide online access to resources such as forms for incorporating businesses, business entity name searches, and online business guides to assist with business start-up and relocation. These state and federal resources amount to much more than hot air. What is truly important is why governments care.

Governments care about small businesses because they create jobs and tax revenues. This is evident in the rhetoric of both candidates. Barack Obama advocates increasing taxes on upper income earners and reallocating income to lower-income consumers. He theorizes that lower-income consumers will use income transfers to purchase goods and services from small businesses who will respond by expanding and creating new jobs and tax revenues. His opponent during the election, John McCain, advocates tax-cuts to all taxpayers to provide lower wage earners more purchasing power, to provide small businesses more capital to use in expanding their operations, and to create more overall tax revenue. Mr. Obama's approach professes that entrepreneurial decisions to invest and expand are reactive to consumer actions, and that income transfers to consumers will spur investment and job creation by small businesses. Mr. McCain's approach indicates a belief that entrepreneurial assessment of risk and opportunity work hand-in-hand with capital availability to create innovative products, to influence consumer actions, to drive the economy, and to create jobs and tax revenues.

Both approaches view small businesses as a major conduit for producing jobs and tax revenues. Through their proposals these candidates provide a strong indication that both the next administration and its opposition will really care about small businesses.

Is Free Enterprise Dead?

We have seen extensive government intervention in free enterprise over the past few months that have surpassed any other by our government since the 1930s. In the past few months the federal government has had to act like a bank because the credit market fell on its face. The loan extended to the auto companies this week is a direct consequence of these adverse market conditions. This intervention, and the poorly executed financial industry intervention, are necessary to rescue the economy from the failing housing, finance, and auto markets. Does this signal the death knell of free enterprise? That of course depends on your view of “free enterprise”.

If you are a free enterprise (“laissez faire”) purist then free enterprise is dead. It started to decline with anti-trust and child-labor laws 100 years ago. It hit its death bed with the new deal and legalized unions in the 1930s, and has certainly passed on with the federal government nationalizing banks and “bailing out” the auto companies. If you subscribe to a view that free enterprise is primarily a means for providing citizens with economic well-being, with private control and profits serving as ways to measure accomplishment of the primary goal, then these government interventions are a matter of course, necessary to assure that the economic needs of the citizenry are met. In that case the free enterprise system is alive and kicking. Apparently President Bush and President-Elect Obama share this view. Bush stated that he would not “let the economy crater to preserve free enterprise” and Obama has advocated heavy government intervention in the economy throughout his campaign and transition to the presidency.

As an advocate of fiscal conservation (“small government”) I have always viewed a “pure” free enterprise system as an ideal that we should at least attempt to emulate as closely as possible. There are a number of reasons why I continue to harbor this view.

Human-beings are self-interested. Profit-based free enterprise provides us with an incentive that feeds that self-interest. The free-enterprise system has also been the primary engine behind the development of the greatest economic market in history, bringing prosperity to the greatest number of people in history. Government-run economies, such as those in the Soviet-block, have largely failed. Even China’s recent success has been due to the infusion of capitalism into its economy. Lastly, government only when necessary means a freer society.

On the other side of the coin, the profit incentive can run amuck with greed. Governments have to intercede to control the greed factor. Anti-trust, child-labor, stock market, and even workplace safety regulations and labor union legalization were all government interventions instituted because of inherent greed in the free-market system. Without these interventions the social goal of economic well-being is arguably realized for relatively few at the expense of many, whose freedom is left in the hands of those who control capital.

The last, and possibly most compelling argument for government intervention in free enterprise, is the fact that the economy is fully globalized now. Other governments intervene in it. We must do the same or our industries will be placed at a competitive disadvantage, a la the auto industry.


In order to stay as close to a pure free enterprise system as we can, we must persuade our trading partners to do so as well. In any event our government needs to create a level playing field for our companies in this world economy. Free enterprise is not dead. It has simply gone global and is not subject to our unilateral control.

Should the Government Rescue the Auto Industry?

We’ve heard a lot of arguing back and forth about what the government should do about the auto industry collapse. The political left and middle-left want extensive government aid to preserve the auto industry and millions of connected jobs. The right and middle-right argues that aid to these companies will pollute the free-market system and that any return on investment for taxpayers is questionable.

The argument for assistance is that there will be a cascading effect on the economy if any of the domestic automakers go under. They further argue that we need to preserve heavy manufacturing in the U.S. as a matter of national security. These contentions are plausible. The opposition to auto industry aid does not dispute these points.

The opposition contends that any aid to the auto industry will amount to government picking winners and losers in a free market economy; that we will be nationalizing/socializing what should be private industries; and that the auto companies probably will not recover so there will be no repayment of these multi-billion dollar loans back to taxpayers.

There is some truth to these points. Government intervention will have an effect on the marketplace; however, the marketplace has been “polluted” by government intervention for more than a century. Ever since child-labor laws appeared we have evolved into a hybrid free-enterprise-socialist market. With the acceleration of globalization over the last 60-70 years this hybrid economic system has become even more pronounced. The only way to undo this is to create a level playing field both nationally and internationally.

On a national level we need to make our “unionization” laws uniform. We should start with “right to work” vs. “union shop” issue. If every state was either "right to work", or every state was "union shop", we would not be seeing the clearly adversarial relationship between the southern republican senators representing “right to work” states and the senators in “union shop” states where the autos are heavily located. We could then act as one nation with a rational policy toward global economics. If “right to work” is the direction, then government would need to provide certain basic protections for the labor force to assure that management would not act in the manner that led to the creation of unions in the first place.

On an international level the U.S. government must either match the level of government assistance and intervention in the market that other governments provide, or we must negotiate enforceable trade agreements that eliminate or make these interventions internationally uniform. I’m talking about interventions like industry subsidies, currency manipulation, employment benefits, and trade restrictions. For example, much has been made of the compensation disparity between the U.S. companies and the foreign manufacturers. Those countries’ governments provide much of the health care and retirement benefits that cause the differential. Our government must either match this level of intervention or negotiate agreements that eliminate those government interventions globally.

The opposition to a rescue correctly states that taxpayers will not see a return on investment if we provide aid and then continue our trade policies as they are. These and many other companies will not survive, unless government acts to solve these pervasive underlying problems with global and domestic trade.

Is the UAW Responsible for The Automotive Collapse?

The UAW has been a favorite whipping boy of both the press and Republicans in Congress. Every time I turn on the TV or read a news report it seems that another pundit, politician, or member of the press wants to accuse unions of kidnapping the industry, or demands that they make more concessions. To understand the UAW’s role one must examine their past relationship with the domestic auto companies.

The UAW has succeeded at negotiating with the big 3 over the years to further what it saw as its members’ best interests. It used its striking leverage to coerce lucrative contracts from the auto companies. One can argue that the union, like any other supplier, had an obligation to engage in fair dealing which would include considering the long-term impact of driving payroll and legacy costs (retirement benefits, etc.) to non-competitive levels; however, this is not something that a labor union would traditionally concern itself with. One could also argue that the management of the auto companies is charged with looking out for their companies’ long-term interests, given the fact that company officers act as fiduciaries on behalf of the company. This argument seems more plausible. The companies themselves are in the best position to assess their competition and long-term interests.

Auto executives have been heavily compensated with near-term incentives based on near-term profit. They have been willing to agree to concessions that preserved their profit machine and near-term incentive based compensation. Conceding to union demands to avert a strike and the loss of near-term profits that would negatively impact their compensation plans was much more attractive than addressing the long-term interests of the industry. The legacy costs that auto executives frequently complain about to explain their inability to compete with foreign transplants are an example of the impact that management’s ignorance of long-term industry interests has had.

The problem with the foreign transplants is truly a “right to work” vs. “union shop” (mandatory union membership) issue. The transplants are located mostly in “right to work” states, while the domestic automakers are not. This means that the foreign transplants are largely able to avoid the type of dysfunctional relationship that has existed for decades between the domestic automakers and the UAW. I believe that employees have a right to be unionized, if they so choose. I also believe that unions should compete with other available labor in a free market economy. In other words I believe that “right to work” is the way to go, not “union shop”. I don’t say this lightly.
I appreciate the fact that unions have much to do with the creation of the middle class in this country; however, they must compete like everyone else in a free market. My own personal philosophy aside, this problem doesn’t go away unless there is national uniformity (all “union shop” or all “right to work”).

It has been asserted that the big 3 are making products that are inferior to their competition. This idea has been largely debunked. As a person who owns four Fords, I can attest to their high quality. I have owned two of these cars, both Taurus’s, for 8 and 10 years respectively, with no serious repair issues and minimal maintenance. Industry publications consistently back this up. If anything, company management is guilty of failure to get this message out. The workers have done their part.

So is the UAW at fault for the auto collapse? It has to shoulder some of the blame, which lies in many places. Many changes are required, including additional union concessions.

Why are double standards being employed in Government Management of the Economic Crisis?

Many have cried foul over the double standard being employed by the federal government regarding the various requests for financial assistance by financial and automotive companies. The U.S. Treasury Department and the Federal Reserve came to Congress kicking and screaming for funds to rescue the financial industry and walked away with TARP. They handed over hundreds of billions of dollars to the financial services industry, free of any real oversight. The U.S. automotive manufacturers came in and asked for assistance that amounted to a small fraction of TARP and were greeted with lectures on fiscal responsibility and flying in private corporate jets.

The reasons for this double standard can best be explained by examining the institutions and people involved in this “crisis management”.

The first to be examined is U.S. Treasury Secretary Henry Paulson. Paulson is the former CEO of Goldman Sachs, a major Wall Street player. While at Goldman, Paulson succeeded in persuading the SEC to exclude major investment houses (such as Goldman) from a requirement to hold reserve capital in order to minimize risk exposure. Many feel that this regulatory relaxation is a major factor in the current meltdown. Paulson received a large payout when he left Goldman Sachs. It’s fair and reasonable to conclude that Mr. Paulson’s eagerness to “bail out” the financial services industry is merely action to take care of his own, particularly in consideration of the fact that he participated in deregulatory actions that led to the current crisis.

While the Federal Reserve is not being run by an individual who is obviously part of the financial “in-crowd”, it is owned by members of the financial services industry (it is not a government agency in the true sense). Its chairman’s and board members’ terms span multiple administrations and Congresses and their decision-making is only subject to periodic government review. Its bank shareholders receive a dividend for their stock holdings and these shareholder banks are its customers.
To say that these banks do not influence the Federal Reserve, as the Federal Reserve itself suggests (see their FAQ page) is disingenuous. The Federal Reserve did nothing to prevent the current crisis. In fact, former chairman Alan Greenspan’s monetary policy arguably made a significant contribution to it by growing the real estate bubble that has burst.

The Congress is knee-deep in this mess as well. It not only passed the financial deregulation in the 1990s, but stood by while deregulation was furthered by the Bush Administration. This occurred on both sides of the aisle.
Those who had the power to prevent this, such as Representative Barnie Frank(D-Ma.) and Senator Christopher Dodd(D-Ct.), are among those who acquiesced by allowing institutions such as Fannie Mae and Freddie Mac to run aground by granting senseless mortgage loans to people who didn’t come close to qualifying for them, despite warnings and calls to action. They obviously felt a need to rectify their own inaction. Their haste to do so is evidenced by the absence of any real oversight in the TARP program.

None of these entities, other than those congressional delegations from states with a heavy domestic auto presence, have any real connection with the auto industry. Having already been burned once by TARP, Congress has no trouble holding the big 3 autos to the fire; the Treasury Department doesn’t have any good old boys to protect; and Congress, reading the polls, acts like a kettle calling the pot black by lecturing these companies about fiscal irresponsibility. The irony in all of this is that the auto companies would be going to the banks to get the loans if the banks were loaning, as was intended with TARP.

Are the U.S. Auto Companies Receiving Fair Treatment from the Press?

We’ve all been watching the press coverage regarding the auto industry request for financial aid from the federal government. The press, particularly the New York media, has gone to great lengths to place the auto industry, its unionized workers, and the rust belt as a whole, in as poor a light as possible.

First, the New York media have gone the extra mile to paint the management of the companies as ignorant buffoons riding on private corporate jets; the unions as conspiring to ruin the American free enterprise system; and the entire U.S. auto industry as no different from Airlines or other considerably smaller industries that have used chapter 11 bankruptcy to reorganize.

ABC's New York based “Good Morning America” went to great pains to expose the private jet use by the auto CEOs. “Good Morning America” never provided any such coverage regarding any of the Wall Street entities that have received federal assistance, despite the fact that CEOs of major corporations commonly fly private due to their extremely busy schedules.

Fox News continuously derides the unions as a root cause of the industry’s problems. Never once have I heard them state the truth. Management has been complicit with the unions because avoiding strikes always guaranteed a profit. Until very recently, there was no “near term” incentive to stand up to union demands that rendered these companies non-competitive. Unions will try to get what they can just like anybody else.
It’s up to management to look further than the period of time it will take to realize their own fat bonuses and cushy retirements, to make sure that long term company interests are preserved.

Fox News has repeatedly promoted the idea of bankruptcy, citing that other industries, such as the airlines, have done the same and come back. What they leave out of their implicit editorializing is the fact that these industries do not impact 1 in every 10 U.S. jobs and do not sell a consumer product that is the second largest purchase that most of us make. These facts render chapter 11 bankruptcy out of the question. People will not buy cars from a bankrupt company.

These New York based media outlets have never attacked the New York based Wall Street “bail out” like they have attacked the automotive request for a loan. Notice that I do not refer to the auto assistance as a “bail out”. The auto companies are freely agreeing to serious conditions (“strings”) on their loan requests. In fact, the main reason they are approaching the government is the fact that the banks that were bailed out in October and November (with little or no strings attached) never loosened up credit despite that expectation from the federal government and the public! You hear very little of this from these New York based media outlets. Would these outlets act in the same manner if Detroit were the nation’s financial center?

The influential New York media outlets, including print media such as the New York Times and New York Post, need to exercise more care in their editorializing/reporting. They are dealing with real people with real jobs that are making things we need, with families to support; not businesses that push paper at an interest rate and act only in their own interests, even when they have their hands out.