Sequestration Creates Another Headwind for Small Business

Last year, the management team for USA Inc., the largest “company” in the world, was unable to reach an agreement about very modest cuts in spending. So, the president suggested the “sequester,” an across-the-board cut in spending that was to be so unpalatable that Congress would never let it go into effect. He hoped it would force Congress to reach a more sensible plan to cut spending by about $85 billion annually. Of course, all the good stuff like Obamacare, Social Security, Medicare, Medicaid and other entitlement programs was exempt.

Well, no agreement was reached. Pres. Obama characterized it as a “meat-axe” approach and traveled the country telling us of unfed children, laid-off air traffic controllers, compromised airport and border security, reduced fire and police personnel, out-of-work teachers and more. During negotiations, Senate Republicans introduced legislation that would have given the president the flexibility to impose the cuts in more sensible places, but every Senate Democrat voted against it, protecting the president from ensuring the cuts were as painless as possible. So much for leadership.

All this has left small business owners in a funk. Only 15 percent expect business conditions to be better six months from now, while 33 percent expect them to worsen. And while 6 percent of owners view the current period as a good time to expand, 65 percent say it isn’t. Of those, 62 percent cite the weak economy as the reason, and a near-record 23 percent cite political uncertainty. This sad commentary on the lack of leadership from our management team indicates that Washington is generating enough uncertainty to prevent owners from expanding or hiring.

The larger firms in the economy are doing well. The stock market is setting new highs, and corporate profits are now at a record share of GDP. That half of the economy is doing well, due in large part to their sales outside the United States.

The small business sector is not faring nearly as well. Consumer spending domestically has been weak, and consumer sentiment is low, although it has improved a bit in recent months. Nineteen percent of business owners reported quarterly gains in sales, but 33 percent reported declines. Profit trends are much the same.

The sequester will slow the economy, especially since it reduces critical spending equally with less important expenditures. However, the headwind this produces won’t be nearly as bad as the headwind from the $110 billion tax increase, which happened when the payroll tax reduction was reversed.

The $85 billion in cuts will be meted out over 10 years. Having ensured that cuts will hit critical areas of government, as well as less important ones, Pres. Obama is likely to continue to blame Republicans for any distress that citizens experience. His solution is to raise taxes to pay for spending, not cut spending, and this will likely be the playbook until the 2014 elections.