NFIB

NFIB's Chief Economist Testifies on Small Business Economic Recovery
10/10/2001

Testimony Of William Dunkelberg
Chief Economist
On Behalf Of
NFIB: National Federation of Independent Business
Before
Committee on Small Business
Regarding
Small Business Economic Recovery
October 10, 2001

Thank you Chairman Manzullo and Ranking Member Velazquez for the opportunity to testify before you today about ways that we can encourage small businesses to grow in light of the current economic climate and the terrorist attacks.

A determination of what to do to assist the U.S. economy must take into consideration several important factors:

(1) The U.S. economy has been slowing since mid-2000. The major cause of this slowdown appears to have been the very strength of the economy that produced investment spending that reached 20% of GDP, and that produced a series of record years for vehicles, housing and consumer spending in general. With "too much stuff," a pause to absorb this production was inevitable.

(2) The large budget surpluses produced by the economy were slowing economic growth. A commitment to hundreds of billions of dollars of "fiscal drag" for the indefinite future was bound to contribute to a slowdown.

(3) The direct impact of the terrorist attack was not large relative to the assets and productive power of the U.S. economy. However, our response to the event (a shutdown of the airlines system nation wide and the resulting interference with commerce) has spread the economic impact of the event nationwide. Discretionary travel has been curtailed, trucks are delayed delivering their loads, destination cities have empty hotels, convention centers and restaurants. Money is spent "at home", but the distribution of spending has been alternated, creating dislocations across the country.

(4) The psychological impact of the event on U.S. consumers is not yet clear, but it has disrupted normal flows of spending in the economy. If we become collectively more cautious and actually reduce overall spending, growth will be slowed.

The most recent NFIB survey of its membership (over 600,000 member firms) illustrates the decline in confidence and the resulting change in spending plans (hiring, capital spending and inventory investment). The outlook for real sales growth and for growth in the economy were seriously damaged. Related to this loss of confidence and increase in uncertainty, plans to increase employment plunged and capital spending plans reached historically low levels. "Normalcy" will overcome this eventually, but it is not clear how long this will take. Certainly if the "war" stays overseas, this process will occur at a much faster rate than would be the case if there are more domestic terrorist attacks.

 

PRE AND POST SURVEY RESPONSES TO THE SEPTEMBER MONTHLY NFIB SURVEY OF BUSINESS OWNERS
	Low 80-82	AVG YTD	AUG	Sept. 1-11	Sept. 12-27	Change
Plan to Increase Employment	- 8	13	18	15	6	-9
Unfilled Job Openings	8	28	30	27	22	-5
Capital Spending Plans	20	32	28	31	25	-6
Inventory Investment Plans	-15	2	2	3	- 1	-4
% Reporting Inventory Too Low	-10	-4	- 5	- 5	- 4	1
Expect Easier Credit Conditions	-31	-5	- 4	- 8	- 8	0
Now a Good Time to Expand	0	12	12	13	8	-5
Expect Better Business Conditions	-37	9	25	21	10	-11
Expect Higher Real Sales	-23	14	18	13	- 4	-17
Earnings Higher in Past 3 Months	-40	-22	-13	-24	-23	1
Small Business Optimism Index	80.1	98.5	101.5	99.2	94.2	-5
Credit Easier or Harder		4	3	8	7	-1
Raised Worker Compensation		31	30	25	26	1
Inventories Increased		- 2	- 1	- 7	- 6	1
Raised Average Selling Prices		9	7	6	4	-2
Number of Respondents			608	240	260

(All data are seasonally adjusted; figures are net percentages of firms, the difference between the percent giving a "favorable" answer less the percent giving an "unfavorable" answer)

The economy has already received a strong dose of stimulus: (1) 9 Fed rate cuts and the accompanying increase in liquidity; (2) falling energy prices; (3) a first round of tax cuts; (4) increases in government spending from the last budget round. These changes all take time to impact the real economy (employment and growth) and have barely had time to do their work. The stimulus delivered has been damped by the large overhang of investment in capacity (especially in several industries like telecommunications and technology) and a large accumulation of "stuff" by consumers (along with the associated debt). This means that the response to lower interest rates will take time under the best of circumstances.

Running a surplus in the government budget will slow economic growth and its contribution to solving the Social Security dilemma is debatable. Thus, it makes good sense to stop draining purchasing power out of the private sector. Just how to move toward fiscal balance now seems to be the issue. One approach is to return the surplus to taxpayers in small "lump sum" payments (the fairness issue). An alternative approach is to return the surplus via tax rate cuts with the goal of stimulating growth, a proven approach over the decades beginning with President Kennedy's cuts through the reductions recommended by President Reagan. Growth in real output is the only way to address the Social Security dilemma in the long haul and to create more jobs and higher income along the way.

Small business is the major job generator for the economy. Tax cuts that infused money into the small business sector would certainly make it possible for small business to retain more employees and to support the hiring of new employees. Such provisions as "expensing" would provide small and growing firms with the funds to keep their firms running and growing, creating new jobs. Or, the cost of labor could be reduced by lowering the social insurance taxes paid by firms (and by workers as well). These types of reductions can have an immediate impact on the economy and jobs. It certainly makes no sense to raise the minimum wage at a time when we are trying to make employees more attractive to firms. Being compelled by law to pay more for the same amount of work will not help small business and will not contribute to job creation. A reduction in social insurance taxes or in marginal tax rates will immediately put more spending power into the hands of consumers and employers.

Regarding capital markets, credit has been widely available and getting cheaper. The average rate paid for short-term money was 8.1% in September. There was an increase in the percent of firms reporting their last loan "harder" to get, before and after the terrorist attack. But, only 3% report credit availability as their most important business problem, 35% reported all credit needs met (35% report borrowing on a regular basis), while only 7% reported difficulty. If banks become "tighter", loan guarantees may help (particularly in New York) but otherwise the capital markets are serving our small businesses well.

Far less useful are government spending projects which take far to long to get started and tend to focus spending too tightly (roads and bridges), putting a strain on resources in localized areas and wasting too much of the funding in haste. Enlarging the size of the government budget is not a promising way to assist the economy. Only the private sector can create jobs. Government jobs must always be financed from the pocketbooks of private sector workers, siphoning resources from the sector that produces real economic growth and destroying private sector jobs to support the government spending.

If the objective is to deliver a quick, widespread stimulus to the economy, then tax cuts are the way to go. There is no wasted overhead cost and the impact on the finances of consumers and small business is virtually instantaneous. Running a surplus when the economy is slowing or actually in recession makes no sense. Simply give the money back to the taxpayers who earned it and return the funds in a way that will contribute to the longer term growth of the economy. The twin goals of economic policy are (1) high employment and (2) low inflation and price stability. In spite of the current weakness, 2001 will prove to be one of the best employment years in history, with low inflation. The U.S. economy does not appear to be in serious trouble, but a policy assist will certainly be appreciated and rewarded with stronger growth as we move into 2002.

Thank you again for the opportunity to testify and I would be happy to take any questions you might have.