America Loves Small Business

There’s little doubt that America loves small business. Unlike much of the 20^th century when the nation was fixated on the adventures of large corporations, over the past 20 years it has all been about entrepreneurs, venture capitalists and the proliferation small business. In fact, since the roaring economy of the 1990s and the incredible growth and success of businesses such as Google, Apple, Oracle, Amazon, Starbucks, Cisco and Biogen, politicians and economic pundits alike are quick to speak on behalf of small businesses. For the premise being what is good for small business is good for America.

We have been told that the majority of jobs created in our economy each year are created by small businesses (which is true); and as a result we are told that anything that may put a damper on the growth of small businesses is a “job killer.” Whether it is policies regarding finance, economic development or taxes, you can count on a politician or a trade group representative speaking with confidence about what is best for small businesses. But if you notice, seldom do we hear from the average small business owners themselves. So it was refreshing and informative to see the results of Minnesota-based U.S. Bank Corp’s second annual survey of small businesses.

The survey, which was conducted between April and May of 2011 and released in June 2011, surveyed a national sample representing 1,004 business owners across the 25 states where U.S. Bank Corp. has a presence. But more importantly, they also conducted an over-sample of more than 1,900 small business owners in 11 selected states, including Minnesota. From my view it’s an opportunity to hear from small business owners without the filter of a politician or a pundit getting in the way.

So who exactly are these small business owners and how small is small? Well according to the survey demographics, the average business owner surveyed has been in business for approximately 10 years, with annual revenues of under $500,000 and fewer than 10 employees. Almost half of the respondents were located in suburban communities, with a third in urban cities and 21% located in rural areas. More than half (58%) were male; the median age was around 50 years of age and 87 percent were white.

While there is certainly variation in responses across the states, overall this group of small business owners appears cautiously optimistic. Approximately two-thirds (64%) report the financial health of their business as good to excellent and an equal percentage report revenues either in line or higher than they were last year. And in Minnesota small business owners report being even more optimistic. While 41 percent of all respondents report their state’s economic conditions as weaker than the overall U.S. economy, only 6 percent of Minnesota small business owners view our state’s economy as weaker than the U.S. economy overall.

However, a disappointing 70% of respondents also reported that they do not anticipate increasing their number of employees over the next 12 months. And when asked what is the most significant challenge facing their business, the most common answer (27%) was the economic uncertainty facing the country and their state. Not surprisingly, given the political tug of war that has occurred in Saint Paul since the beginning of our legislative session, a much larger 38 percent of Minnesota’s small business owners reported economic uncertainty as the most significant challenge facing their business today. But what exactly does economic uncertainty mean?

Well accordingly to the results of the U.S. Bank Corp. survey, 16% reported poor sales as their most significant challenge; 12% reported Federal regulations and 9% reported competition in the marketplace as the most significant challenge to their business. Of course, such responses will certainly vary based upon the industry involved. For example, bricks and mortar retailers and travel agencies may see the competitive pressures from Internet commerce as the most challenging; manufacturers may view competition from China as the most challenging; while those in health care, insurance or financial services might view the changing regulatory environment as the most challenging. That’s just the nature of small business. But what about taxes? Haven’t politicians, lobbyists and special interest trade group representatives been telling us for years that taxes choke off small businesses and as a result are “job killers?” Well maybe so … but according to the small business owners themselves, only 8 percent reported taxes as the most significant challenge facing their business.

As I started this post, America loves small business and rightfully so. They are a critical element of our national, state and local economy and as a result, helping small businesses thrive and become the job creators they can be should be a priority. At the same time many politicians, special interest groups and individuals will try to use small businesses as a premise to advance their own political and economic agenda. Don’t be fooled; if you really want to learn more about the needs and concerns of small business owners … go ask them.

Negotiating the State Deficit or the State Budget?

A quick review of the letters to the editor in Minnesota’s newspapers over the last week shows a definite recurring theme. Specifically, readers from all areas of the political spectrum are disappointed, angry and frustrated that our Governor and legislative leaders seem incapable of reaching some type of agreement that will end the current government shutdown. In fact, a common theme in these letters is the idea of locking them up in a room and not letting them out until a deal is reached.

Now I am far from an expert in negotiations, but I would suggest that at the beginning it is important for both sides to agree on what exactly they are negotiating over. For example, if I am negotiating the price of a new car with a salesman, we may have two very different ideas regarding the worth of the car, but at least we both are talking about the same thing. But it appears that one reason why the current political negotiations have been so difficult progressing is that both sides simply are not negotiating over the same thing. Let me explain.

From the Governor’s perspective it is clear that he believes that he is negotiating to find a solution to resolve the current $5 billion state budget deficit. As such, he has proposed a multi-billion budget cut, along with an income tax increase on high-income earners. And when that didn’t fly he continued to propose a variety of budget cuts and revenue enhancements all designed to find the right combination of cuts and enhancements that would both close the deficit and be acceptable to Republican legislators. Others have also tried to suggest that in addition to sizable budget cuts there might be new types of revenue more palatable to our Republican legislative leaders. These include the establishment of 2 Racinos; a state operated downtown casino, increased liquor taxes, tobacco taxes, as well as a new round of bonding from future tobacco settlement funds. But alas, all have been swiftly rejected by our legislative leaders.

Why such apparent intransigence from the Republicans? Well it appears that from their point of view they are not negotiating to resolve the budget deficit, but rather they are negotiating the size of our state budget. Simply put, they believe that the appropriate measure of the size of government is found in the amount of money it spends and therefore any increase in revenue is an increase in the size of government. Accordingly from their perspective, no additional revenue is acceptable. A few examples will help support this notion.

Early in the legislative session Senator Julianne Ortman, Chair of the Senate Tax Committee made clear her desire to review all state tax expenditures. What exactly is a tax expenditure? Well the simple answer is that when the legislature passes a law to exempt certain products or groups of people from specific taxes that others have to pay it is recorded as a tax expenditure. Some may consider it a special tax break. And when government finances get tight, many argue that we just can’t afford all these special tax breaks anymore. So Senator Ortman declared her interest in reviewing these tax expenditures. Now please understand that some of these tax expenditures such as the exemption of groceries and prescription drugs from sales tax is something we all could agree on. But there may be others we certainly no longer can afford and repealing these exemptions would help close that budget deficit. For example, we all heard that if we repealed the sales tax exemption on clothing it would increase state revenues by approximately $250 million per year. But did you realize that repealing the exemption on consumer and business services such as legal or accountancy services from sales tax could yield 10 times that amount, or $2.5 billion per year? How about repealing the sales tax exemption on newspapers and magazines ($65 million); the exemption on telecommunications equipment ($26 million); or the exemption on farm machinery ($36 million)? In fact over the years dozens and dozens of such tax expenditures were written into Minnesota law worth billions of dollars that Senator Ortman simply wanted to review. But such a review never happened, for our legislative leaders have argued that repealing a special tax break is now defined as a tax increase. And while it would certainly help reduce the current budget deficit it would also bring in more revenue and therefore help grow the size of government.

Or how about Representative Runbeck’s bill to repeal former Governor Pawlenty’s JOBZ initiative that provides multiple income, corporate and sales tax breaks to businesses expanding or relocating in rural Minnesota. It was introduced on April 18 and that was the end of it, as it never received a hearing. But the words that epitomize this perspective was actually provided by Senator Mike Parry of Waseca, who was quoted on July 2 in the Mankato Free Press as suggesting that he and his Republican colleagues should pull back their current budget of $34.2 billion and replace it with a budget $2 billion smaller at $32 billion. Do you really believe that these are the words of someone who is serious about ending the shutdown?

So don’t be surprised if these negotiations stay stalemated for much of the summer. Until both parties agree to begin negotiating about the same thing it’s hard to see how any real solution can emerge that both sides can live with.

Government Reform or Engineered Mediocrity?

The idea of reforming the way government operates has been a goal of both politicians and public officials alike. But like many catch phrases the idea of reforming government means different things to different people. To me the idea is simple; reforming the way an organization operates is about making the organization more effective in its efforts to carry out its mission and meet its goals. Sometimes these reforms save money and sometimes they don’t. But whether the organization is public or private, for-profit or non-profit, the idea of reform is to make the organization function more efficiently and more effectively.

In this regard, the 2011 Minnesota State Legislative session actually got off to a great start. Recall that early in the session the legislature passed and the Governor signed a landmark alternative teacher licensure bill; creating new pathways to bring experienced and educated professionals from business and industry into the classroom. Or recall the efforts of the legislature and the Governor in approving new expedited paths toward environmental permitting that shortens the review process in some cases from years to months. Whether you agree with these actions or not, there is little question that such actions fall into the category of reforming the way government operates.

But shortly after that it seemed like the agenda changed and the goal went from making government more efficient and effective to just cutting costs. Of course cutting costs are needed when you are facing a $5 billion deficit, but you should never lose sight of how such cuts will impact the effectiveness of the organization. On my campus of the University of Minnesota we just completed a very painful exercise to similarly cut costs by eliminating a number of academic programs, services and functions. Other universities across Minnesota have been similarly responding with the termination of academic programs and other services.

In these efforts we have been very careful to make what many call “vertical cuts” vs. “horizontal cuts.” Essentially the point is to understand that while the elimination of an academic program may be detrimental to the students, faculty and staff members in that program, we should work diligently to ensure that it does not adversely impact the effectiveness of other programs that are not being cut. It’s no doubt a difficult call, but in the end, you want those programs that will remain to still be strong, effective and poised for growth. Conversely, just cutting budgets across the board (or horizontally) simply weakens all programs and functions and makes the entire organization less effective. That’s not what I would call reform – that’s simply engineering organizational mediocrity.

Maybe the legislature should do the same thing. For example, if legislators no longer see the need or the priority for state government to engage in economic development, why not simply eliminate those functions from the Department of Employment and Economic Development? But to just cut the agency budget and leave all of its functions simply ensures that the agency will no longer be effective in carrying out its mission. Similarly, just cutting the budget for MinnesotaCare, leaving more than 100,000 Minnesotans uninsured is not government reform; it just makes these government programs less effective.

And that’s the bottom line. When faced with the need to make significant budget cuts to an organization we know in advance that there will be plenty of pain and disappointment to go around. But we also need look beyond the cuts themselves and understand how the organization is to function in the future. In fact I would suggest that we need to recognize that if the Governor is our CEO and the Legislature is our board of directors, then their job is to ensure that whatever functions of government remain after these painful cuts are completed, work efficiently and effectively for the citizens of the state. Substantively cutting the budget is much more than just doing the math. In fact, solving the math problem is the easy part.

Sometimes the logic of treating such budget cuts simply as a math problem reminds me of the story we often hear about how some elderly people faced with limited finances chose to cut their prescription pills in half. Or sometimes to save money they may choose to take their medication every other day instead of daily. Of course the result of lowering the prescription dosage through such actions simply renders the medication less effective or in some cases completely ineffective in treating their condition. But when asked why they would do this, many simply say that that they are just trying to “live within their means.”

The Triple Bottom Line for Higher Education

I don’t think I can ever remember a time when more expectations were being place on our institutions of higher education, while at the same time these institutions are being financially stretched and challenged as never before. To be honest, it’s not exactly what I would call a formula for success. But to successfully meet the multiple expectations placed upon them will require skilled administrators; dedicated faculty; a new level of teamwork; and a new type of open dialogue. Admittedly, as a tenured professor in one of those institutions, it could be argued that I have somewhat of a conflict of interest – no disagreement there. So if you will … take that as my personal disclosure.

The need to adequately educate the next generation of leaders, professionals and knowledge workers is undeniably obvious. As I have previously written, now that the leading edge of the baby boom generation has crossed the age 65 threshold, this highly skilled and highly educated cohort of achievers will begin exiting the workforce in waves we have never seen before. A simple example can be found amongst our public school teachers. According to a 2009 report by the Minnesota Department of Education, an average of 2.3 percent of all teachers retired each year between 2002-2007. However in 2008 the percentage of teachers retiring more than doubled to 4.8 percent. And with the average age of public school teachers currently at 41, look for that percentage to further increase as the retirement of “boomers” hits its stride. But realize that such examples can be found not just among teachers, but rather in virtually all industries be it in the public, private or nonprofit sectors. And undoubtedly, we will expect that our colleges and universities will be there to adequately prepare our future workforce to fill these essential and highly skilled jobs.

But meeting planned employment needs is only a part of our expectations. Another expectation of our colleges and universities is to adequately prepare the next generation for the jobs of the future. If you don’t fully understand the concept here, simply ask yourself what do social media strategists, fuel cell engineers, content managers, health informatics specialists, and wind farm engineers all have in common? Well the answer is quite simple; all of these jobs did not exist 10 years ago! Due to the pace of technological change approximately 14% of all jobs occupied today simply did not exist 10 years ago; and as we all know, that pace of change and innovation is accelerating. President Obama often gets chided because of his use of the phrase, “winning the future.” But in fact … that’s precisely what is at stake; and our colleges and universities feel the pressure to stay ahead of the curve to ensure that our Minnesota economy and our Minnesota workforce can successfully secure those jobs and industries of the future. This is primarily accomplished through conducting the breakthrough research that often leads to the development of these new industries, as well as through the creation of new and innovative curriculum to meet the associated workforce needs. But we also must recognize that at the very same time state budget restraints are forcing our institutions of higher education to focus more on program reductions, consolidations, increasing class sizes and putting the necessary development of those new innovative programs on the back burner.

So what’s a university to do? Well there is a concept that businesses have been using for several years called the “triple bottom line.” High performing businesses have come to learn that just focusing on the financial bottom line is no longer enough. So these high flyers have begun to pay attention and measure their social bottom line as well as their community bottom line. The social bottom line measures the social capital or the trust and relationships that employees have with each other to functionally work as a team, as well as the communication and functional relationships between labor and management. The community bottom line measures community capital, or those ties that the business has with outside suppliers, customers, industry peers, local governments and other external constituencies.

For Minnesota’s colleges and universities to successfully meet the multiple expectations placed upon them during this time of unprecedented fiscal restraint will require team work and a new level of dialogue. It will require a focus not just on the financial bottom line as legislators and other public officials demand. In fact, that may be the easy part, as we can all do the necessary math. But to truly win the future for Minnesota, its economy, and our future workforce will require a new level of dialogue and trust, both within our colleges and universities, as well as with policymakers, alumni, community leaders and other external constituents.

It’s a dialogue that Minnesota cannot afford to ignore.

An All Too Slow but Steady Recovery

The recent news that the Minnesota unemployment rate dropped again in March to a rate of 6.6% certainly was welcome news to government officials and economic developers alike. In fact, a belief that Minnesota is finally climbing out of the grasp of the “Great Recession” now seems to be common; and why not? Minnesota has now experienced three straight months of employment growth; we’ve added over 7,000 new jobs year-to-date; and at 6.6% Minnesota now has the 11^th lowest unemployment rate in the nation. And yet … in spite of all this good news, many do not necessarily feel like the recovery has truly taken hold and that good times are ahead.

So is this economic good news really something to celebrate, or is it all just statistical mumbo-jumbo? Well, like everything … it depends on how you look at it. On a positive note, a 6.6% unemployment rate is good news; and the fact that it has steadily declined over the past year is even better. With a national unemployment rate of 8.8% and with the state of Nevada now occupying the top spot at 13.6%, Minnesota’s rate of 6.6% cannot be viewed as anything but positive. Minnesota’s manufacturing sector, which had taken a particularly hard hit, has shown a great resilience with a net gain of close to 8,000 jobs in the past year. And the traditional growth sectors of health care and education continue to add jobs, although not as rapidly as we have seen in the past.

At the same time, most of Minnesota’s contiguous neighbors actually have a lower unemployment rate, with North Dakota leading the nation with a current 3.7% unemployment rate. And with South Dakota at 4.8% and Iowa at 6.1%, that leaves Wisconsin as the only contiguous state behind us at 7.4%. But is the unemployment rate really a good measure economic recovery? I would suggest that at best, the unemployment rate is a very crude measure.

One shortcoming is that the unemployment rate does not differentiate between temporary employment and permanent, full-time employment. And a recent study by the National Employment Law Project reports that more than 20% of the job growth in this recovery is comprised of temporary employment. The rate also does not differentiate between low-medium wage jobs and what I would call a “first-earner income;” you know … the type that you can raise a family on. So clearly, the types of jobs being created can have a big impact on how we view this recovery.

But in addition, there are a number of other forces that are creating headwinds for the Minnesota economy that lead me to believe that while we are certainly not going back into recession, the recovery will be steady, but slow. Allow me to cite just a few:

· First, we have to recognize that the Minnesota workforce is continually expanding. In fact, a certain amount of job growth is required just to keep the unemployment rate from rising further. So as we congratulate the current crop of high school and college students graduating this month (including my daughter) we have to realize the growth in the size of workforce actually works against the lowering of the overall unemployment rate as more jobs need to be created just to stay even.

· Second, we have tended to discount the importance of the residential construction industry and the financial services industry in their contributions to job and economic growth over the past 15-20 years. In fact a recent report by the Federal Reserve Bank of St. Louis documents the reduction of their contributions to both jobs and GDP growth, which will further slow down the prospects of a speedy economic recovery. And while we are now seeing the typical seasonal increase in construction employment in Minnesota, it will likely be a fraction of the job growth we have experienced in years past. That’s not good.

· And finally as I noted in a previous post, we must remember that the overall employment picture of our region is comprised of jobs in the private, public and nonprofit sector. And with the presence of multiple public institutions of higher education, a MnDOT regional headquarters and a large regional security hospital in St. Peter, the Mankato/North Mankato region is disproportionally dependent upon public sector jobs. As a result it is likely that the current mood at the State Capitol will create some additional headwinds for the region as reductions in the public workforce take hold.

So overall, while there are no real signs to suggest that the steady improvement in our economy will reverse, these headwinds noted above may keep the recovery from speeding up as well. In other words, be prepared for an all too slow, but steady recovery.