[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
STATE OF THE SMALL BUSINESS ECONOMY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
FEBRUARY 16, 2017
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-004
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
TRENT KELLY, Mississippi
ROD BLUM, Iowa
JAMES COMER, Kentucky
JENNIFFER GONZALEZ-COLON, Puerto Rico
DON BACON, Nebraska
BRIAN FITZPATRICK, Pennsylvania
ROGER MARSHALL, Kansas
VACANT
NYDIA VELAZQUEZ, New York, Ranking Member
DWIGHT EVANS, Pennsylvania
STEPHANIE MURPHY, Florida
AL LAWSON, JR., Florida
YVETTE CLARK, New York
JUDY CHU, California
ALMA ADAMS, North Carolina
ADRIANO ESPAILLAT, New York
BRAD SCHNEIDER, Illinois
VACANT
Kevin Fitzpatrick, Staff Director
Jan Oliver, Chief Counsel
Adam Minehardt, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Dave Brat................................................... 1
Hon. Dwight Evans................................................ 2
WITNESSES
Stan Veuger, Ph.D., Resident Scholar, American Enterprise
Institute, Washington, DC...................................... 4
Mr. Victor Hwang, Vice President, Entrepreneurship, Ewing Marion
Kauffman Foundation, Kansas City, MO........................... 5
Ms. Holly Wade, Director, Research and Policy Analysis, NFIB
Research Foundation, Washington, DC............................ 7
Ms. Bob Bland, CEO & Founder, Manufacture NY, Brooklyn, NY....... 9
APPENDIX
Prepared Statements:
Stan Veuger, Ph.D., Resident Scholar, American Enterprise
Institute, Washington, DC.................................. 19
Mr. Victor Hwang, Vice President, Entrepreneurship, Ewing
Marion Kauffman Foundation, Kansas City, MO................ 28
Ms. Holly Wade, Director, Research and Policy Analysis, NFIB
Research Foundation, Washington, DC........................ 32
Ms. Bob Bland, CEO & Founder, Manufacture NY, Brooklyn, NY... 37
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
STATE OF THE SMALL BUSINESS ECONOMY
----------
THURSDAY, FEBRUARY 16, 2017
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax, and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 11:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Dave Brat
[chairman of the Subcommittee] presiding.
Present: Representatives Brat, Chabot, Kelly, Gonzales-
Colon, Fitzpatrick, Velazquez, Evans, and Clarke.
Chairman BRAT. Welcome to the Committee on Economic Growth,
Tax, and Capital Access in the 115th Congress. I call this
hearing to order. Thank you all very much for coming today.
This is my first hearing as Chairman of this Subcommittee.
I could not be more excited as we begin a new Congress, a new
presidential administration, and, with the right policies, a
new chapter for the American economy. And thank you all for
coming to share with us today.
As a former economics professor, I am particularly pleased
that we have such a distinguished panel here today to help us
explain what the economic indicators are telling us and how
they reflect what we hear back home from our constituents every
day.
It has been said time and again, both at this Subcommittee
and in the Full Committee, but I believe it cannot be stressed
enough, small businesses are the backbone of the American
economy. They represent 48 percent of workers in the private
sector and 99.9 percent of all firms. You do not have to be an
economist to understand the equation: When small businesses
succeed, our country succeeds. And it is just that simple.
The economy grew at an anemic rate of 1.6 percent in 2016,
and 1.5 percent over the last decade or so. This rate is half
of the historical average.
During this period of slow growth, 155 million Americans
faced higher costs due to the Affordable Care Act. Americans
also spend $1.89 trillion a year just to comply with Federal
regulations.
Finally, for most small businesses, the effective tax rate
is more than 47 percent. All of these issues have converged to
affect the economy at large.
Although it is important to label the problem, Congress is
actively working to implement solutions. We are starting the
process to repeal and replace the Affordable Care Act. We are
passing regulatory reform bills such as the Regulatory
Accountability Act of 2017, and utilizing the Congressional
Review Act to repeal burdensome Obama-era rules. The
administration is also taking actions, such as their ``two out,
one in'' regulatory approach to help cut some of the red tape
faced by small businesses.
The unified Republican government is committed to helping
the Nation's economy escape this slow growth, and we are
backing up our words with action.
American small businesses are not in business to comply
with Washington, though it can sometimes feel that way. Rather,
they are in business to earn a profit so they can make a living
for themselves and for their families. In turn, they create
jobs for their fellow Americans and help strengthen the
economy.
As I am certain we will hear this morning, healthcare
reform, regulatory relief, simplifying and lowering taxes, and
getting Washington out of the way would unleash the power of
our small businesses so they can do what they do best: to grow
and create jobs.
We look forward to hearing from our witnesses and thank
them all for being here today. We will certainly benefit from
their perspectives on the state of the small business economy.
I now yield to the ranking member for his opening
statement.
Mr. EVANS. Thank you, Mr. Chairman.
Small businesses are the backbone of the American economy.
There are 29.6 million small businesses in the United States
who employ about 58 million people, nearly 50 percent of all
private sector employees in the U.S. When our small businesses
succeed, America succeeds. Today here will give us a great
opportunity to hear from successful small business owners about
what works and what does not, and discuss policies that will
help this sector grow.
The American economy, as strong as it has been in years,
while we are seeing steady and sustainable growth, certain
sections, such as manufacturing and construction, continue to
struggle. It is imperative that we do more in these areas.
However, we should also remember the dire straits of our
economy after the 2008 fiscal crisis.
The Great Recession was the largest economic disaster our
Nation faced since 1929. Housing prices plummeted more than 30
percent. Businesses of all sizes shed jobs. In 2009,
unemployment reached 10 percent nationally. That staggering
number does not even include discouraged workers who left the
workforce or the unemployed who took jobs where they were
overqualified.
Small businesses felt these challenges acutely. In the
first three quarters of 2009, small firms accounted for almost
60 percent of the net job loss. As the recession caused lending
to tighten, entrepreneurs increasingly struggled to access the
capital. In late 2009, one survey found that 78 percent of
small business owners reported being negatively affected by the
access to capital.
Eight years later, economic indicators tell a completely
different story. Real gross domestic product continues to
increase year after year. In 2016, the GDP increased due in
part to increase in consumer spending and residential
investment. Unemployment has remained below 5 percent for well
over a year. In fact, last November, unemployment dipped to 4.6
percent, the lowest it has been since 2007.
We have also seen considerable job growth. Over the course
of the Obama administration, America gained 11 million new
jobs. His presidency saw 75 percent straight months of job
creation, the lowest continuing that is stretched in job growth
since 1939. This period of growth continues with January adding
approximately 246,000 new jobs, including 62,000 small business
jobs. Median household income surged in 2015 for the first time
since 2007. The 5 percent increase we saw in 2015 showed the
economy is improving, yet income remains 2.7 below its 1999
peak.
Moreover, these gains have been uneven with recovering
progressing much slowly in certain industries and regions,
showing that there is still a great deal of work to be done.
Small businesses also have to see improvement over the last
8 years. Commercial credit conditions have eased. Demand for
loans have increased as the economy has recovered. However,
there remains wide differences in credit demand between small
and large revenue firms. Lack of capital is one of the primary
reasons businesses flounder.
I hope today's hearing will help us better understand small
companies' lending needs so that we can improve their options.
The improvement in the economy has led small business owners to
enter 2017 with more optimism about the economic future than
they have in decades. However, they remain concerned about
health care, taxes, and other regulations. That is why it is
imperative that we ensure small businesses have a seat at the
table when we discuss major policy reforms.
I look forward to working with the chairman and all members
and colleagues on this Committee to craft bipartisan
legislation policy that will help sustain and shift in small
business growth.
I yield back my time, Mr. Chairman.
Chairman BRAT. Thank you.
If Committee members have an opening statement prepared, I
ask they be submitted for the record.
I would like to take a moment to explain the timing lights
for everyone with us today. Speakers will have 5 minutes each
to deliver your testimony. The light starts out green. When you
have 1 minute remaining, the light will turn yellow. And
finally, at the end of your 5 minutes, it will turn red. I ask
that you all try to adhere to that time limit as best as
possible. And so let us begin.
Our first witness this morning is Dr. Stan Veuger, resident
scholar at the American Enterprise Institute. His research
interests include political economics and public finance. Dr.
Veuger is a board member of the Netherland American Foundation
in Washington, and a senior editor at the Bulwark, a quarterly
public policy journal.
Dr. Veuger, you have 5 minutes, and you may begin. Thank
you.
STATEMENTS OF STAN VEUGER, PH.D., RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE; VICTOR HWANG, VICE PRESIDENT,
ENTREPRENEURSHIP, EWING MARION KAUFFMAN FOUNDATION; HOLLY WADE,
DIRECTOR, RESEARCH AND POLICY ANALYSIS, NFIB RESEARCH
FOUNDATION; BOB BLAND, CEO AND FOUNDER, MANUFACTURE NY
STATEMENT OF STAN VEUGER
Mr. VEUGER. Thank you, Chairman Brat, Ranking Member Evans,
members of the Committee. Thank you for inviting me to testify
here today on the state of the small business economy.
The U.S. economy is still on the long way back to recovery
from the 2007-2008 financial crisis. And while conventional
measures such as real GDP per capita have surpassed their pre-
crisis peak, a number of severe weaknesses remain. Some of
these are plausibly the result of the long and deep recession
the country went through, while others are symptoms of more
long-run trends. As an example of the former, the number of
long-term unemployed workers is still significantly above the
pre-crisis level. Weaknesses of the latter variety are arguably
more worrisome, as there is no reason to believe that they
will, with enough time, heal and disappear.
Two examples of this type of long-run weaknesses are trends
and levels of concentration within industries, and trends in
the entry of new firms. Levels of concentration have been
trending up. Entry of new firms has been trending down. And
that I think should be of particular concern to the Committee.
During the same period something else has happened and that
is what I will focus my testimony on today. Uncertainty
surrounding economic policy has been elevated for quite some
time now. Now, this type of policy uncertainty was widely
discussed in the popular press during the crisis, after the
crisis, and it has also received significant attention from
academic researchers.
Now, theoretical research has taught us that policy
uncertainty can affect consumption, investment, as well as
broader activity. And while those theoretical insights have
been around for a while, going back to Milton Friedman and work
even before that, recent research has also shown that these
effects do, indeed, exist. And in the real world it can be
shown to do so empirically.
For example, hire policy uncertainty from 2008 on has been
found to be associated with a deeper and longer recession. The
political stalemates in the U.S. contributed to the length of
the recession as did shocks from Europe. In work with Daniel
Shoag of Harvard, I, myself, found that increases in local,
State-level uncertainty over the period was strongly correlated
with the effects of the recession unemployment, and that
correlation is very robust to arrange other potential
explanations for bad labor market outcomes.
And while there is certainly a feedback loop between
outcomes and policy uncertainty, there are fiscal institutions
and preparations that stayed and most of the Federal Government
can take to limit those increases in uncertainty.
This type of policy uncertainty is of particular concern to
small businesses which are in a sense more risk averse by sheer
size, typically less diversified than multinational firms. And
I think that this is why this is an area that should be a
concern of interest to this Committee as it starts to legislate
in this new Congress.
Some of the things the Committee has already contributed to
I think have been very positive on this front. For example, the
Small Business Regulatory Flexibility Improvements Act which
passed as part of H.R. 5 requires more careful consideration
before new rules and regulations are implemented, demands that
their impacts on small businesses be considered more
specifically, and I think that those are good initiatives.
Similarly, the HALOS Act, which passed the House last month
is helpful in limiting the reliance that small business owners
and managers have on their own private capital and allow for
them to raise more outside capital, reducing potentially their
levels of risk aversion and the trouble they run into when
dealing with inevitable levels of policy uncertainty.
And so as I conclude, I would like to ask the Committee as
it proceeds to consider more legislature, to consider these
potential sources of policy and regulatory uncertainty. For
example, while I think that fundamental corporate tax reform is
way overdue, it is, I think, important to proceed in a way that
does not disrupt firm operations in unnecessary matters. But
there are always going to be winners and losers from this kind
of fundamental policy change, but I would ask for well-
considered transition measures and certainly well thought-out
measures as they may have unintended consequences.
And with that I would like to thank you again for giving me
the chance to speak.
Chairman BRAT. Thank you, Dr. Veuger. We appreciate your
testimony.
Our next witness is Victor Hwang, Vice President of
Entrepreneurship at the Ewing Marion Kauffman Foundation in
Kansas City, Missouri. Mr. Hwang is co-author of The
Rainforest: The Secret to Building the Next Silicon Valley, and
the follow-up, The Rain Forest Blueprint: How to Design Your
own Silicon Valley, which examine how the innovation ecosystem
in the Bay Area can be replicated in other parts of the
country. Prior to joining the Kauffman Foundation, Mr. Hwang
co-founded Liquidity, a nanotech firm that makes filters for
safe drinking water.
Thank you for being here with us today, Mr. Hwang. You may
begin. Thank you.
STATEMENT OF VICTOR HWANG
Mr. HWANG. Chairman Brat, Ranking Member Evans, and members
of the Committee, thank you for the invitation to testify.
I am pleased to share insights and recommendations from the
Kauffman Foundation about the state of entrepreneurship in
America. I will describe the bad news, share some good news,
and talk about how to address these challenges.
First the bad news. America is suffering from an
entrepreneurship deficit. It is slowly but surely eroding our
quality of life and our national competitiveness. I personally
experienced the challenges of starting and growing new
businesses. My parents were entrepreneurs. For most of the past
decade I have been an entrepreneur and investor in Silicon
Valley, and over the past year I have gotten a big-picture
perspective as the head of Entrepreneurship at the Kauffman
Foundation.
Based on our work at Kauffman, we believe this
entrepreneurship deficit comes from a long-term decline in
business dynamism, or the pace at which firms start and grow.
As a case in point, Americans are starting new businesses at
roughly half the rate they were a generation ago. The
implications of the steps are profound. Recent research is
starting to show how the entrepreneurship deficit is connected
to some of America's biggest challenges: slower productivity,
lower wages, stagnant job growth, and rising inequality.
A recent report expands on the connection between the long-
term decline in entrepreneurship and the effect on productivity
and growth. That lackluster productivity drags wages and living
standards down. Put simply, fewer startups mean a lower quality
of life for all Americans.
Now, some good news. After a long hangover from the Great
Recession, entrepreneurship is finally rebounding in America.
According to the Kauffman Index of Entrepreneurship Series,
entrepreneurship is up across all three measures: new business
creation, growth, and local small business activity. Kauffman's
Main Street Entrepreneurship Index is nearing a two decade
high, driven by a jump in small business survival rates. Today,
almost half of all new businesses are making it to their fifth
year of operation.
Both the long-term decline and the recent uptick in
entrepreneurship have been shaped by three megatrends. These
trends are affecting entrepreneurship today and we believe will
for decades to come. We call these trends the new demographics,
the new map, and the new nature of entrepreneurship.
Demographically, the U.S. population is increasingly
becoming more racially diverse, yet the American
entrepreneurial population does not reflect these changes.
Today, 80 percent of American entrepreneurs are white, and 65
percent are male. That is a big gap for racial minorities and
women. That gap costs the country about 10 million jobs.
The map of entrepreneurship, the second face of
entrepreneurship, is increasingly urban. While entrepreneurial
activity is growing in midsize cities outside of major metro
areas like Silicon Valley, it is still lagging in rural
communities. And technology is changing the nature of
entrepreneurship. In the past, as companies scaled their
revenue, jobs could scale at a similar pace. Today, companies
can rapidly grow revenue and value while job growth lags
behind.
In response to the entrepreneurship deficit and these
trends, the Kauffman Foundation today launched the Zero
Barriers to Startup Challenge. We believe that entrepreneurship
is a fundamental human right. You should not need a formal
degree. It should not matter your race, your gender, or where
you live. You should be able to do it quickly, inexpensively,
without confusion, and without barriers imposed by others.
Unfortunately, there is a big gap today between that vision
and the reality. You can help people--current entrepreneurs and
those with an idea--afraid to make the leap by taking that Zero
Barriers to Startup Challenge with us. The Kauffman Foundation
encourages members of Congress to host entrepreneur town halls,
to tour entrepreneur support organizations, and to invite
entrepreneurs to testify before this Committee and others about
the barriers they face. Listen to the grassroots and act on the
solutions.
When barriers hinder Americans from pursuing their
entrepreneurial dreams our whole nation suffers. That is no
longer conjecture. There is accumulating research evidence for
it. Together, let's commit to zero barriers to entrepreneurship
so that all Americans, regardless of who they are or where they
are from, can turn their ideas into reality. Thank you very
much.
Chairman BRAT. Thank you, Mr. Hwang. We appreciate your
testimony very much.
Our third witness this morning is Holly Wade, Director of
Research and Policy Analysis at the National Federation of
Independent Business, NFIB, in Washington, D.C. At NFIB, Ms.
Wade provides analysis on public policy issues and economic
trends affecting small business. She also produces the monthly
small business economic trends survey with NFIB's chief
economist, which surveys their members' plans for expansion,
sentiment on the United States economy, and top priorities.
Ms. Wade, thank you very much for being here, and you may
begin.
STATEMENT OF HOLLY WADE
Ms. WADE. Good morning, Chairman Brat, Ranking Member
Evans, and members of the Subcommittee on Economic Growth, Tax,
and Capital Access. Thank you for the opportunity to testify
today on the state of the small business economy.
Over the past 10 years, small business owners have
struggled to bounce back from the Great Recession. The economic
recovery has been painfully slow for many, at first due to poor
sales, but quickly overtaken by issues related to taxes,
regulations, and the cost of health insurance.
NFIB's Small Business Economic Trend Survey found small
business owners stuck in a below average rut with the survey's
optimism index exceeding its 43-year average reading only five
times since July 2007. Three of those above average ratings
were recorded in the last 3 months.
Owners' optimism failed to materialize as average GDP
growth remained relatively flat at 2 percent over the last 8
years, and government policies continue to increase the cost of
doing business.
In response to the combination of policy constraints and
anemic GDP growth, few small business owners found economic
conditions supportive of investing in or growing their
business. The poor business climate is further exacerbated by
heightened level of economic and government uncertainty.
NFIB's 2016 Small Business Problems and Priorities Survey
found that two of the top 10 most severe problems affecting
small business owners are uncertainty related. Uncertainty
about economic conditions and government actions are ranked
fourth and sixth out of 75 business problems, respectively, and
about one-quarter of small business owners find each a critical
problem in operating their businesses, all creating significant
barriers to economic growth in the small business sector.
Post-election, small business owner sentiment improved
dramatically with more owners optimistic about the outlook for
business conditions and business expansion. The rosier outlook
has translated into more favorable expectations for sales
growth and hiring to support expected gains in sales and
revenue.
As owners' confidence in the economy and economic policies
rise, owners will be more likely to invest in and grow their
business. Owners hold high expectations that Congress will now
create a friendlier business climate for them to succeed.
The three main concerns of small business owners for
operating their businesses are taxes, compliance and disruption
cost of regulations, and the rising cost of health insurance.
All three of these issues consume valuable resources from small
business owners, including their time, time diverted away from
operating their business, and profits, which is the main source
of financing for capital investment and business operations.
For example, NFIB's newly released survey on regulations
find that half of small employers report that regulations are a
problem in operating their business, with 25 percent of them
finding it a serious problem. When asked what specifically
impacts them the most, 28 percent of small employers cite
compliance costs as their biggest problem. However, 18 percent
are most burdened by understanding how to comply with the
regulations, and 17 percent most burdened by the extra
paperwork requirements. And for over half of small employers,
the volume of regulations is their biggest challenge compared
to 37 percent who are most troubled by a few specific ones.
The volume of regulations is particularly important in that
most small employers take on the responsibility of learning
about new government requirements themselves instead of
delegating the task to an employee. The more time they spend
learning about and complying with government regulations, the
less time they have in operating their business.
NFIB hears from small business owners year-round about the
various challenges they face operating their business, and
their stories are reflected in the survey results published by
the Foundation. But given the right set of policies, policies
that lower government cost hurdles for small business owners,
they are in a great position to invest in and grow their
business.
I appreciate this opportunity to discuss the current state
of the small business economy and the challenges it faces going
forward, and I look forward to working with the Committee to
support small businesses and the U.S. economy. Thank you.
Chairman BRAT. Thank you, Ms. Wade. We appreciate your
testimony. Thank you for coming in today.
I now yield to the ranking member for the introduction of
our next witness.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. It is my great
pleasure to welcome Bob Bland, who is a Brooklyn-based fashion
designer, entrepreneur, community organizer, and working
mother, and my constituent. She is the CEO and founder of
Manufacture NY, a fashion incubator and factory hybrid
dedicated to providing independent designers with the resources
and skill to streamline their production process and transform
local manufacturing into the most affordable, innovative option
for all. An international speaker and advocate for domestic
manufacturing, ethical supply chains, and design
entrepreneurship education, Ms. Bland has presented Manufacture
NY as a case study in Copenhagen, Seoul, Los Angeles, Las
Vegas, Washington, D.C., and New York City.
Welcome, Ms. Bland.
STATEMENT OF BOB BLAND
Ms. BLAND. Thank you, Chairman Brat, Ranking Member Evans,
and thank you so much to Ranking Member Velazquez for your kind
invitation to speak today.
Since the Great Recession, virtually all small, creative,
and manufacturing businesses in the Nation have had the same
challenges: access to affordable industrial space with long-
term leases, relocation grants for those who are displaced,
affordable housing with a reasonable commuting distance of
their workplace, low-interest working capital and lines of
credit to grow their small businesses, and competitive
equipment procurement and training programs so that we, as
entrepreneurs, can adapt to a rapidly changing global
landscape.
Design and manufacturing jobs specifically are more than
just jobs. They are an inclusive pathway to meaningful careers
and the potential for business ownership, regardless of
previous educational background or socioeconomic status. With
an average salary of $59,000 per year, they are more likely to
include benefits and have a clear path for growth, both in
terms of skills training and the opportunity to advance.
The New York City fashion ecosystem is a great template for
a unique and creative dynamic ecosystem that could be used in
innovation economies in other cities, and that is some of the
work that Manufacture NY specifically has done, is going to
other cities, most recently North Las Vegas, for instance, and
seeing how can we create that same sort of innovative
manufacturing ecosystem around the country. And we need to have
programs in place where we can do this, not just independently
as we have been doing, but actually have Federal support to
create these innovation economies around the country.
Small businesses and entrepreneurs are the engine of our
Nation's economy and drivers of innovation, and we cannot
compete without having better workplace benefits, and we
definitely cannot compete with larger companies that are able
to afford those benefits because of the economies of scale.
Freelancers and microbusinesses, and when we are talking about
microbusinesses, saying that 25 people and under is a
microbusiness, is actually quite funny to a lot of small
business owners because that is most of our small businesses
are much smaller than what the SBA currently defines as a small
business or microbusiness. So we also need to look at how we
define what a microbusiness is and how we are offering support
for even smaller businesses than 25 employees and under.
And we do not have the infrastructure to support workers
with caregiving responsibilities. I am here with my daughter
today who is 2-1/2 months old because I cannot afford to get
care for her as an entrepreneur and as a business owner myself,
so I have simply had to bring her with me everywhere for the
last 2-1/2 months because there is no option for me as a
business owner to take maternity leave. And so this is an
example of something where the Federal Government could offer
benefits across the board in terms of paid family leave. And I
have been informed of the Family Act, which would create self-
sustaining family insurance for all workers modeled after
successful State programs.
And then also I would just say a national family leave
policy would really reduce the burden on businesses,
particularly businesses owned by women where we are really
stopped from moving forward by our duties of care both for our
children and then also elder care as well that
disproportionately affects women.
In terms of the SBA and what they offer, I have personally
participated in programs around the SBIR, which is essentially
an equity-free venture capital fund, and I highly recommend
that we continue on with those programs. With the SBA's
innovateHER program that they did in partnership with
Microsoft, we participated in that and we need to advance those
sort of programs.
And then also, the Growth Accelerator Fund was a program
through the SBA that actually supported the creation of
incubators and accelerators around the country, and it really
was a driver for new businesses. So I highly recommend those
programs.
And then also, the Manufacturing Innovation Institutes
under the Obama administration were an incredible driver for
manufacturing, and particularly advanced manufacturing, and I
would recommend that those continue forward, as well as
manufacturing communities. And I know there is bipartisan
legislation available around a manufacturing communities bill
in both the House and the Senate. Thank you.
Chairman BRAT. Thank you, Ms. Bland. We appreciate your
testimony.
Now we will begin the first round of questioning. I now
recognize myself for 5 minutes.
I was going to defer, but as an economist and professor for
the last 20 years in economics, I do want to just add some
preliminary remarks. Everyone is referring back to the Great
Recession, and there has been a grand misdiagnosis that the
economy has been anemic because of that, and then what caused
that. We usually call it a financial crisis. But I think it is
important to go back to the history of what happened, and in
what order it happened, and I do not think there is any debate
the last financial crisis started in the housing market. Right?
That, I think, is unquestionable.
And so then we get to the crux of the good policy, and why
in the world would bankers make mortgages, to folks with no
incomes? Right? And the answer throughout the history of
American economic history is they would not. Right? Something
would be very strange. In the old days, the banker would go
meet the neighbors and say, hey, does this person have a good
job and a good credit history and a good ethical reputation?
Oh, good. Okay, I will give you $100,000 for a mortgage.
So what changed to the housing market, which Greenspan and
Bernanke argued and they are not overly political. It is not a
political argument. They said that was the asset class that had
never--it was the gold standard, right? The housing sector was
the gold standard. And so how in the world did the gold
standard--the asset class that had never had any issues, right,
every other asset class has--fall into such ruin? That did go
over and fall into the financial crisis, and there--I am not
condoning Wall Street or anything, just so we are clear on the
politics. When you get to the financial crisis, there was
ethical, you know, misconduct all across the board.
But I think it is important to go back and look at what
caused the housing crisis because that is what got us into this
low-growth environment, and in my view, a lot of it was caused
by bad Federal policy. Fannie and Freddie, bankers no longer
had to take the risk, right? That is their main job is risk
assessment. Instead of assessing risk, they would get their fee
for making a mortgage and hand off the risk immediately to
Fannie and Freddie. And when Fannie and Freddie take on that
risk, who owns the risk? You do because you backstopped. The
American people do, right? You backstopped through the
government, Fannie and Freddie.
So I just think it is important to get that backstop in
mind. That was wrong Federal Government policy, and policies
which wrongly incentivize the housing market which caused the
financial crisis. And so with that in mind, I will just start
with Dr. Veuger and work our way down.
We are kind of working on three big buckets right now:
healthcare efficiencies, tax reform going forward, a corporate
rate and individual rate, and then immediate expensing. And
then the third is just the basket of regulatory reforms.
In your view, where is the biggest bang for the buck? Where
should we be spending most of our time up here? Or do you got
to do all three? I mean, just in your experience, if you could
share a little, and then Mr. Hwang next.
Mr. VEUGER. I think focusing on all three is complicated.
There is only so much output that the legislative branch can
produce. So of those three I would probably focus on tax
reform. I think that is a good--you know, it clarifies matters
because it is a broad issue or touches upon a lot of the
problems we discussed.
I think regulatory reform is important, but because so much
of it is driven by--it is not clear to me what beyond what the
House has already done, what it can do there to really make
significant progress in one specific bill or one specific
initiative that does not--maybe it is because there are so many
subparts. I would say tax reform should be the top priority.
Chairman BRAT. Mr. Hwang?
Mr. HWANG. We launched today the Zero Barriers movement
specifically to deal with this issue of: ``What are all the
things that get in the way?'' If you look at the burdens of
real entrepreneurs, there are so many, and there are so many
headwinds that they face. And so with the Zero Barriers
movement, what we are trying to launch is a realization, an
acceptance of the fact that this stuff starts at the grass
roots. It is city by city. It is county by county, district by
district, state by state. When we think about these problems,
we tend to ask, ``Well, what is the one thing we can do?'' But
ultimately, it has got to be something where we empower the
community of entrepreneurs and people that fight for
entrepreneurs to come up with the answer. So what we are doing
is harvesting the answers, gathering them, empowering people
back in their communities, and supporting experiments around
the country at the local level, even hyperlocal, to try to
figure out what works and overcome these barriers.
Chairman BRAT. Great.
Ms. Wade, NFIB?
Ms. WADE. Unfortunately, all three are incredibly important
for small business owners, our members. When we surveyed for
the 2016 Problems and Priorities Survey, health insurance cost
is the number one problem. Fifty-two percent say it is a
critical issue in operating their business. Burdensome
regulations is the second most critical issue facing small
business owners, and then under that is Federal taxes on
business income. So all three are the top three important
issues that they face.
When it comes to tax reform, which is incredibly important,
you know, tax reform should start with small businesses because
they need parodies. Small businesses should not be paying more
than larger corporations in the Federal Tax Code. And so
tackling tax reform is incredibly important, and all the
variety of ways that it is important for small businesses, but
regulations and health insurance costs are equally as
important.
Chairman BRAT. Thank you. Thank you very much. Sorry, as
the chair I went over my own time limit. I see my time has
expired, and I would like to now yield to the ranking member,
Mr. Evans, for 5 minutes.
Mr. EVANS. Thank you, Mr. Chair.
Ms. BLAND. Oh, do I not get to----
Mr. EVANS. Ms. Bland, would you like to answer the
question?
Ms. BLAND. Okay. Yeah. As an entrepreneur and a small
business owner myself and a woman, I just want to say that we
work with--we have launched over 150 small businesses in the
last 4 years and they are primarily women and person-of-color-
owned businesses. And what we see as the two big things are the
healthcare situation, and really just social safety net in
general, giving people the support they need to start launching
their business by ensuring that they have their own personal
health insurance and then also a place to live, a place to
work. You know, that sort of support is needed throughout the
first 2 years of a small business' launch.
And then additionally, with the taxes, yes, I would totally
agree that my tax rate as a small business owner is way too
high, and it just seems impossible for me to continue,
particularly when I am trying to create job growth. When I am
trying to hire more employees, it is especially onerous and
impossible for me to continue creating more jobs and still even
break even.
Mr. EVANS. Let me follow up a little bit. As you know, many
economists have talked about employer-based health insurance
can lead to job lock where employees stay in their job solely
for the benefits.
The Affordable Care Act effectively eliminates job lock. As
an entrepreneur, how important was the availability of health
insurance coverage in your decision in starting up your
business?
Ms. BLAND. Well, originally when I started my business is
was prior to the Affordable Healthcare Act, and it has actually
really helped me to have flexibility as a business owner to be
able to say to my employees--beucause my business has less than
50 employees, so I am not required to have health insurance.
And so being able to direct them to the New York market to be
able to get their health insurance, and then knowing that they
have that security has been incredibly beneficial, both in
making sure that they have care even when I cannot afford to
subsidize it for them, but then, also, from an ethical
perspective, knowing that I do not have employees on the job
that are going to get sick and have nowhere to go. So I would
say it has been very beneficial.
Mr. EVANS. I would like to piggyback to Mr. Stan--last name
again?
Mr. VEUGER. Veuger.
Mr. EVANS. Veuger. Sorry about that. About this issue of
policy uncertainty and the drag on the economy. I am fascinated
with what you have talked a little bit about. Can you, you
know--I heard what the chairman said as he laid out the three
particular issues, but I sense that the issue of policy
uncertainty is probably the common denominator in the decisions
that are made. Can you speak a little bit to that in terms of
the impact of the issue around policy, particularly if you talk
about the Affordable Care Act? Can you talk a little bit about
that?
Mr. VEUGER. Yes. I think one priority for this Congress
should be to be careful as, you know, it works toward the
stated goal of repealing and replacing the Affordable Care Act.
I think we need to be careful not to unnecessarily disrupt,
especially the individual market, which is pretty vulnerable to
even announcements of future policy. There are significant
weaknesses in the individual market as it stands, and I would
worry that if Congress goes ahead with repeal of the Affordable
Care Act or significant parts of it without having a clear
direction of where policy is going afterwards in mind, I would
worry what the individual market would be. And that is sort of
true for the small group market, too, that that would unravel
in a way that would be detrimental.
Mr. EVANS. Mr. Hwang, real quick, I have not much time, but
there is a real gap for racial minorities and women. What
impact do you think a lack of diversity has on the small
business community?
Mr. HWANG. We have done research on this. As I mentioned in
my earlier testimony, there would be about 10 million jobs more
if women and minorities were creating companies at the same
rate as others. So it is a profound gap. It is also not just in
terms of the gross economy. It is also in terms of the level of
innovative products. There is research that shows that diverse
teams tend to make more innovative solutions together. And I
think that goes a lot to the core of the American fabric. What
makes us competitive is the ability to bring in a diversity of
ideas and talents to bear on problem solving.
Mr. EVANS. Thank you, Mr. Chair. I yield back the remainder
of my time.
Chairman BRAT. Thank you very much.
The gentlelady from Puerto Rico is now recognized for 5
minutes.
Ms. GONZALEZ-COLON. Thank you, Mr. Chairman.
This is going to be for the full panel. Even though the
interest rate has been low for quite some time, many small
business owners say that they have issues obtaining credit. Why
is this the case and maybe are some solutions for that?
Ms. BLAND. As a small business owner who has had issues
obtaining credit, I can definitely tell you that even for my
business that fosters so many other businesses and is seen as a
case study for what this entrepreneurial incubator ecosystem
should look like, the simple matter is if you do not have--you
know, let's say I want to get a $200,000 loan. If I do not have
$200,000 in security, I am not getting a loan. It is as simple
as that. You have to be able to back your own loan. And why
would I need a $200,000 loan if I already had $200,000. You
know?
So it is something where even with all the great programs
out there, it is kind of a feel-good thing where most of my
businesses, when they go after all of these low-interest loans,
at this point they still do not end up qualifying for them
because what they need is really a mix of a loan and then
something that allows for more risk, like a venture capital
type solution. But again, with most of these businesses,
particularly in the manufacturing sector where the growth
pattern is a little slower and the overhead is a little higher,
it is hard for them to get venture capital as well. So there
are a lot of businesses that are caught in the middle of this
and they simply cannot just bootstrap or crowdsource, and we
are really missing out, particularly in the manufacturing
sector.
Ms. GONZALEZ-COLON. Mr. Hwang?
Mr. HWANG. Mr. Kauffman, the founder of our foundation,
started his business with $5,000. And one of the questions to
ask is: could someone obtain $5,000 as a bank loan today? And
it is very, very hard. There has been a tremendous decline in
community-scale banking. Yet there has been a tremendous
aggregation in capital for risk. 80 percent of the venture
capital in the United States is concentrated in three States:
California, New York, and Massachusetts. So there is an unlevel
playing field for capital right now, and there are several
reasons that we can hypothesize around this.
One is around the lack of community connection. The
chairman had talked earlier about how you could go to your
neighbors and people you had relationships with, and they
trusted each other to pay back these loans. The disconnection
of capital--the community--and the people that are in these
local environments--has caused a problem because it has made
people more risk-averse in lending capital.
There is also, I think, a scale in difference between how
we think of capital, both at the macro level and the micro
level. Battleships can handle storms better than dinghies, and
startups are dinghies. And it is hard for dinghies to get
people to throw them these lifelines when they need them. And
so I think an attention to the effect and the impact of
policies on small-scale lending, not just big-scale lending, is
very, very important.
Ms. GONZALEZ-COLON. I will piggyback on that. How, in your
experience working in Silicon Valley and all your research you
have done for your books, can rural American territories
replicate that in terms of entrepreneurship?
Mr. HWANG. That is a complex answer and there are many
different aspects to that. But I think primarily one of the
things that we know innovation derives from, and we know
startup companies are born out of, are highly interconnected
environments. If we can build more opportunities for flows of
information, people, and connections in communities, that is
where capital comes from. It is from the flow of people with
resources. It is from the trust that is built in these
communities.
So we can use new technological tools. We can build
communities. We can make significant efforts to try to increase
the interactions between people who have resources and those
who do not. That is a very core way of getting a level playing
field.
Ms. GONZALEZ-COLON. I yield back my time, Mr. Chairman.
Chairman BRAT. Thank you.
The gentlelady from New York, Ms. Clarke, is now recognized
for 5 minutes.
Ms. CLARKE. Thank you, Mr. Chairman Brat, and I thank our
ranking member, Mr. Evans. I thank our panelists of experts for
their testimony here this morning.
Today we have heard testimony of the state of small
businesses in our economy. As we all know, and it is not just
cliche, small businesses are the lifeblood of our economy.
There are millions of Americans that are allowed to provide for
their families and help our economy grow. In recent years we
have seen the effects of the Great Recession slowly recede into
the distance. Wages have increased slightly, median household
income is on the rise, and capital is being lent with greater
ease. However, these trends are not true for all Americans.
Minority communities remain disproportionately affected by the
Great Recession and face difficulty obtaining jobs, receiving
raises, and accessing capital. The Small Business
Administration has programs in place that take into account the
unique challenges that minorities and women face in accessing
capital and entering the entrepreneurial realm. Yet, these
programs are not all of the cure.
So Mr. Hwang, in your testimony, you stated that one of the
megatrends affecting the spread of entrepreneurship is the
increase in American diversity. As you stated, the
entrepreneurship gap between white males and everyone else is
wide and costs our company greatly, to the tune of 10 million
jobs. Aside from cutting taxes and regulations, what can
Congress do to ensure that all Americans are able to contribute
and utilize their entrepreneurial acumen to inure to our
economic growth. Give us a little bit more about your concept
about zero barriers.
Mr. HWANG. Sure. So what you are talking about is the
biggest challenge facing our field today and the biggest
mission of our foundation: how do we overcome these gaps? And I
wish I had all the answers for you. This is obviously a very
complex question, but I think one of the very key pieces of
this is that there are hard and soft barriers. There are the
hard ones, which are regulatory and legal, and the challenges--
local, county, State, Federal--that get in the way of
entrepreneurs, but there are also invisible ones, which are the
social barriers, the disconnected parts of communities where
people do not interact, where you do not get the flow of talent
and ideas between different parts of communities. We see that
all over the country. You have certain places where
entrepreneurship has, unfortunately, become almost a privileged
activity and it feels like it is something that is accessible
and obtainable only by people who are lucky enough to
understand how to do it. And it should not be that way. It
should be democratized where everyone has access to it.
We are going to be working on this and finding new ways to
do this. And ultimately, it is not about us at a foundation or
people in Washington solving this; it has got to come from the
grassroots. But can we find better ways to empower the
grassroots to come up with these types of solutions, which can
then turn into policies and actions that we can implement?
Ms. CLARKE. Do you see closing that gap as something that
is doable perhaps through the interconnectedness of social
media, the Internet, and deployment of broadband to remote
areas where perhaps it does not currently exist?
Mr. HWANG. I think it is part of it. I think new
technologies are able to connect people who have not been
connected before, but we have also seen increasing silos happen
because of new technology. You see groups that tend to be more
isolated than ever because they chat and tweet to each other
rather than to others.
Ms. CLARKE. Double-edged sword.
Mr. HWANG. It is a double-edged sword. And I think one of
those fundamental challenges is: how do we use technology in a
way to nurture the very fabric that makes innovation happen and
small businesses grow? I think that is an open question. And we
are going to be looking at this issue closely and launching
experiments. Last year we launched experiments in 12
organizations, totaling $4.3 million, through what we called
the Kauffman Inclusion Challenge, into organizations across the
U.S. trying to solve this issue of gender and racial barriers.
We are going to be doing more of these and we are going to
learn from that process.
Ms. CLARKE. Very well.
Quickly, just one question to Ms. Bland. Small employers
must fight harder to attract and retain talented employees than
their larger counterparts. Can you explain how the ability to
offer healthcare benefits can help your business stay
competitive?
Ms. BLAND. Yes. It is the single difference for me
oftentimes when I am hiring between whether I get the first
tier, very best in class employee, for instance, a pattern
maker that I really wanted that I knew had the best skills in
the industry. Her one caveat was she must have health
insurance, and that was the difference. So at that time I
actually put together a healthcare plan for my employees
specifically so I could hire her and then extended it to them.
But again, there is so much in terms of overhead and
regulations and everything that goes on in administering that
plan. Sometimes it would be easier if there was an independent
plan like the Affordable Healthcare Act where people can just
go on a market and pick their own plan, especially if I do not
have enough bandwidth as an employer to do the administration
on that. You know?
Ms. CLARKE. Chairman, I yield back.
Chairman BRAT. Thank you very much.
The gentleman from Mississippi, Mr. Kelly, is recognized
for 5 minutes.
Mr. KELLY. Thank you, Mr. Chairman. And thank you for such
a distinguished panel.
My oldest son is a senior in college this year, and the
share of entrepreneurs age 20 to 34 has declined from 35
percent in 1996 to 23 percent in 2013. I am hearing a lot of
things. I had a small business. I ran my own law office. The
question was not how much money I made that first year; it was
how much I lost that first year and whether I could sustain to
go into a second year, and that is truly. And I had a brand new
baby about the age of yours, Ms. Bland, that my wife was also
working, but she was putting more money into my business than I
was, than we could afford. And so we had the same struggles and
the same daycare that we could not afford, but she had to work.
And so I understand those things.
But I say all that to say, being an entrepreneur and owning
a small business is hard, and there is risk associated with
that. And it is that great pioneer spirit of Americans who are
willing to take a loss, to take a risk, to not be able to
afford things that you want to do. Those are the things that
made America great, will keep America great, and all those
things.
So what can we do to spread the risk? Okay, make a level
playing field so that all people, regardless of where they live
or where they come from, so that all have an equal opportunity;
not necessarily buy their risk, but at least make a level
playing field so everyone else has, and especially in rural
areas, which are much different.
And I think, Mr. Hwang, if you can start.
Mr. HWANG. Yeah, I appreciate your comments, especially on
the pioneer spirit. Kansas City happens to be at the very edge
of the frontier. That is where people gathered as they made the
westward journey for 6 months into what was essentially no
man's land at the time. And so the ability of people to
organize resources in the pioneer spirit as they moved west is
a great metaphor for the entrepreneurial spirit, which is how
do you create something out of nothing?
As I think about how we level the playing field and spread
the risk--as you were talking about your son in college--one
issue is that the way we educate people today is on how to fill
jobs, how to find jobs, as opposed to how to make jobs and make
a living and survive. And I think to talk about that shift and
how we teach people the skills for getting jobs, versus how you
create something that did not exist before, is a big shift that
cuts across so many aspects of society, including education.
So my personal feeling on this, and I think many in the
Foundation share this, is this really cuts across many issues.
It includes education policy. It is also the way we deal with
capital allocation and capital resources, and policies and
burdens that fall on entrepreneurs. I think the ability to
honor the individuals, the pioneers, and to understand rules
and laws that affect them, to understand the access issues they
face is sort of flipping things upside down. We tend to focus
on the top instead of the bottom. But when we think about
entrepreneurs, we have got to focus on the bottom and what is
it like to be in the situation when you started.
Mr. KELLY. Do any of the other panel wish to comment?
Ms. BLAND. At Manufacture NY, we have worked on a variety
of innovative internships, apprenticeships, and workforce
training programs specifically around blending, STEM training,
and wearable technology with traditional manufacturing. And so
I am a manufacturing wonk. But I think it can extend to other
types of entrepreneurship, that we need to create training
programs that work around people's schedules, work around their
lives, that start a little earlier on. So while folks are still
in high school, that they can start doing workforce training
programs so that there is not a gap. Not everyone, you know, of
course, we would love if everyone could go to college, but for
some folks, particularly in the design and manufacturing
industries, there might be a more hybrid program that is needed
so that it is training them specifically for the career that
they want to go into. And I think there is a lot to be explored
in that area.
Mr. KELLY. Thank you.
And I think, Dr. Veuger, and I apologize, us southerners do
poorly with names, you know, all the bright minds in
Mississippi and in a lot of rural areas, they all want to go to
law school. How do we encourage them to understand that maybe
that is not the best way to use your talents to do that? How do
we encourage that entrepreneur spirit at a young age so that
they understand to have a 2-year degree but to be able to
create something or build something is being much more
successful than having a law degree, which I have, which I hope
I never use again. But how do we create that as a Congress? How
do we create that entrepreneur spirit, or can we?
Mr. VEUGER. Well, I think one specific remedy here is to
make it less profitable to be a lawyer. I think limiting the
disruptions caused by the Federal Government, of course,
reduces the demand for lawyers to some extent. So I think that
is a good place to start.
Mr. KELLY. Mr. Chairman, I yield back. Thank you.
Chairman BRAT. Mr. Kelly, that was outstanding. Thank you.
I do want to thank all the panelists, all the members here
today. I think this really was great and the diversity of ideas
across everyone who testified today, we really appreciate you
all being here with us and sharing your perspectives.
I ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the
record.
Without objection, so ordered.
This hearing is now adjourned, and thank you all very much.
[Whereupon, at 11:57 a.m., the Subcommittee was adjourned.]
A P P E N D I X
[GRAPHICS NOT AVAILABLE TIFF FORMAT]
Testimony of Victor Hwang
Vice President of Entrepreneurship
Ewing Marion Kauffman Foundation
Before the
U.S. House Committee on Small Business, Subcommittee on
Economic Growth, Tax and Capital Access
The Entrepreneurship Deficit
February 16, 2017
Chairman Brat, the Ranking Member and members of the
Committee, thank you for the invitation to testify at this
hearing about the small business economy.
I'm pleased to share some insights and recommendations from
the Kauffman Foundation about the state of entrepreneurship in
America. First, I'll describe the bad news. Then I'll share
some good news. Finally, I'll talk about how we can address
these challenges.
First, the bad news. America is suffering from an
Entrepreneurship Deficit. It's slowly but surely eroding our
quality of life and our national competitiveness.
I've personally experienced the challenges of starting and
growing new businesses. My parents were entrepreneurs. For most
of the past decade, I've been an entrepreneur and investor in
Silicon Valley. And over the past year, I've gotten a ``big
picture'' perspective as the head of entrepreneurship of the
Kauffman Foundation, an institution that funds research on
entrepreneurship, educates policymakers, and supports
entrepreneurial success.
So what is causing this Entrepreneurship Deficit? Based on
our work, we believe the deficit comes from a long-term decline
in what economists call business dynamism, the pace at which
firms start and grow. As a case in point, Americans are
starting new businesses at roughly half the rate they were a
generation ago.\1\
---------------------------------------------------------------------------
\1\ Haltiwanger, John. ``Top Ten Signs of Declining Business
Dynamism and Entrepreneurship in the U.S.'' NBER, August 2015.
The implications of this deficit are profound. Recent
economic research is starting to show how the Entrepreneurship
Deficit is connected to some of America's biggest challenges:
slow productivity growth, lower wages, stagnant job growth, and
rising inequality. The data indicate that entrepreneurs create
economic opportunities for others in society, like a circle in
the water that ripples outward, in a continuing process that
facilitates upward mobility. And each year, as our research
suggests, the new and young businesses started by entrepreneurs
create nearly all of the net new jobs in our country.\2\
Another recent report expands on the connection between the
long-term decline in entrepreneurship and the effect on
productivity and growth. That lackluster productivity drags
wages and living standards down.
---------------------------------------------------------------------------
\2\ Haltiwanger, John, Ron Jarmin, and Javier Miranda. ``Who
Creates Jobs? Small vs. Large vs. Young.'' NBER Working Paper, August
2011.
Put simply--fewer startups mean a lower quality of life for
---------------------------------------------------------------------------
Americans.
But there's a gap between what we know and what we do. For
the most part, entrepreneurs are left out of the policy debate.
Our national discussions tend to fall along the same political
fault lines of the past. Meanwhile, entrepreneurship remains
far below what's needed.
The Three Megatrends
To make this case, I'd like to highlight some interesting
new data. At the Kauffman Foundation, we have identified three
megatrends that are reshaping entrepreneurship. We call these
trends the New Demographics of Entrepreneurship, the New Map of
Entrepreneurship, and the New Nature of Entrepreneurship. These
trends present both challenges and opportunities to solving the
long-term decline of entrepreneurship.
First, the New Demographics.
The U.S. population is increasingly becoming more racially
diverse. Yet, the American entrepreneurial population does not
reflect these changes. Today, 80.2 percent of American
entrepreneurs are white and 64.5 percent are male.\3\ That's a
big gap for racial minorities and women. And it costs the
country.
---------------------------------------------------------------------------
\3\ Morelix, Arnobio, Victor Hwang, and Inara Tareque. ``Zero
Barriers: Three Mega Trends Shaping the Future of Entrepreneurship.''
Kauffman Foundation, February 2017.
If minorities started businesses at the same rate as non-
minorities, the United States would have more than one million
additional employer businesses and as many as 9.5 million more
jobs.\4\ The persistent gender business gap has cost our
country an additional 1.7 million businesses.\5\
---------------------------------------------------------------------------
\4\ Ibid
\5\ Ibid
---------------------------------------------------------------------------
The second megatrend is the New Map of Entrepreneurship.
The New Map is characterized by two things. First,
entrepreneurship is increasingly an urban phenomenon. And
second, entrepreneurial activity is growing outside the largest
metropolitan areas traditionally associated with
entrepreneurship--like Silicon Valley.\6\
---------------------------------------------------------------------------
\6\ Ibid
Over time, America has become a more urban nation. Fewer
people live in rural areas today than they did in the past. But
for those Americans living outside our nation's largest cities,
we need to ensure there is economic opportunity where they
---------------------------------------------------------------------------
live. Entrepreneurship is part of the answer.
The final megatrend is the New Nature of Entrepreneurship.
Technology is changing everything, including
entrepreneurship. In the past, as companies scaled their
revenue, jobs could scale in almost the same fashion. That is
no longer true and will be even less true in the future.
Take for example two businesses that were leading
innovators in their day: Kodak and Facebook. In 1962, Kodak's
sales first surpassed $1 billion dollars. At the time, Kodak
employed 75,000 workers. When Facebook reached $1 billion in
revenue in 2013, it employed about 6,300 workers.\7\
---------------------------------------------------------------------------
\7\ Morelix, Arnobio, Victor Hwang, and Inara Tareque. ``Zero
Barriers: Three Mega Trends Shaping the Future of Entrepreneurship.''
Kauffman Foundation, February 2017.
This is not exclusive to Facebook. This is only one example
of what we know from research covering millions of companies
and almost twenty years of data: the most innovative, high-
productivity companies are not creating as many jobs as they
did in the past.\8\
---------------------------------------------------------------------------
\8\ Decker, Ryan, John Haltiwanger, Ron Jarmin, and Javier Miranda.
``Declining Business Dynamism: Implications for Productivity?''
Brookings Hutching Center on Fiscal & Monetary Policy, September 2016.
---------------------------------------------------------------------------
The State of Entrepreneurship
Now, some good news. Earlier this morning, the Kauffman
Foundation held its eighth annual State of Entrepreneurship
Address, where we assessed the health of American
entrepreneurship and launched a new initiative to empower
bottom-up change.
There is some positive movement on the short-term
indicators. After a long hangover from the Great Recession,
entrepreneurship is finally rebounding in the United States.\9\
According to the Kauffman Index of Entrepreneurship Series,
entrepreneurship is up across all three measures: new business
creation, growth, and local small business activity.
---------------------------------------------------------------------------
\9\ Morelix, Arnobio, Victor Hwang, and Inara Tareque. ``Zero
Barriers: Three Mega Trends Shaping the Future of Entrepreneurship.''
Kauffman Foundation, February 2017.
Kauffman's Main Street Entrepreneurship Index, which
measures local small business activity, is nearing a two-decade
high, driven by a jump in small business survival rates. Today,
almost half of all new businesses are making it to their fifth
year of operation. This marks a major turnaround from the Great
Recession, when business survival rates dropped to a low of
42.9 percent.\10\
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\10\ Fairlie, Robert, Arnobio Morelix, Inara Tareque, Joshua
Russell, and E.J. Reedy. ``2016 Kauffman Index of Main Street
Entrepreneurship.'' Kauffman Foundation, November 2016.
While the recent uptick in entrepreneurship is indeed good
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news, it exists within the long-term decline I referenced.
Also concerning is the fact that new and young businesses
today employ fewer workers on average than they used to.
According to the Kauffman Main Street Entrepreneurship Index,
small businesses have gotten even smaller over the last 20
years. The smallest of those small businesses--companies with
one to four employees--make up 53.1 percent of all established
small businesses.
Zero Barriers
As it becomes evident that the Entrepreneurship Deficit is
one of America's biggest challenges, what can we do about it,
and what can Congress do about it?
To start, we cannot afford to linger in the same debates
and arguments of the past. The Entrepreneurship Deficit is
causing hardships every day for people in your districts--fewer
jobs, lower wages, and a lower quality of life.
As a response, the Kauffman Foundation today launched the
Zero Barriers to Startup Challenge.
Our founder, Ewing Kauffman, believed that individuals have
a fundamental right to take an idea they have and turn that
into a business reality. To be an entrepreneur, you shouldn't
need a formal degree. You shouldn't need expensive experts to
navigate the process. It shouldn't matter your face, your
gender, or where you live. You should be able to do it quickly,
inexpensively, without confusion, and without barriers imposed
by others.
Unfortunately, there is a big gap between that vision and
today's reality.
The Zero Barriers to Startup Challenge is a collaborative,
nationwide effort to identify barriers, big and small, that get
in the way of new business creation. The Kauffman Foundation
will team up with entrepreneurs, policymakers, and others
nationwide to identify the key barriers to starting a business
and then work together to identify and design solutions.
You can help people--current entrepreneurs and those with
an idea afraid to make the leap--by engaging in this process.
The Kauffman Foundation encourages members of Congress to host
an ``Entrepreneurs' Town Hall'' in your district, to tour
entrepreneur support organizations, and to invite entrepreneurs
to testify before this committee and others about the barriers
they face.
After listening to entrepreneurs, we encourage you to act
on the solutions, conversation by conversation, city by city,
district by district.
We also support continued public investments in data
collection. The Kauffman Foundation was able to identify the
three megatrends because data was available from the U.S.
Census Bureau, the Bureau of Labor Statistics, and other
federal agencies.
Access to timely, quality data is so important to
understanding how we can best help entrepreneurs that Kauffman
invested in the creation of the Census Bureau's Annual Survey
of Entrepreneurs. This and other public data collection efforts
need to continue.
When barriers hinder Americans from pursuing their
entrepreneurial dreams, our whole nation suffers. That's no
longer conjecture; there is accumulating research evidence for
it. Together, let's commit to lowering barriers to
entrepreneurship so all Americans, regardless who they are or
where they're from, can turn their ideas into reality.
Thank you, and I look forward to answering your questions.
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Good morning Chairman Chabot, Ranking Member Velazquez and
members of the Committee on Small Business Subcommittee on
Economic Growth, Tax and Capital Access. Thank you for the
opportunity to testify today on ``State of the Small Business
Economy''.
My name is Holly Wade, and I serve as the director of
research and policy analysis for the NFIB Research Foundation.
NFIB is the nation's leading small business advocacy
association, representing members in Washington, D.C. and all
50 state capitals. Founded in 1943 as a nonprofit, nonpartisan
organization, NFIB's mission is to promote and protect the
right of its members to own, operate, and grow their
businesses.
Small businesses are the bedrock of the U.S. economy with
roughly 28 million small firms, of which, 5.8 million are small
employers.\1\ Small businesses account for about half of U.S.
gross domestic output and about half of the private sector
employment. Their contribution to the U.S. economy is vital to
the creation a strong foundation for the middle class, offering
job opportunities and contributing to their local communities.
Small businesses provide goods and services in every market, in
every geographic region, and throughout every demographic
across the country.
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\1\ Small Business Administration, Office of Advocacy, Frequently
Asked Questions. https://www.sba.gov/sites/default/files/advocacy/SB-
FAQ-2016--WEB.pdf
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General Small Business Conditions
Over the past 10 years, small-business owners have
struggled to bounce back from the great recession. The economic
recovery has been painfully slow for many, at first due to poor
sales but quickly overtaken by issues related to taxes,
regulations and the cost of health insurance.
NFIB's Small Business Economic Trends survey found small-
business owners stuck in a below-average rut, with the survey's
headline optimism index exceeding its 43-year average reading
on a monthly basis only five times since July 2007, three of
those recorded in the last three months.\2\ Owners' optimism
failed to materialize as average GDP growth remained relatively
flat at 2 percent over the last eight years and government
policies continued to increase the cost of doing business. In
response to the combination of policy constraints and anemic
GDP growth, few small-business owners find economic conditions
supportive of investing in or growing their business and new
business formation has languished.
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\2\ Dunkelberg, William C. and Holly Wade, NFIB Small Business
Economic Trends, Series, NFIB Research Foundation.
The poor business climate is further exacerbated by
heightened levels of economic and government uncertainty.
NFIB's 2016 Small Business Problems and Priorities survey found
that two of the top ten most severe problems affecting small-
business owners are uncertainty related.\3\ Uncertainty about
economic conditions and government actions are ranked fourth
and sixth out of 75 business problems, respectively, and about
one-quarter of small-business owners find each a ``critical''
problem in operating their businesses. The Small Business
Economic Trends Uncertainty Index also reached record high
levels leading up to the 2016 presidential elections, all
creating significant barriers to economic growth in the small-
business sector.\4\
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\3\ Wade, Holly, Small Business Problems and Priorities, August
2016. NFIB Research Foundation.
\4\ Dunkelberg, William C. and Holly Wade, NFIB Small Business
Economic Trends, Series, NFIB Research Foundation.
Post-election, small-business owner sentiment improved
dramatically with more owners optimistic about the outlook for
business conditions and business expansion. The rosier outlook
has translated into more favorable expectations for sales
growth and hiring to support expected gains in sales. As
owners' confidence in the economy and economic policies rises,
owners will be more likely to invest in and grow their
business. Owners hold high expectations that Congress will now
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create a friendlier business climate for them to succeed.
Tax Costs and Complexity
The three main concerns of small business owners fore
operating their businesses are: taxes, compliance and
disruption costs of regulations and health insurance costs.
Small-business owners are inundated with a complex and
costly tax structure that wastes their time and resources.
According to NFIB's 2016 Small Business Problems and Priorities
survey, five of the top ten most severe small business problems
are tax related.\5\ The adverse impact of federal taxes on
business income ranks third out of 75 issues and is a
``critical'' problem for nearly three in ten small-business
owners, important because profits are the major source of
capital for growing their firms.
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\5\ Wade, Holly, Small Business Problems and Priorities, August
2016, NFIB Research Foundation.
Tax complexity also creates major consternation among
small-business owners. About 27 percent find tax complexity a
``critical'' problem, the fifth most burdensome issue. Because
of the tax code's complexity, most small-business owners must
use a tax preparer to file their business-related taxes to
ensure compliance, an unnecessary cost to provide tax revenue
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to the government that ``simplification'' could eliminate.
Tax-related costs compete with owners' ability to use
limited profits for primary business activities. Profits are
the main funding mechanism for owners purchasing new equipment,
expanding facilities, hiring and stocking inventory. Tax-
related cost pressures are especially problematic for newer
firms that almost solely rely on profits for operation and
expansion costs as they are generally not able to access
traditional lending sources. But regardless of the firm's age,
tax burdens take a heavy toll on owners' ability to operate
their businesses.
Regulatory Obstacles
Regulation is another area of angst for many small-business
owners. One-third of small-business owners find unreasonable
government regulations a critical problem in operating their
businesses. Regulation is the second-most severe problem for
small-business owners after the cost of health insurance.
NFIB's newly released survey on regulations finds that while
small-business owners are affected by every level of
government, the federal government is the largest contributor
to the problem for half of small employers. Another 30 percent
are most affected by state-level regulations and 17 percent,
local regulations.\6\ Twenty-eight percent of small employers
cite compliance costs as their biggest regulatory problem,
followed by 18 percent most burdened by understanding how to
comply with the regulations. Extra paperwork is the biggest
regulatory problem for 17 percent of small employers. One of
the many regulatory problems facing small employers is simply
the volume of regulations they must comply with. The volume of
regulations is the largest problem for 55 percent of small
employers compared to 37 percent who are most troubled by a few
specific regulations coming from one or two sources. The volume
of regulations is important in that most small employers must
take on the responsibility of learning about new government
requirements themselves instead of delegating the task to an
employee because their staff is too small.
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\6\ Wade, Holly, Regulations, NFIB National Small Business Poll
Series, February 2017, NFIB Research Foundation.
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Rising Cost of Health Insurance
Small-business owners rank the cost of health insurance as
their most severe issue in operating their business out of 75
potential issues with 52 percent of small-business owners
finding it a ``critical'' problem. The high cost of health
insurance is the main reason owners do not offer employer-
sponsored health insurance and the main reason owners
discontinue providing the benefit. And for those offering
health insurance, many owners annually confront the arduous
task of adjusting profit expectations, insurance plans, cost-
sharing and other mechanisms to help absorb often erratic
changes in premium costs.
The rising cost of health insurance has forced many small
employers to rethink the viability of offering health insurance
to their employees. Since 2008, the offer rate for small
businesses with less than 50 employees has dropped
precipitously. Small-business owners are less likely to commit
themselves to offering a long-term, high-cost benefit. The
offer rate for this group has fallen 14 percentage points from
43 percent offering in 2008 to 29 percent in 2015.\7\
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\7\ U.S. Department of Health and Human Services, Agency for
Healthcare Research and Quality, Medical Expenditure Panel Survey,
series.
The small business health insurance tax credit was a
targeted approach in the healthcare law to help curb health
insurance costs for offering small employers and was intended
to provide an incentive to start offering for those that do
not. However, the tax credit was largely ineffective on both
fronts as its design is exceedingly restrictive, complicated,
and only offers limited and temporary relief to a larger small-
business cost problem. The tax credit serves as a windfall for
the few who qualify and take the time, or pay an accountant, to
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file for it.
Small Business Financing
Small business's ability to access financing is a vital
component of a healthy small-business sector. Small businesses
rely on financing for general business operations but also
expansion activities and reinvestment. But since the recession,
loan demand remains historically weak, even with record low
interest rates still available. Historically high numbers of
firms remain on the ``credit sidelines'', seeing no good reason
to borrow over the past eight years. However, if the positive
expectations for real sales and business conditions of the last
three months are translated into actual spending on capital
equipment, expansion and inventory investment, borrowing
activity should pick up. NFIB does have concerns about small
business access to financing as the economy picks up with fewer
small and regional banks available to them. Small-business
owners are often more successful accessing credit through
smaller banks, and it is yet unclear whether bank consolidation
will have a significant impact on small business lending.
Conclusion
NFIB hears from small-business owners year round about the
various challenges they face operating their business. The
primary step in developing pro-growth policies is to first,
``do no harm', especially when it comes to artificially
increasing the cost of doing business whether in the form of
higher taxes, health insurance costs or more regulations, to
name a few. Small-business owners are in great position to
invest in and grow their business given the right set of
policies. Most attention must be paid to the benefits of
regulation that use up valuable human and financial capital.
I appreciate the opportunity to discuss the current state
of the small-business economy and the challenges it faces going
forward. I look forward to working with the Committee to
support small businesses and strengthen the U.S. economy.
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State of The Small Business Economy
Testimony - Bob Bland
Co-Chair, Women's March on Washington
CEO + Founder of Manufacture New York
Members of Congress, thank you for convening this session
on the State of the Small Business Economy, and to all
representatives who share a tireless commitment to retaining
equitable opportunities for working and middle-class small
business owners and their families.
My name is Bob Bland, and I am the CEO & Founder of
Manufacture New York, and the Co-Chair of the Women's March on
Washington. Five years ago, I founded Manufacture New York as a
29 year old female designer, entrepreneur & young mother with a
vision of an inclusive, sustainable 21st century apparel &
textile industry where collaboration & colocation of local
talent provided the engine for truly revolutionary leaps
forward in domestic manufacturing.
Since the Great Recession, virtually all small creative &
manufacturing businesses in New York City have had the same
challenges--access to affordable industrial space with long
term leases, relocation grants for those who are displaced,
affordable housing within a reasonable commuting distance, low
interest working capital & lines of credit to grow our small
businesses, and competitive equipment procurement and training
programs so that we can adapt to a rapidly changing global
landscape.
Fashion design & manufacturing jobs are more than just
jobs--they are an inclusive pathway to meaningful careers and
the potential for business ownership, regardless of previous
educational background or socioeconomic status. With an average
salary of $59,000, they are more likely to include benefits and
have a clear path for growth, both in terms of skills training
and opportunities to advance. The New York City fashion
ecosystem is a unique creative and dynamic cultural powerhouse
that touches lives internationally on a daily basis.
While in 1931, New York City's iconic Garment District was
home to the highest concentration of apparel manufacturers' in
the world, employing 1 million locals at its height, it has
since contracted to 15,000 total apparel manufacturing jobs in
the city, which contextually, still accounts for 30% of all New
York City manufactures. This can look like a bleak picture, but
we would are sitting on several global opportunities for
significant job growth in NYC at the intersection of fashion,
sustainability and technology if we seize the moment.
Bob Bland / [email protected] / 917-349-9155 /
www.manufactureny.org
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New York City is home to 900 fashion company headquarters,
employs 180,000 people and pays $11B in wages and $2B in tax
revenue annually. From the smallest emerging design startups to
the largest department stores and luxury conglomerates,
Manufacture New York has experienced significant interest in
the conceptualization, research, development and
commercialization of a shared set of resources and best
practices to capture value and provide accountability at all
stages of our supply chain.
New York City has a unique proximity to a talented,
experienced and passionate workforce; headquarters of major
brands and media outlets in web, print, television and radio;
and the emergence of Silicon Alley as a hotbed for VC funding
of related technology companies. From biomaterials (Modern
Meadow) to wearable technology (Ringly) to the connected
devices revolution known as the Internet of Things (IoT), major
21st century manufacturing opportunities for New York City
exist where fashion (apparel, textiles, footwear, jewelry, home
goods) collides with previously distant sectors like consumer
electronics, health care, transportation and defense.
Since Superstorm Sandy decimated our working waterfront,
unemployment, under-employment and lack of sector-specific
skills training remains a major barrier for economic prosperity
in South Brooklyn, particularly among 18-24 year olds who are
just entering into their professional lives and older residents
looking for opportunities in new, growing businesses. We must
work inclusively with community stakeholders and local partners
to develop entirely new types of internships, apprenticeships
and workforce training programs that blend STEM training in
wearable technology and material science with apparel and
textile manufacturing so that together, we can create a fresh
start for urban manufacturing and new generation of leaders in
entrepreneurship & innovation.
The Obama Administration worked diligently to establish a
national network of Manufacturing Innovation Institutes
(``MII''), and we look forward to participating in future
institutes, as these sort of public-private partnerships are
essential to long term innovation and job opportunities in
advanced manufacturing. The United States lost 40% of our
middle class jobs nationally during the 30-year exodus of
domestic manufacturing, and it will take significant, sustained
public and private investments across administrations, with all
key stakeholders working together, to restore our prosperity
and economic security as a nation. We urge Congress to continue
funding and growing these programs.
In August 2016, Senator Kirsten Gillibrand announced the
bipartisan Made in America Manufacturing Communities Act. In
order to earn the ``Manufacturing Communities'' designation,
communities would demonstrate the significance of manufacturing
in their region and develop strategies to utilize their
``Manufacturing Communities'' designation in making investments
in six areas:
Workforce training and retraining;
Advanced research;
Infrastructure and site development;
Supply chain support;
Promotion of exports and foreign direct
investment; and
Operational improvement and capital access
for manufacturers that supports energy or process
efficiency, equipment or facility upgrades, or the
development of business incubators, among other
activities.
Senator Gillibrand's bipartisan legislation is cosponsored
by Senators Mark Kirk (R-IL), Jerry Moran (R-KS), Richard
Blumenthal (D-CT), and Christopher A. Coons (D-DE), and a
bipartisan House version was introduced by U.S. Representative
David Cicilline (D-RI), Richard Hanna (R-NY), Tom Reed (R-NY),
Tim Ryan (D-OH), John Katko (R-NY), Cheri Bustos (D-IL), John
Garamendi (D-CA), and Lloyd Doggett (D-TX), We urge the House
of Representatives to move this legislation forward and make
the Manufacturing Communities program a permanent incentive for
Made In USA small business growth.
Manufacture New York also advocates for a healthy domestic
manufacturing sector at large. Not only do manufacturing jobs
pay better than comparable service jobs, but they currently
provide skilled work for roughly 12 million Americans.
Domestic manufacturers object to NAFTA & TPP-style trade
agreements that not only outsource American manufacturing jobs
to low-wage, unregulated countries, but they offer little in
the way of oversight for overseas labor conditions.
Our objections to this trade deal include the fact that TPP
countries like Vietnam are known for ongoing labor and human
rights abuses. It's questionable whether TPP labor standards
can actually be verified or enforced in such countries.
Additionally, free trade agreements like TPP do not include
enforceable provisions to prohibit currency manipulation.
Deliberate currency undervaluation by America's trading
partners has cost the U.S. millions of jobs over the last two
decades. TPP would have also gut Buy America provisions in U.S.
law by allowing firms in any TPP country to bid on U.S.
procurement, including Chinese state-owned firms located in
Vietnam. Thus, U.S. tax dollars for apparel and textiles could
go to China instead of to U.S. producers.
Made In USA manufacturing is the backbone of the innovation
economy, giving creatives + technologists the tools to
commercialize their ideas and create new startups that fuel job
growth in our NY metropolitan region and across the country.
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