End of Work, End of Affluence V: Government--Reinvention or Insolvency (December 12, 2008)
Government at all levels has a stark choice: either reinvent itself to serve a financially diminished populace or become insolvent and perish. Some local governments "get it" and are seeking new sustainable, entrepreneur-based models, most are not and will go bankrupt.
In a way, only someone who has risked all as an entrepreneur/small business owner can truly understand this entry--but everyone else will gain a valuable insight into the End of Work, End of Affluence Depression we are entering by reading this.
Small business is the real workhorse of the U.S. economy. Wall Street and multinational corporations get the headlines, but for context, compare global colossus IBM's entire global workforce of 386,000 with the U.S. workforce of 135 million. (The majority of IBM employees work outside the U.S.)
The plight of small business is partially illuminated by this entry, When Belief in the System Fades (March 12, 2008). Here is an excerpt:
In every case, the person takes on the burdens in the belief that their career will be enhanced and they will make more money/gain more prestige. Yes, we all understand this. But they also must believe in the structural fairness, justice, opportunity, security, meritocracy, etc. of the machine they willingly serve--even if their belief is subconscious or rarely in their conscious thoughts.
Government and its employees fundamentally assume the workhorse of small business and its millions of employees will always be there to pay for government via taxes. I think government and its employees are about to discover that small business "belief in the system" is fading fast or has already been depleted.
At some point, the pressures on the people carrying much of the responsibility--be they Army captains, division managers, or entrepreneurs--reach a point where the person realizes, "This isn't worth it." That is, the sacrifices made to sustain The System (U.S. Army, the business, the division, billings, etc.) are not being compensated by either the inner rewards (sense of purpose, sense of being appreciated, prestige or respect factors, etc.) or the tangible rewards (financial compensation, security, etc.)
Employees of small business can also fail to grasp the knife-edge the owner/ entrepreneur lives on. When my partner and I were building dozens of houses a year (22-25 years ago), we had a standard answer whenever an employee would "crack wise" about how much money we were making (actually, we were losing money): we would hand them the keys to the office and say, "Payday's on Friday."
That would bring them up short, because we were exhausted and therefore serious. Go ahead, here's the keys--you figure out how to make payroll. (Many times we had to take cash advances on our personal credit cards to make payroll.)
Contrast this soul-draining burden with the complaints typical of government offices: somebody's playing their radio too loud, somebody didn't kick into the birthday kitty for the supervisor, etc. etc.
Many in high-stress government jobs also feel the asymmetric burdens. Those who work in law enforcement and emergency medical care (for instance) carry huge responsibilities, and the increasing workloads can raise the same question: "Is it worth it?"
Even though it's devastating for an entrepreneur to close the business they've dedicated their life to, it's also an enormous relief; the long struggle to maintain solvency is over, and whatever comes along will be easier. There's always a way to pick up the pieces, and always a niche in the underground/barter/cash/informal economy.
What gets blown off is skyigh rents, taxes, employees, paperwork and stress. It's astonishingly easier to make a living as a sole proprietor in the informal economy than it is to make a living with employees in the formal economy of junk fees, high rents, etc.
Note to commercial landlords and local government: you think we need to operate this business? Well guess what, we don't. Here's the bankruptcy papers, have fun trying to collect a dime. We're too tired to care how it all pans out, we're moving on to a life without employees, rent, regulations and taxes.
Now multiply this scenario by a million and you get a taste for what lies ahead. Beneath the headline-grabbing greedfest of the past 20 years--one bubble after another in the make-believe debt-fueled world of high finance and flipping houses you never even lived in--those struggling to make a living in small business have seen the rewards decrease and the hassles, taxes and other costs increase.
Government is about to discover "the impossible" is happening: nobody's paying taxes anymore because they no longer have a job or formal small business. The City and County of San Francisco has about 800,000 residents and a budget of $6.5 Billion. The enormity of that number doesn't faze the politicos or government employees at all; everything they say tells us they think "that's as it should be." Never mind the budget was only $4 billion not that many years ago--now $6.5 Billion is the new baseline, and anything less than that "will cause dramatic cuts in core programs," blah blah blah.
The state of California's budget was less than $100 Billion earlier in this decade. It rose to $130 Billion, and now the governor is bleating about "financial Armaggedon" because there's a $14 Billion deficit which might turn into a $30 Billion deficit by next year.
Question to S.F. and Calif: how did you survive on $4B and $90B a few short years ago, and now a 10% reduction is "financial Armageddon"?
I hate to tell you, S.F. and California, but you better be prepared for a city of S.F. budget of $3 Billion, not $6 Billion, and a state of California budget of $60 Billion (if you're lucky) not $130 Billion. And frankly, I consider those revenues estimates extremely generous, because starting or running a small business is asymmetric, i.e. a losing proposition now: revenues are falling but fixed costs and taxes are rising.
Let's turn to knowledgeable correspondent R.W. for an insider's perspective on the costs of starting and operating a small business in urban America:
I have read your posts for a decent while now, and your latest regarding the new informal businesses of the future really struck a nerve w/ me. I found its targeting and penetration uncanny. Most particularly, your allusion to the stubbornness of some landlords (and I may be taking license w/ your views here) bears some further mention.Thank you, R.W., for a sobering account of "capitalism in the real world."
In sum: once it no longer makes any rational sense to start and operate small businesses, then they will vanish like raindrops in a Death Valley heatwave. I think that point is fast-approaching for hundreds of thousands of small businesses.
A very few local governments are responding to reality rather than screaming for more taxes to raise more revenue. Correspondent Freeacre from the excellent Freeacre & Murph blog, sent me this story about Salt Lake City's drive to create a "Sustainable Economy" city code: SLC mayor wants green rules in black and white.
Here is Freeacre's comment, and the relevant excerpt from the article:
Thought it was interesting, especially the city making it easier to have entrepreneurial in-home businesses and selling stuff from front porches, etc.Clearly, this kind of ordinance is a baby-step, but at least it's a baby-step in the right direction in two key ways: by encouraging/enabling "legal" informal business and by encouraging the small-scale production and profitable marketing of food.
Astute correspondent Kevin M. sent in this account of how informal businesses once had places to gather and do business: and not just at the open-street farmer's markets:
Your entry today on the potential for the growth of informal businesses is supported by a similar development which occurred in the U.S. decades after the Great Depression. In the economic malaise of the late 1970s/early 1980s, many big box retailers closed down stores leaving a vast oversupply of large retail centers. Many of those retail spaces were converted to flea markets and swap meets, as scores or even hundreds of independent and often informal vendors filled WalMart-sized buildings selling everything from popcorn and soft drinks to jewelry and TVs. More significantly, at the crest of the wave, many of the buildings would be packed with thousands of patrons on weekends, crowds comparable to or even exceeding typical weekend mall activity today. This was even more pronounced leading into the Christmas holiday season.Thank you, Freeacre and Kevin, for important commentaries.
So local and state government, here's your choice: reinvent and re-scale your
ordinances and operations to what our economy can support, or continue squeezing every last
dime out of small business and watch your tax revenues plummet to the point where
bankruptcy is the only option left.
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