31Oct2011 Where Does the Money Go?
"When you run in debt, you give to another Jobs:
America's small-business sector is surprisingly tiny compared to other countries. What's more, small businesses aren't even the main driver of job growth in the United States. The obsession with small businesses is a little misguided. Instead, as economists have found, young firms are the key drivers of growth. New businesses are the real job creators. So how does America stack up here? Actually, not so well. As James Wimberly finds, back in 2007, before the financial crisis hit, the United States ranked just 23rd among wealthy countries in new businesses formed per thousand working adults. That's below countries like New Zealand, Iceland, the United Kingdom, Canada, Sweden and Norway. But we're also, a little unexpectedly, lagging behind countries like Hungary and Slovenia.
America's low-ranking seems a little surprising. After all, many erstwhile U.S. startups - Google, Apple, Boeing, FedEx - are now the envy of the world. So why don't we have more of them? Wimberly suggests that the thin U.S. safety net might be a factor. It's easier, after all, to take a risk, quit your day job, and start a new business if you don't have to worry about getting health-care coverage. One piece of evidence on this score: A 2010 RAND study found that Americans are much more likely to start new businesses as soon as they turn 65 and qualify for Medicare.
Alternatively, perhaps startups are having trouble securing financing. In October, the White House Council on Jobs and Competitiveness put out a report noting that IPOs under $50 million have plummeted since the 1990s. The council recommended loosening some of the financial disclosure rules in Sarbanes Oxley for small startup firms. To take one example, the SEC rules currently prevent new businesses from getting "crowd-funding" from a slew of small investors.
The number of new businesses formed in the United States has dropped 23 percent since 2007. If the rate of start-ups had simply continued at its pre-recession pace, there'd be 1.8 million more jobs in the United States right now. It's hardly a given that boosting the number of start-ups further is the key to prosperity - after all, per Wimberley's figures, countries like Germany and Austria seem to get by just fine with dismal startup rates. Still, focusing on new businesses seems like a better target for policy than focusing on small businesses per se.
Consumer Spending:
With the recent uptick in consumer spending giving our economy a little lift, we thought it would be interesting to take a look at where the money is going.
Europe:
The euphoria over Europe's latest rescue package faded quickly. Now, will European leaders actually implement measures needed to end the sovereign debt crisis? Will they get another chance? At least European leaders got the pieces right this time. They have recognized that a plan must include big write downs of sovereign debt, recapitalization of the banking system and guarantees for newly issued government bonds.
If implemented, the plan would reduce Greece's debt by less than 50 percent, raise about 100 billion Euros in new capital and boost the guarantee capacity of the European Financial Stability Facility to about 1 trillion Euros. (A need for 3 Trillion Euros may be closer to reality).
The plan's shortfalls may be intentional. German Chancellor Angela Merkel and European Central Bank officials blocked the only credible option, an open promise from the ECB that it stands ready to buy trillions of euros in government bonds. The Germans and ECB want assurances they won't end up financing more irresponsible government spending.
Germany and the ECB are betting that incremental rescues, together with occasional bond purchases by the central bank, can keep the situation from spinning out of control, while maintaining the pressure needed to get big nations, such as Italy, to give up some fiscal sovereignty.
Surrendering sovereign budgets to the ECB is a monumental shift. The reforms they seek require treaty changes that could take years to carry out. Meanwhile, the doubts over Europe's future will weigh on the region's economy, pushing more, and larger, governments to the point where their debts become unbearable and aggravating concerns about the health of the banking system. At some point, investors will refuse to lend to sovereigns and banks at any price. The strain will exceed the ECB's ability to contain them. |
