How Washington-Created Economic Uncertainty Undermines Start-Ups and Job Creation

Unable to reach agreement regarding acceptable terms for funding government operations beyond the end of fiscal year 2013, Republicans and Democrats in Congress resolved at midnight on September 30th to allow the government of the United States to partially shut down for the first time in seventeen years.  The economic uncertainty associated with the shutdown and partisan gridlock on Capitol Hill is further heightened by the looming prospect that the United States will run out of money to honor its financial obligations on or about October 17th, unless Congress passes legislation to raise the nation’s borrowing limit or “debt ceiling.”

The last time Washington policymakers took the nation to the brink of default was in August of 2011 – the same summer that we were conducting roundtables with entrepreneurs in twelve cities around the country, asking them about the obstacles undermining their efforts to launch new businesses, grow those new firms, and create jobs.  That partisan showdown caused business and consumer confidence to plunge, set off the worst financial market turmoil since the 2008 financial crisis, and resulted in the first-ever downgrade of the U.S. government’s debt rating.

As much as any other factor discussed at our roundtables, the return to anemic growth so soon after the worst economic downturn since the Great Depression jarred and frightened many of our participating entrepreneurs, causing them to second-guess, postpone, or even cancel plans to expand and hire.  The lack of business, and the uncertainty regarding future business, is the principal obstacle to accelerated hiring, according to many of our roundtable participants.

“For us and for most people I talk to, it’s no more business as usual,” said Bob Burns, president of construction management firm RL Burns, Inc. in Orlando, Florida. “We’ve made some pretty good investments in our business in the past – equipment, staff, training, education, and so on.  But taking the risk of those investments today is not very wise, and I don’t think many others do it either.  It’s very difficult to consider investing money in a future you just can’t see.  There’s no way to gauge it or really know what the next year is going to look like…So today we’re looking to cut back, get lean, and stay lean.  We have absolutely no plans to upgrade our equipment or purchase new computers.  They’re going to hang around until they blow up.  Any kind of long-term investment is off the table.”

Bobbie Kilberg, president and chief executive officer of the Northern Virginia Technology Council in Herndon, Virginia, pointed out an additional source of uncertainty facing businesses in the greater Washington, DC area: “Many of our members, a lot of whom are small companies, are federal contractors or subcontractors.  The inevitable [government] cutbacks are simply going to have to come in defense as well as civilian agencies, given the budget situation.  And that will hit particularly hard on small businesses.  Those businesses don’t have the ability to put people on the sidelines and wait for those contracts to come back along.”

Travis McCready, former Executive Director of the Kendall Square Association in Cambridge, Massachusetts, highlighted a similar problem: “There is great uncertainty about what the federal government will do regarding R&D dollars.  If you look back at the history of Kendall Square, MIT, and how some of our best companies have been built over the years, many of them have their roots in R&D dollars from some aspect of the federal government. We have no certainty now, no predictability about federal research dollars.”

Perhaps the most fascinating aspect of the problem of too little economic dynamism and too much uncertainty was what, or rather who, the vast majority of our entrepreneurs blame for such debilitating circumstances.  While a range of factors were cited as contributing to the halting recovery – the still struggling housing market, continued deleveraging by the American consumer, political turmoil and recession in Europe – most of our participants insistently and even angrily blamed the sluggish U.S. economy on what they perceive as poor leadership, dysfunction, and outright incompetence in Washington, DC.

Many cited policymakers’ inexplicable inability or unwillingness to address problems they see as threatening the future of the nation itself, most notably federal budget deficits and the national debt.  “Small business owners need customers feeling confident about the economy to start spending their money,” said Clay Banks, Director of Economic Development at the Chamber of Commerce in Bartlett, Tennessee, outside Memphis. “When we talk about the fact that we’re already borrowing 50 cents of every dollar we spend, and now we’re talking about borrowing even more, that money has to come from somewhere.  It’s coming out of the pockets of consumers that entrepreneurs need out there spending money.”

Others railed against policymakers’ apparent ignorance regarding the needs and priorities of business.  “I could have all the tax credits in the world,” said Craig Sonksen, owner of Krema Natural Peanut Butter and Crazy Richard’s Natural Peanut Butter brands in Dublin, Ohio, “but if I don’t have more business, I’m not going to hire a soul.  I cashed my Bush check happily a number of years ago, and I get a payroll tax break now from Obama.  But here’s my personal soapbox – quit gerrymandering the economy.  How about we get back to some basic free-market capitalism?  Stop trying to use this lever and that lever.  If they just left us alone to do what we do best, we’d all be much better off.”

Still others were more cynical, dismissing policymakers as hopelessly conflicted and, therefore, incapable of making decisions in the best interest of the country.  “The politicians are largely ignorant and make decisions based on short-term political considerations,” lamented Laura Yamanaka of teamCFO in Los Angeles.  “Or they know the consequences of their decisions, but just don’t seem to care.”

For fragile new businesses – with limited resources, small and unreliable customer bases, and scarce cash flow – a single mistake can mean failure.  In the face of partisan gridlock and pronounced uncertainty regarding the operations of government, tax policy, Federal spending, regulation, and, therefore, the pace of economic growth, new businesses avoid risk – postponing investment, growth opportunities, and hiring.

The paralyzing effect of economic uncertainty is not unique to new businesses.  But as debilitating as Washington-produced uncertainty clearly is for small businesses and larger corporations, start-ups are particularly vulnerable.  New businesses, given their inherent fragility and limited resources, are disproportionately impacted by policy challenges such as regulatory and tax complexity, and Washington-created economic uncertainty, according to many of our participating entrepreneurs, inflicts a similarly disproportionate blow on new businesses with profound consequences for job creation.

“Where’s the leadership?” asked an exasperated Mark Luden, chief executive of the Guitammer Company in Westerville, Ohio.  “It’s the uncertainty out there.  When people are uncertain, those with capital sit on their hands.  Those who are trying to sell decide to wait. And buyers who are able to wait just wait.  It’s the uncertainty that’s killing us. And, yeah, I hear President Obama and people in Congress talk about how innovation is the driver of growth and job creation, but where’s the follow-up?  My response to uncertainty is ‘Where’s the leadership?’  Until someone leads and gets rid of some of the uncertainty out there, you’re going to have problems getting people to buy and invest.  If you’re a big company like Walmart, you can wait it out.  But if you’re new and small, all of this makes it harder to stay afloat.”