Small Business Groups Urge U.S. Senate Leaders to Advance Crowdfunding Legislation

A coalition of the nation's most influential organizations representing small business owners and entrepreneurs is urging U.S. Senate leaders to work together to bring crowdfund investing legislation to the Senate floor for a vote. In a letter addressed to Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY), the groups note that crowdfund investing legislation passed the U.S. House 407-17, and President Barack Obama has expressed his support for the legislation through a Statement of Administration Policy as well as in his Startup Legislative agenda recently delivered to Capitol Hill.

(READ THE LETTER BY CLICKING HERE.)

Crowdfund investing platforms will allow entrepreneurs who lack access to funding networks the opportunity to bring their business ideas directly to investors through regulated, online platforms. As the groups note in the letter, "Americans will have the opportunity to invest in small businesses in their local communities, or support entrepreneurs in rural areas where business formation is critical to sustaining those communities." The letter points out that capital access remains a serious challenge for startups and growth-oriented businesses, and without "adequate sources of capital, the economy will continue to underperform, and the recovery will remain less than robust." Funding streams "remain cautious, locked or tentative," write the groups.

Two crowdfund investing bills have been introduced in the U.S. Senate. Majority Leader Reid announced yesterday that the U.S. Senate will address the package of capital formation bills that overwhelmingly passed the U.S. House. With respect to crowdfund investing legislation, state regulators have engaged in a campaign of "fear and fraud," which has deprived Senators from learning the facts about how crowdfunding currently works through gift-based platforms, and how technology -- and a new regulatory framework - will play a central role in rooting out potentially bad actors on crowdfund investing platforms.

As the groups note in their letter:

"On these platforms, investors will dynamically engage with other investors to vet business ideas and fund those businesses that have significant promise. Crowdfund investing platforms will be open and transparent, and operate under a new regulatory framework. The platforms will protect investors by utilizing proven technologies and tap into 'the sunshine' of social media. This is what has made gift-based crowdfunding so successful, and why crowdfund investing has been a major success in other parts of the world. Entrepreneurs looking to raise capital will be required to provide significant financial information to potential investors, as well as withstand the scrutiny of the crowd in regards to the feasibility of their business plans and models."

The small business groups are optimistic about the legislation's fate. In the letter, they communicate a belief that "a consensus is achievable for advancing legislation that enables effective crowdfund investing platforms for small businesses while protecting investors." Majority Leader Reid said the Senate Banking Committee will hold an additional hearing on the package of capital access bills next week, which the groups hope will include expert witnesses on crowdfunding so that Senators can be properly informed about existing platforms, and how the new space will protect investors.

The groups underscore the importance of the need to work together to enact solutions that will help small business owners invest, grow and create jobs "Capital is the lifeblood of our economy, and without it small business owners and entrepreneurs simply cannot generate the new jobs, breakthrough innovations and economic impact that are necessary for bringing our nation back to sustained growth," the groups conclude in the letter.

The letter was signed by Harry Alford, President & CEO, National Black Chamber of Commerce; Kristie Arslan, President & CEO, National Association for the Self-Employed; Roger Campos, President & CEO, Minority Business Roundtable; Allen Gutierrez, National Executive Director, The Latino Coalition; Barbara Kasoff, President & CEO, Women Impacting Public Policy (WIPP); Karen Kerrigan, President & CEO, Small Business & Entrepreneurship Council; and Todd McCracken, President, National Small Business Association.

Karen Kerrigan, President & CEO

Consumer Confidence: Up ... But Big Questions Continue

On February 28, the Conference Board reported that its Consumer Confidence Index, which had declined in January, increased in February from 61.5 a month earlier to 70.8.

Consumers were more optimistic on their assessments of both current conditions and their short-term outlook. That's certainly welcome. But all of this needs to be put in perspective.

For example, before the deep recession and poor recovery took over, the Consumer Confidence Index was far higher. Five years ago, in February 2007, it came in at 111.2. Over the three years prior to the most recent recession, the index range ran between 85.2 and 111.9. For good measure, over the past three-and-a-half decades, the high was 144.7 in January 2000.

So, while consumer confidence is improved compared to where it's been over the past year - falling short of the 72.0 mark hit last February, which was the high mark for the past four years - we're still nowhere near where we should be, especially more than two-and-a-half years into a recovery.

In addition, while improved, consumers remain far from optimistic in terms of their outlooks for both business conditions and the labor market.

On business conditions, the Conference Board reported: "The proportion of consumers expecting business conditions to improve over the next six months increased to 18.7 percent from 16.7 percent, while those anticipating business conditions will worsen decreased to 11.8 percent from 14.6 percent." And on labor markets: "Those anticipating more jobs in the months ahead increased to 18.7 percent from 16.4 percent, while those anticipating fewer jobs declined to 16.9 percent from 19.1 percent.

Again, while any positive moves are appreciated, these levels hardly reflect a robust confidence in the economy. Indeed, it's quite the contrary.

Finally, it must be noted that this measure of consumer confidence might already be outdated. The cutoff date for these results was February 15. With the recent rise on gas prices, and expectations for rising costs at the pump in coming weeks and heading into the summer, especially with uncertainty swirling around Iran, it would not be surprising to see consumer confidence take a hit as a result.

In the end, of course, consumer confidence reflects the state of the economy and job creation, along with key costs like energy. Consumer uncertainty, along with business and investor uncertainty, need to be reduced via sound public policies, which mean a shift to smaller government, namely, substantive, permanent tax and regulatory relief, reduced federal spending, sound monetary policy focused on price stability, and stronger leadership on free trade in the global arena. That shift would be good for entrepreneurship, business, investment, growth, jobs and therefore, consumer confidence.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

France Fights to Protect IP

The great early 19th century, French economist Jean-Baptiste Say noted the importance of property rights: "Political economy recognises the right of property solely as the most powerful of all encouragements to the multiplication of wealth."

On protecting private property as a necessary role of government, Say wrote: "Without this protection of each individual by the united force of the whole community, it is impossible to conceive any considerable development of the productive powers of man, of land and of capital; or even to conceive the existence of capital at all; for it is nothing more than accumulated value, operating under the safeguard of authority."

While the technological state of our economy is light years ahead of where it stood two hundred years ago, the protection of private property - including intellectual property - remains a critical duty of government, and central to economic development and growth.

On February 20, The New York Times ran an interesting article titled "A Piracy Law in France Appears to Curb File-Sharing and Lift Digital Music." The main point of the story was that two years afo France approved a measure to fight digital piracy, and the result has been a sharp decline in file-sharing piracy, growth in digital sales, and a stabilization of music industry revenues.

The article described the process under the French law: "The agency that administers the three-strikes system, known by the French abbreviation Hadopi, had sent 822,000 warnings by e-mail to suspected offenders as of the end of December. Those were followed up by 68,000 second warnings, issued through registered mail. Of those, 165 cases have gone on to the third stage, under which the courts are authorized to impose fines of €1,500, or nearly $2,000, and to suspend Internet connections for a month."

The piece also quoted √Čric Walter, the secretary general of Hadopi, explaining: "Our work is to explain to people why piracy is a bad thing and why they should stop... When the people understand that, they stop. Of course, some people don't want to understand. Then we have to transfer their dossiers to the justice system."

A study on the impact of Hadopi by researchers from Carnegie Mellon University and Wellesley College was referenced in the article. That study, conducted by Brett Danaher, Michael D. Smith, Rahul Telang and Siwen Chen, summed up its key findings this way: "Our results suggest that increased consumer awareness of HADOPI caused iTunes song and album sales to increase by 22.5% and 25% respectively relative to changes in the control group. In terms of robustness, we find that these sales changes are similar for each of the four major music labels, suggesting that our results are not driven by one particular label. We also find that the observed sales increase is much larger in genres that, prior to HADOPI, experienced high piracy levels (e.g., Rap and Hip Hop) than for less pirated genres (e.g., Christian music, classical, and jazz). This tends to strengthen the causal interpretation of our results given that if HADOPI is causing pirates to become legitimate purchases, its effects should be stronger for heavily pirated music."

So, credit France for taking a significant and apparently powerful step to protect intellectual property. Jean-Baptiste Say would be pleased, and U.S. policymakers should take note.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Rising Fuel Prices

As recent as early October, the price of oil was below $80 a barrel. On February 22, it was just above $106. That's a nearly 40 percent increase in four-plus months.

At the gas pump, the national average price of a gallon of gas, according to Energy Information Administration data, came in at $3.65 on February 20. That was up by 30 cents a gallon versus early January.

Obviously, two big issues regarding prices at the gas pump are the price of crude oil and taxes. In fact, API's Chief Economist John Felmy noted on February 22 that 84 percent of the price of gasoline are accounted for by crude oil and taxes.

Interestingly, policymakers can help on both fronts. First, and most obvious, is the tax issue. Quite simply, rolling back taxes on the energy sector will reduce costs. Consider that the average federal and state tax on a gallon of gasoline is 48.8 cents. For good measure, the President and various members of Congress need to stop the push for increased taxes on energy firms, as that will only reduce investment and production.

As for the price of crude oil, there clearly is an Iran fear premium at work. That is, the threat of the Iranian nuclear program and the potential reactions, including possible war with Israel, disruption of oil supplies as some 17 million barrels flow through the Strait of Hormuz daily, and how the U.S. might react, have pushed up oil prices. If Israel does take action, all bets are off as to how high oil might jump.

Beyond decisions made in terms of national security and foreign policy, policymakers can make a difference by removing obstacles and prohibitions on domestic energy production. A good place to start would be with H.R. 3408, which passed the House of Representatives by a bipartisan vote of 237-187 on February 16. As summed up in a House press release, the legislation would "require the Administration to move forward with new offshore energy production in areas containing the most oil and natural gas resources - including the Atlantic Coast, Pacific Coast and portions of the Eastern Gulf of Mexico;" open a small percentage of ANWR to oil and natural gas development; "encourage the development of 1.5 trillion barrels of oil shale in the Rocky Mountain West, and approve the Keystone XL pipeline."

Natural Resources Committee Chairman Doc Hastings offered a challenge: "As gasoline prices continue to rise to almost double what they were when President Obama took office and Iran continues to strain foreign oil supply, Americans are demanding action. Republicans are responding with this action plan to create jobs and grow the economy through new American energy production. The only question is, will the Democrat controlled Senate and President Obama stand in the way or become part of the solution?"

In the end, of course, more energy production, whether in the U.S. or any other nation, is positive for prices and the energy costs faced by U.S. consumers and businesses.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Crowdfunding Legislation: Time to Move Forward!

Everybody seems to be onboard with crowdfunding. Well, almost everybody.

Using the Internet and social media, crowdfunding allows entrepreneurs to raise limited amounts of capital from a wide array of micro-angel investors. In this common-sense way of expanding the universe of potential investors, transparency and a large population - the crowd - wind up evaluating each investment opportunity.

Making crowdfunding legal makes sense given the capital needs of small firms, and the tremendous opportunities opened for small investors via the Internet and social media. And rare bipartisan support exists for this important economic measure.

For example, on November 3, the U.S. House of Representatives passed the Entrepreneur Access to Capital Act (H.R. 2930), which again allows small businesses and small investors to get together via the Internet, by a vote of 407-17. Specifically, the legislation allows crowdfunding when the total amount of capital to be raised is $2 million or less, with individual investments limited to $10,000, or 10 percent of an investor's income, whichever is less.

President Barack Obama has embraced crowdfunding. On November 2, the administration released the following in a "Statement of Administration" policy: "In the President's September 8th Address to a Joint Session of Congress on jobs and the economy, he called for cutting away the red tape that prevents many rapidly growing startup companies from raising needed capital, including through a ‘crowdfunding' exemption from the requirement to register public securities offerings with the Securities and Exchange Commission. This proposal, which would enable greater flexibility in soliciting relatively small equity investments, grew out of the President's Startup America initiative and has been endorsed by the President's Council on Jobs and Competitiveness. H.R. 2930 is broadly consistent with the President's proposal. This bill will make it easier for entrepreneurs to raise capital and create jobs."

Steve Case serves on the President's Council of Jobs and Competitiveness, and also is chief executive of investment firm Revolution and heads up the public-private Startup America Partnership. Speaking at the Washington Economic Club on February 23 about the importance of entrepreneurship in the U.S., as the Washington Post reported, Case "underlined the importance of improving access to capital by allowing entrepreneurs to tap into modern financing alternatives like online crowd-funding platforms."

So, what's the hold up? The U.S. Senate has yet to take action.

Senate bills would have different funding levels and tighter regulations. As reported by CNBC.com on February 14, "Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council says she thinks it has an 80 percent chance of passing the Senate when it does come up for a vote. ‘It has deep bipartisan appeal and President Obama's support,' she says. The only roadblock seems to be state regulators, who fear massive potential unregistered securities fraud. ‘They're spreading fear and slowing the process,' she says."

In particular, state regulators want to prevent the preemption of state law, and are seeking to severely restrict the maximum amount that can be invested by an individual.

The effort to over regulate in the Senate, in response largely to this lobbying from state regulators who in the end are seeking to protect their turf (as government regulators and bureaucrats do), places this common-sense, pro-entrepreneur crowdfunding measure at risk. With transparency and basic safeguards, as proposed by the House and the President, crowdfunding can be a tremendous opportunity for entrepreneurs to find the capital needed to start up and/or grow. It would be a clear plus for U.S. economic growth, competitiveness and job creation.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Initial Jobless Claims

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), released the following statement in response to the latest initial jobless claims released by the Department of Labor:

"The second week in a row of seasonally adjusted initial jobless claims coming in at 351,000 is a clear plus. That's the lowest level since early March 2008. And the trend, though uneven, has been positive since mid-September of last year.

"While moving below the 400,000 initial claims level is important, it must be pointed out that during periods of solid economic growth, initial jobless claims generally run in the range of 270,000 to 330,000. So, we still have plenty of work to do.

"Our economic recovery remains uncertain, uneven and under-performing largely due to an adverse policy climate for business and investment. To return to robust economic and employment growth, there needs to be a shift from anti-growth tax, regulatory and government spending policies to a pro-growth policy structure of tax and regulatory relief, and smaller government."

SBE Council Responds to President Obama's Corporate Tax Reform Plan

The Small Business & Entrepreneurship Council (SBE Council) released the following statement in response to the Obama administration's corporate tax reform proposal:

"The idea of reducing tax breaks and credits in order to broaden the base and lower corporate income tax rates is sound. Unfortunately, President Obama's plan also proposes to increase overall taxes on corporations and investors, while still favoring certain industries over others. The last thing this economy needs is higher taxes on business, investment and the energy sector," said SBE Council chief economist Raymond J. Keating.

The plan reduces the corporate tax rate to make it more globally competitive, but does not reduce individual tax rates, a move that would help America's small business owners and the self-employed. However, the President did call for expanding small business expensing levels to $1 million, and making that permanent.

"The expensing proposal is a positive step. At the same time, though, substantive tax reform would offer expensing as an option for all businesses in terms of their capital expenditures," added Keating.

The proposal also calls for repeal of the last-in, first-out (LIFO) accounting method, which would hit many small businesses. In addition, taxing carried interest as ordinary income would undermine investment and hurt U.S. competitiveness.

"At the very least, tax reform should strive to be revenue neutral. Ideally, we need substantially lower tax rates and overall tax relief to help get this economy back on a path of robust economic growth. And both corporate income and personal income tax rates must be reduced, so that all businesses, including small firms, can benefit and drive innovation, economic growth and job creation forward," concluded Keating.

Steve Jobs' IP Grammy

The 54th Grammy Awards on February 11 claimed boffo ratings. Some 44 million viewers tuned in, up from 27 million people watching last year.

Perhaps that was not surprising given the salute to Whitney Houston after her untimely death, along with a reuniting of the Beach Boys, the comeback of Adele, and Paul McCartney taking the stage, among other top performers.

But one of the most interesting Grammies awarded this year did not go to a singer or musician. Instead, it went to a businessman. The late Steve Jobs, co-founder of Apple Computer Inc., received a Trustees Award.

At the Recording Academy's Special Merit Awards Ceremony on February 11, as noted on the Grammy's website, "Jobs' Trustees Award was accepted by Eddy Cue, Apple's senior vice president of Internet software and services, who made note of Jobs' love of music. ‘Music shaped his life and made him who he was,' said Cue. ‘When he introduced the iPod in 2001, people asked, "Why are you doing this?" He said, "We love music and it's always good to do something you love.'"

If anyone deserved being honored by the music industry, it would be Jobs, who, arguably, saved the industry.

It's worth reminding ourselves that online theft of music took off in the late 1990s, in particular with the creation of the Napster file sharing business in 1999. Jobs responded with the iPod and iTunes in 2001, which made online purchases of songs affordable, easy and appealing.

Music theft online continues, of course. Indeed, it remains a major problem. The RIAA, for example, reports: "While the music business has increased its digital revenues by 1,000 percent from 2004 to 2010, digital music theft has been a major factor behind the overall global market decline of around 31 percent in the same period. And although use of peer-to-peer sites has flattened during recent years, other forms of digital theft are emerging, most notably digital storage lockers used to distribute copyrighted music." The RIAA numbers show how daunting music theft is: "Since peer-to-peer (p2p) file-sharing site Napster emerged in 1999, music sales in the U.S. have dropped 53 percent, from $14.6 billion to $6.9 billion in 2010. From 2004 through 2009 alone, approximately 30 billion songs were illegally downloaded on file-sharing networks."

The RIAA also notes a striking correlation between the decline in music sales and a decline in the number of people working as "musical groups and artists" according to Bureau of Labor Statistics numbers (see the analysis here.) The RIAA analysis sums up: "Selling music is an important motivator to creating music, and ... the decline in sales has correlated with fewer people making a living in music."

Keep in mind that the music business is overwhelmingly about small firms. For example, in that industry category of "musical groups and artists," 93.6 percent of firms with employees had less than 20 workers, and 99.9 percent (i.e., all but five firms) had less than 500 employees (according to the latest Census Bureau data from 2009).

Jobs' love of music, combined with his business common sense, led him to understand the need to protect intellectual property if the music business were to survive.

In another recent SBE Council Technology & Entrepreneurs analysis, we quoted the recent biography Steve Jobs by Walter Isaacson, when the author wrote about Jobs, piracy and protecting IP. That is worth highlighting here once more:

"At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:

"‘From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we'd be out of business. If it weren't protected, there'd be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there's a simpler reason: It's wrong to steal. It hurts other people. And it hurts your character.'

"He knew, however, that the best way to stop piracy - in fact the only way - was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting."

Steve Jobs combined an understanding of the importance of IP with an incredible talent for innovating, and the result allowed the music industry to have a fighting chance in competing with "free," that is, online piracy.

Depending on your music tastes, you can always debate who did or did not deserve a Grammy. But whatever kind of music you happen to favor, there's no debating the Grammy honor awarded to Steve Jobs.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

The Truth About Private Equity

Political expediency too often overrules common sense economics. That has been the case recently when it comes to private equity.

Private equity has become a favorite political target of President Obama, certain members of Congress and other assorted politicians who are pushing a class warfare agenda. For example, in a February 14 Bloomberg report, it was asserted, "Private equity managers' preferential tax treatment, less than half the rate paid by ordinary wage earners, is ‘indefensible,' the investment chief of the California Public Employees' Retirement System said." On the presidential campaign trail, some Republican candidates have even taken potshots at fellow candidate Mitt Romney for his work in private equity.

The standard line against private equity firms seems to go something like the following: private equity groups gut companies and eliminate jobs just so partners can enrich themselves. It's all about greed.

The President has called longstanding law on taxing carried interest at the capital gains tax rate "inappropriate." The Obama budget calls for boosting the tax on carried interest from the current 15 percent capital gains tax rate to a top personal income tax rate of 39.6 percent, or as much as 43.4 percent when the Medicare income tax is included. That's a near tripling of the tax rate on carried interest.

Following the lead of elected officials, no doubt, the Securities and Exchange Commission has begun an examination of the private equity industry.

Do any of these and other attacks on private equity make sense? Specifically, what's the real role of private equity in our economy?

Well, quite simply, private equity provides capital and expertise needed to grow and increase the value of businesses. By the way, that's a good thing.

Specifically, private equity partnerships set up funds that raise capital from various sophisticated investors, including pension funds and foundations. In fact, according to a 2011 Preqin report, 63 percent of capital invested in private equity funds in 2010 came from public and private pension funds, endowments and foundations. They like the higher returns that come with private equity. These investors are limited partners, with the private equity firms serving as the general partners, who also invest their own capital and run the fund. The general point of private equity funds is to buy companies, with the objective of increasing the value of the enterprise and eventually selling the business for a profit.

A key positive of the private equity model is the alignment of incentives. With publicly traded companies, it's often a significant challenge to line up the interests of management with those of the owners (i.e., shareholders). Private equity funds get directly involved in owning and operating companies, including laying out goals and strategies, and selecting the management team, who usually have to invest in the firms as well. The interests and incentives then are uniform, with the focus being to enhance the firm's value.

As for carried interest, that simply is the share of profits earned by the general partners. Carried interest is not the same as a wage or salary, as it is completely tied to the investment in and performance of the firm. Carried interest is all about firm profitability - no profits mean no carried interest - and it is not only typical in private equity, but also in real estate and venture capital. For good measure, clawback provisions mean that limited partners in the fund must first be paid a certain profit, and if other investments fail to meet profit criteria, then general partners have to return their carried interest to the fund. Of course, that is never the case with wages or salaries.

It makes sense then that carried interest not be taxed the same as wages and salaries, but instead be treated as capital gains given the reality that this is a return on risk taking, i.e., on entrepreneurship and investment. And in fact, carried interest has been taxed as capital gains for decades. The only reason this has come up is due to economic ignorance and/or political calculation.

As for what private equity achieves, it's obviously not about gutting companies and randomly firing employees, since the objective is to increase a firm's value in order to eventually sell it at a profit. Instead, the point is to work to improve and build an enterprise, and when successful, that's good news for customers, employees, and owners.

On the issue of jobs, which has been central to the political assault on private equity, the Private Equity Growth Capital Council points out: "According to a 2008 World Economic Forum report that studied 5,000 transactions over 25 years, prior to their acquisition, private equity companies were, on average, losing jobs at existing facilities at a rate one to three percent faster than their competitors. The WEF study also concluded that in the first two years of investment, private equity firms increased the rate of job growth at U.S. facilities by their portfolio companies to six percent above the peer industry average."

Steve Judge, president and CEO of the council, recently offered the bottom line on private equity in our economy: "Private equity is a vital source of capital, having invested nearly $150 billion in over 1,200 companies in 2010 alone."

In a piece summarizing their findings in The Atlantic, economists Kevin Hassett and Steven J. Davis explained, "Private equity firms operate in just about every sector. Some of them focus on leveraged buyouts (LBO), in which a firm uses debt, i.e.: leverage, to buy out a controlling stake in a company. Others specialize in providing capital to new ventures, offering growth capital to promising existing ventures, or turning around distressed companies."

They concluded: "Summing up, the academic literature supports three conclusions about private equity firms. First, they provide attractive returns for their investors. Second, the effect of private equity buyouts on employment in target firms is, on average, quite small. The venture capital side of private equity almost certainly has a positive effect on employment. Third, private equity buyouts accelerate the process of creative destruction: old jobs disappear more rapidly, new jobs get created more rapidly, and productivity growth increases as a result. In this respect, private equity looks like a potent form of capitalism."

Of course, that's exactly what our economy needs, i.e., investment to build up and improve U.S. businesses, enhance productivity and therefore boosting output and incomes, and innovation to drive our economy forward.

Consider private equity's role in the energy sector, where it has been a source of capital for new and expanding enterprises. The February 13 Wall Street Journal noted: "Private equity occupies a crucial slot in the sector's food chain, fortifying small, cash-hungry explorers until they are ready to be consumed by large producers or go public. Firms typically team up with management groups with energy experience to lessen risk." Indeed, private equity's role is a considerable one: "Deal makers are excited because advances in drilling techniques such as horizontal drilling and hydraulic fracturing, or fracking, have made it easier to extract oil and natural gas from shale and other rock formations, creating an opening for private-equity firms to place big bets in a capital-hungry business. Some early investors already have extracted billions of dollars of profits. Private-equity firms completed $24.8 billion of energy deals last year, nearly triple the $8.5 billion in 2010, while the value of all deals last year rose just 17%, according to data-tracker Preqin."

In a related February 13 story on private equity's involvement with energy start-ups, the Journal added: "Private-equity firms don't often start companies from scratch, but in oil and gas they often pair with management groups in exploration start-ups."

Clearly, all of this is good news for energy entrepreneurs in need of capital, for workers in the energy sector, and ultimately, for energy consumers.

Despite the obvious economic value in private equity, attacks continue. Tamara Mellon is the co-founder of Jimmy Choo. She experienced big success running the firm under private equity ownership, and got quite wealthy as a result. But according to a February 10 Wall Street Journal report, Mellon has been taking potshots at private equity via Twitter, and is promising some kind of expose. This, of course, sounds like another political agenda being vented, and/or perhaps some revenge for a work relationship gone awry. But one of her tweets is worth noting here: "Remember - Its (sic) entrepreneurs that create jobs, not Private Equity or Investment bankers."

But what Mellon, along with President Obama and assorted others in the political class, fail to grasp is that entrepreneurs need capital to grow, expand, achieve success, and sometimes to reclaim success. Private equity plays a crucial role in the process of allocating capital, and therefore, the job of private equity is worthy of praise, rather than being set up as a punching bag for political purposes. As we've seen time and time again, sacrificing common-sense economics at the altar of politics never turns out well for entrepreneurship, investment, economic growth and job creation.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Energy and President Obama's Budget

President Obama has been unfailing in his desire to punish the U.S. domestic energy industry. Of course, attacking so-called "Big Oil" might score some points with the president's political base, but in reality, it is an attack on the hundreds of thousands of people and the thousands of small firms working in the oil, gas and coal industries, for example, not to mention energy consumers, including individuals, families and businesses of all types and sizes.

This presidential hostility came through loud and clear, once again, in the proposed Obama budget.

Over ten years, the oil, gas and coal industries would get his by an estimated $29.6 billion in tax increases. These are listed as the elimination of "fossil fuel preferences" in the budget, but they amount to nothing more than eliminating legitimate tax deductions and measures.

And at least another $110 billion in tax hikes are proposed that would fall disproportionately on the energy industry.

In the end, this turns out to be the same list of energy tax increases that the President has been long pushing. Of course, this agenda of jacking up taxes on domestic energy producers is an odd choice if the President truly supports increased energy production at home, and the goal of boosting job creation.

The reactions from key industry voices were on target.

For example, Jack Gerard, President and CEO of the American Petroleum Institute, warned, "Increasing our taxes would push oil and natural gas investment overseas and diminish job-creation and economic activity here at home. After a handful of years, we would see less domestic energy production - particularly of natural gas - more imports, fewer new jobs, and, eventually, depressed tax, royalty and other revenues."

And American Fuel & Petrochemical Manufacturers President Charles T. Drevna said, "It's disappointing that President Obama is once again proposing to bar companies that produce oil and natural gas and that manufacture fuels and petrochemicals from taking the same business tax deductions as other industries. If the president's proposal is enacted by Congress it will drive up energy costs for American consumers and prevent the creation of desperately needed new jobs for American workers."

But given the President's recent decision not to approve the Keystone XL pipeline, we should not be surprised by anything this administration does to deter expanded energy production and the jobs that come with it.

Finally, and as usual, whenever government decides to tax or regulate, it is small businesses that tend to get hit hardest. Consider the following from a February 13 Wall Street Journal report on the proposed energy tax increases: "But for some smaller oil and gas producers, some of the tax benefits play a larger role, because those producers have less capital in a capital-intensive industry."

There's no such thing as "Big Oil." Instead, it's just the many businesses of varying sizes and their employees that work in the energy industry ultimately serving residential and business energy needs. And all of these are under assault by the Obama budget plan.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Small Business Survival Index: An In-Depth Look

TheStreet.com takes the most comprehensive look to date at SBE Council's "Small Business Survival Index." It's a great article that delves into the policy barriers that hurt investment, small business growth and entrepreneurship.

Read the full article here.

SBE Council's "Health Care Policy Cost Index 2012" Ranks the States

The Small Business & Entrepreneurship Council (SBE Council) today released its "Health Care Policy Cost Index 2012." The index ranks the 50 states and District of Columbia according to public policy measures that impact the costs of health care and health insurance coverage.

SBE Council chief economist Raymond J. Keating, author of the report, said: "The employer costs of providing health care coverage and the overall cost of health care just keep rising. A big part of these rising costs have to do with unwise and unwarranted government intervention in the health care marketplace. These government-driven costs don't just come from misguided federal policies, but policies in the states as well."

The "Health Care Policy Cost Index 2012" ties together eight measures, including tax treatment of health savings accounts, various forms of guaranteed issue and community rating regulations, the number of insurance coverage mandates, whether or not states have high-risk pools, and spending on government health programs.

Among the 50 states and District of Columbia, the best 10 states in terms of state health care policies are: 1) South Carolina, 2) Iowa, 3t) Indiana, 3t) South Dakota, 5) Nebraska, 6) Utah, 7) Wyoming, 8) Montana, 9) Alabama, and 10) Wisconsin.

Meanwhile, the 10 worst states are: 42) Oregon, 43) District of Columbia, 44) Connecticut, 45) Washington, 46) New Jersey, 47) Vermont, 48) Rhode Island, 49) Massachusetts, 50) Maine, and 51) New York.

Keating added: "More government programs and spending mean fewer incentives to be concerned about prices and utilization of services. More mandates on insurers inevitably translate into higher insurance costs. And while increased regulation might sound good to many, costs rise as government overrules decisions made in the private, competitive, consumer-centered marketplace. Unfortunately innovation, competition and affordability are all hurt when government overly intrudes."

Keating concluded: "Elected official at the federal and state levels need to move away from more government controls and spending, and towards reforms that expand competition and choice in the private health care marketplace. Of course, this process needs to start with the outright repeal of ObamaCare at the federal level. But there's much that can be done to rein in government-related costs in the states as well."

To see the full rankings and to get a copy of the "Health Care Policy Cost Index 2012," please click here.

No Start-Ups, No Recovery

A Challenger, Gray & Christmas survey found that 2011 marked the lowest start-up rate in the 11 years since their study began. The waning state of entrepreneurship demonstrates why the U.S. Senate needs to get off the dime and pass H.R. 2930, the "Entrepreneurs Access to Capital Act" -- otherwise known as the crowdfunding bill.

GOP Senators are having a press event today to urge passage of four capital access bills that swept through the House with huge bipartisan majorities. For example, the vote for H.R. 2930 was 407-17. President Obama supports these bills, so what is the hold up in the Senate? Entrepreneurs need access to capital – the environment is getting steadily worse.

Call your U.S. Senators at 202-224-3121 and demand that they act on the bipartisan, Obama-supported crowdfunding bill – H.R. 2930!

Karen Kerrigan, President & CEO

Top 10 Reminders of Importance of IP

As legislation and issues such as piracy get discussed and debated, sometimes it can become easy to lose focus on why intellectual property rights and their protection matters to businesses of all types and sizes, and to the economy as a whole.

The World Intellectual Property Organization, or WIPO, is an international organization established in 1967. It's stated purpose is "developing a balanced and accessible international intellectual property (IP) system, which rewards creativity, stimulates innovation and contributes to economic development while safeguarding the public interest." In November, WIPO published its "2011 World Intellectual Property Report: The Changing Face of Innovation."

The report offers analysis on assorted IP-related topics, with this annual particularly focused on issues of collaboration and competition, as well as the role of public research. But it's worth highlighting key foundational points from the report that address IP in terms of the broader economy, international markets, and the individual firm.

I've boiled this down to a "Top 10 Reminders on the Centrality of IP to Prosperity."

1) The role of innovation cannot be overestimated: "Innovation is a central driver of economic growth and development. Firms rely on innovation and related investments to improve their competitive edge in a globalizing world with shorter product life cycles."

2) The data make clear that innovation is a driver of economic, productivity and income growth. "As early as the mid-1990s, the economic literature suggested that innovation accounted for 80 percent of productivity growth in high-income economies; whereas productivity growth, in turn, accounted for some 80 percent of gross domestic product (GDP) growth. More recent studies at the country-level demonstrate that innovation - as measured by an increase in R&D expenditure - has a significant positive effect on output and productivity."

3) The importance of intellectual property rights for firms and the economy in general is driven home by the international growth in patents: "Turning to the IP system, there is every indication that IP ownership has become more central to the strategies of innovating firms. IP policy has, therefore, moved to the forefront of innovation policy. Demand for patents has risen from 800,000 applications worldwide in the early 1980s to 1.8 million in 2009. This increase has occurred in different waves, with Japan driving filing growth in the 1980s, joined by the United States (US), Europe and the Republic of Korea in the 1990s and, more recently, by China."

4) International integration regarding IP is further emphasized: "Dividing in patenting worldwide in to so-called first filings - approximating new inventions - and subsequent filings - primarily filings of the same invention in additional countries - shows that the latter explains slightly more than one-half of that growth over the last 15 years... Patent applicants increasingly seek to protect their patents abroad and, indeed, in a larger number of countries, reflecting greater economic integration."

5) Along with patents, other areas where are IP rights and protections matter have expanded as well: "Demand for other IP rights - which firms often use as a complement to patents - has also seen marked growth. Trademark applications worldwide increased from 1 million per year in the mid-1980s to 3.3 million in 2009. Similarly, industrial design applications worldwide more than doubled from about 290,000 in 2000 to 640,000 in 2009. Greater internationalization is also an important factor behind the rising demand for protection of these forms of IP."

6) How much of a difference do IP protections make when it comes to relative competitiveness in the international marketplace? "Differences in innovative activity and related technological gaps between countries are a significant factor in explaining cross-country variation in income and productivity levels. According to several studies, roughly half of cross-country differences in per capita income and growth can be explained by differences in total factor productivity, a measure of an economy's long-term technological change or dynamism."

7) Indeed, being at the cutting edge of innovation matters: "In addition, the variation in the growth rate of GDP per capita is shown to increase with the distance from the technology frontier. Countries with fewer tdchnological and inventive capabilities generally see lower and more diverse economic growth than do richer countries."

8) The reality for individual businesses conforms to broader economic realities on IP: "At the firm-level, there is emerging but increasingly solid evidence that demonstrates the positive links between R&D, innovation and productivity in high-income countries. Specifically, these studies imply a positive relationship between innovative activity by firms and their sales, employment and productivity. Innovative firms are able to increase efficiency and overtake less efficient firms. Firms that invest in knowledge are also more likely to introduce new technological advances or processes, yielding increased labor productivity. In addition, a new stream of research stresses the role of investing in intangible assets for increased output and multifactor productivity growth."

9) As for the views of economists, while research continues to explore the finer details of IP and IP protections, the main point of intellectual property rights being a central driver of innovation and growth remains clear. It is noted in the report: "Understanding how IP protection affects innovative behavior has long been a fertile field in economic research. Important insights from the past still shape how economists view the IP system today. Above all, compared to other innovation policies, IP protection stands out in that it mobilizes decentralized market forces to guide R&D investment."

10) Finally, the bottom line: "Innovation is a driver of economic growth and development. Importantly, innovative capability is no longer seen only in terms of the ability to develop new inventions. Recombining existing inventions and non-technological innovation also counts."

These realities hold at the firm level, for the domestic economy, internationally, and online or offline. IP stands as a main ingredient to innovation, productivity and growth, which is why policymakers must be sure that intellectual property is properly protected.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Obama Budget Plan

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following statement on President Barack Obama’s proposed budget:

“If you’re seeking good news that might help boost the economy from President Obama’s proposed budget, you will not find any. To the contrary, this budget plan is jammed with anti-growth and anti-small business measures.

“For example, under the President’s plan, taxes on the earnings of successful entrepreneurs and investors would jump dramatically. The top income tax rate would increase from 37.9 percent (personal income and Medicare taxes) to 43.4 percent in 2013. The capital gains tax would jump from 15 percent to 23.8 percent (actually 30 percent, with Mr. Obama’s proposed ‘Buffett’ tax), and the dividends tax would climb from 15 percent to 43.4 percent. For good measure, the death tax would increase, pushing the rate up from 35 percent to 45 percent. Raising taxes on risk taking is a surefire way to get less risk taking.

“Meanwhile, on the spending side, nothing is done to actually reduce total federal outlays. After massive increases in federal spending in recent years, the Obama budget does not seriously try to pull spending back to historical norms. Instead, federal outlays would persist at unprecedented levels.

“This combination of higher taxes on entrepreneurship and investment, and persistently high levels of government spending is a recipe for putting the U.S. on a long-term track of slow growth and poor job creation. If the idea is to transform the U.S. into an economy whereby the private sector is constrained by high taxes and big government, then the President has the right plan.”


Credit Options for Small Businesses

The "Small Business Center" at Fox Business ran an article by Kate Rogers on February 10 titled "Can't Get a Loan from a Bank? You Have Options."

The article focuses on "a new breed of lenders ... hitting the market that rely on small business’ cash flow and payment history rather than just credit scores."

SBE Council chief economist Ray Keating is quoted in the piece, talking about how such services fit and work in the marketplace.




Keating Talks Economy and Small Business

SBE Council chief economist Ray Keating was a guest on Jim Blasingame's Small Business Advocate syndicated radio show on February 9.

Keating and Blasingame discussed some of the latest economic numbers, and the impact of federal policies on small business and the economy.

Listen to the most recent show, along with previous guest spots with Ray here.

Latest Credit Data Shows Life

Contrary to how many people might feel, we have not actually been in a recession since December 2007.

The recession that began at the end of 2007 was one of the deepest and longest on record. But it officially ended in mid-2009. The subsequent recovery, though, has been so poor that it feels like the recession never ended.

The reality of a long-term under-performing economy has meant that banks have been less willing to lend (coupled with increased regulation), at the same time that loan demand has declined and been restrained among both businesses and consumers.

Two indicators reflecting this economic and credit reality are nonrevolving credit and revolving credit.

When the mortgage/credit mess hit in the summer of 2008, consumer credit outstanding dropped dramatically. For nonrevolving credit, that decline lasted to May 2010.

But revolving credit (overwhelmingly credit cards) kept falling through August of 2011.

However, the latest data released by the Federal Reserve on February 7 noted that both nonrevolving and revolving credit increased notably in both November and December.

Nonrevolving credit grew by a seasonally adjusted, annual rate of 10.7 percent in November and 11.8 percent in December.

Revolving credit was up by 8.4 percent in November and by 4.1 percent in December.

Along with the latest employment data, these numbers provide some hope that this anemic recovery might be gaining a bit more strength.

Of course, when things have been so bad for so long, it's easy to get a bit carried away. Keep in mind that since July 2008, nonrevolving credit is only up by 5 percent, and revolving credit is still down by 18 percent over the same period.

The hope that can be found in these latest consumer credit numbers, of course, would only grow and strengthen if policymakers stepped back from excessive taxation and regulation, and if it reined in the subsidies and political games that swirl around so much of the credit market, in particular home mortgages.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

U.S. Needs More Spectrum to Accomodate Explosive Growth in Small Business Apps Use

SBE Council's landmark study, "Saving Time and Money with Mobile Apps: A Small Business 'App'ortunity," continues to receive widespread media coverage. Recent pieces focus on the explosive growth of mobile app usage by small businesses, and how these practical and innovative tools are saving firms time and money while improving productivity.

See the recent articles here:
DIY Apps Save Small Business Time and Money, BusinessWeek
Mobile Apps Fuel Small Businesses, McClatcy/Tribune

The explosive growth in apps (and their rapid adoption by consumers) also demonstrates why the U.S. needs more spectrum to accomodate and encourage this growth. This would start with a sound and common sense approach toward spectrum auctions. Unfortunately, the FCC seems to be doing all it can to mess them up. Similar to what the Administration is doing in other sectors (i.e.: energy), the FCC wants to pick winners and losers. In this case, choosing what companies will be able to participate in the auctions. It wants to "manage the outcome" of the auctions to ensure competition. That means it could exclude the biggest players that actually have the resources to purchase this valuable spectrum. Oh, and they need the spectrum too.

The current FCC is only impeding progress, something it has been doing quite well over the past several years. It has become the single greatest barrier to building out our nation's broadband and wireless infrastructure. The FCC is hamstringing investment, innovation, job growth, U.S. competitiveness, and in the case of spectrum auctions, an inflow of revenue to the federal government. It's time for Congress to start asking questions about what purpose such a government agency serves, particularly if it believes its main job is to micromanage a successful industry whose growth and vibrancy is so critical to the entire U.S. economy.

In regard to spectrum auctions, a bill has been introduced in the House to limit the damage that the FCC can do -- thank goodness. All players should be able to bid on spectrum, and the FCC must not be allowed to discriminate against specific companies. We all know what happens when government picks winners and losers in the marketplace. Time and again, industrial policy has proven itself a failure. The economic stakes are much too high to allow the FCC to pursue and prove (yet again) the failure of such misguided policy.

The FCC is overreaching. It is putting U.S. economic and innovative strength at risk, and Congress must hold it accountable.

Karen Kerrigan, President & CEO

Negatives of Natural Gas Impact Fees

In the private marketplace, prices and profits provide critical information. Rising prices and high profits signal that suppliers should boost investment and production. On the flip side, falling prices and profits point to reducing investment and supply.

All of this is driven by the choices made by consumers, with businesses and investors making decisions and competing accordingly.

But suppliers have to consider future developments as well. That is, how the market changes, and investors, entrepreneurs and businesses that do well at figuring out where the market or industry is headed are better prepared than others.

Of course, though, misguided government policies distort and create problems in the marketplace for investors, business, workers and ultimately, consumers.

These economic facts of life are playing out in the natural gas market right now, with adjustments being made regarding production in Pennsylvania's Marcellus Shale region.

With natural gas prices at a decade low, Chesapeake Energy Corp. announced late last month that it would be reducing its natural gas production in the Marcellus Shale in terms of wells with higher costs and lower potential returns. Chesapeake is the nation's second largest natural gas producer.

At the same time, though, the longer run outlook for natural gas demand remains bullish for a variety of reasons. As noted in a recent NPR report, "Sara Banaszak, an economist with America's Natural Gas Alliance, an industry trade group, says other energy companies are doing the same [as Chesapeake], but they aren't likely to abandon shale gas. ‘Companies that are here to produce natural gas are here for the long term,' she says. ‘You know, there are micro-adjustments in the path along the way, but I think they've made their investments and I think they're going to pursue that path.' Banaszak says fracking operations are pretty flexible. ‘One thing that is good about a lot of the unconventional production is the ability to sort of scale it up and down with changes in demand and supply,' she says." For good measure, international demand exists, so U.S. firms have the option to liquefy gas and export it.

This is an excellent example of how markets work and adjust.

Unfortunately, Pennsylvania also might turn out to serve as an example of how government interference and costs can disrupt and reduce market-driven investment and production meant to meet the demands of consumers.

Legislation in being considered that could both help and hinder the natural gas industry, and the thousands of related jobs, in Pennsylvania.

On the positive side, Gov. Tom Corbett is pushing legislative leaders to make sure that any reforms limit local controls over the oil and gas industry, namely, putting in place uniform standards for when and where drilling can happen. A patchwork of regulations and requirements - not to mention local bans on natural gas production - will only limit investment, development, jobs and state economic growth. The governor is absolutely correct to insist on uniform standards, which will provide the certainty under which investment can flourish.

On the negative side, though, is the consideration of new taxes - labeled "impact fees" - on such energy production. An impact fee is an annual per well fee, with revenues presumably used to offset any drilling related costs on local government.

As reported by Stateimpact.npr.org, Governor Corbett proposed impact fees in October: "The Corbett fee would be imposed and collected by counties. It would place a $40,000 levy on wells during their first year of production. That number would drop to $30,000, and then $20,000, during the second and third years. From year four through ten, energy companies would pay $10,000 per well."

Such a tax is highly dubious, to say the least, especially given the added tax revenues generated from increased economic activity. And one of the dangers is that other elected officials will push such taxes even higher. And that is exactly what's going on. The Pennsylvania state senate has proposed impact fees equal to $360,000 per well over a decade. That's 125 percent higher than the governor's plan.

Recent reports point to a possible compromise at $260,000 per well over a decade - which is still 63 percent higher than what Corbett called for initially.

Jacking up fees quite simply means raising costs for producers, which in turn can mean reduced investment and production, and therefore, fewer jobs and less economic activity.

If Pennsylvania's elected officials want to see investment, the economy and jobs grow in the state, then the right reform combination is to create a stable regulatory environment with uniform drilling standards across the state, and either killing the idea of impact fees or capping them at very low levels.

______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

The Path to Job Creation -- Not an easy one...

On February 1, the House Small Business Committee hosted a hearing on "The Path to Job Creation: The State of American Small Business." SBE Council member Mike Fredrich provided great testimony on the threats and uncertainties that continue to linger for small businesses. Committee staff put together this great highlight video of the hearing, which features Fredrich.



As summarized by House Small Business Committee Chairman Sam Graves (R-MO) regarding testimony provided by witnesses: "There is no doubt that the lack of certainty in burdensome regulatory requirements and complex tax structures coming from Washington continues to be an impediment for growth and job creation for small business owners. This must change sooner rather than later if we want to see economic growth and Americans back on the job.”

Karen Kerrigan, President & CEO

Piracy not a big problem??

A January 30 headline at TheHill.com caught my attention: "Report minimizes online piracy impact." Really?

The article was about a new study from the Computer and Communications Industry Association (CCIA), authored by Mike Masnick who writes about technology policy for Techdirt, which focuses on the growth of entertainment choices and opportunities that have emerged in recent times due in large part to the Internet and broadband.

The study highlights, for example, that consumer entertainment spending as a share of household income grew by 15 percent from 2000 to 2008; the entertainment sector employment grew by 20 percent during that last decade, including 43 percent growth among those identified as independent artists; box office revenues, according to the MPAA, rose by 25 percent from 2006 to 2010; music concert sales in the U.S. tripled from 1999 to 2009; and the value of the entertainment industry, according to data from PricewaterhouseCoopers and iDATE, grew from $449 billion in 1998 to $745 billion in 2010.

That's great news, and given the obvious expanded opportunities due to Internet and broadband advancements, it's not a surprise.

The study also offers the following summary on the challenges and opportunities at hand: "For the traditional middlemen, the internet represents both a challenge and an opportunity. There is no doubt that the internet has eaten away at some traditional means by which these businesses made money. But, as the data shows, there is more money going in to the overall market, more content being created, and many new ways to make money. That shows that there is a business model challenge -- and a marketing challenge -- but much more opportunity in the long run. The key challenge for business is in figuring out how to capture more of the greater revenue being generated by the wider entertainment industry. Legacy players certainly face a lot more competition (and fewer reasons that artists have to do deals with them) -- which can explain some of the public complaints about the ‘death' of various industries -- but overall, it's clear that by embracing new opportunities, there are plenty of ways to succeed."

That assessment is basically on the mark. But none of this should minimize the impact of piracy, and the need to countdr such theft.

Unfortunately, though, the minimization of piracy appears to be the main purpose of this CCIA report.

CCIA President & CEO Ed Black declared: "The numbers paint a quite a contrast from the vision of doom and gloom the entertainment industry has pointed to lately. Having a more clear picture of the economic successes and challenges of the content industry will help lawmakers around the world as they consider policies like increased copyright enforcement." As TheHill.com reported, "Both Masnick and CCIA were strong critics of the Stop Online Piracy Act and Protect IP Act, which were championed by the entertainment industry as vital cures for the epidemic of online piracy."

The line of thinking in the CCIA report seems to be that since new opportunities exist, then the very real losses experienced due to IP theft do not matter, and stronger IP rights and protections do not matter. That's absurd.

Internet and broadband technologies have vastly expanded opportunities for creators, consumdrs and businesses. That's not really in dispute. At the same time, this does not mean that real and significant losses due to IP theft are not occurring. The full potential of the Internet obviously is being restrained due to widespread stealing of intellectual property, as has been made clear by countless studies and analysis on, for example, losses to the entertainment and software industries.

Stronger IP protections are not bad for consumers, or for small businesses and independent artists. To the contrary, beefing up IP rights will only further expand choices for consumers, and increase opportunities for independent creators and the business community.

Acknowledging new opportunities should not serve as an excuse for ignoring IP theft.

______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

SBE Council Chief Economist on Latest Jobs Data

Today, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), released the following statement in response to the January employment data reported by the U.S. Bureau of Labor Statistics:

"The resiliency of U.S. businesses and entrepreneurs was on full display in the latest jobs numbers. No matter which survey is chosen - the establishment (or payroll) survey or the household survey - the jobs story for January was good.

"In fact, the household survey, which better captures startup and small business activity, was particularly strong. After factoring out population adjustments that the BLS puts into effect in January, compared to December, January employment was up by a robust 631,000, which was the biggest leap since November 2007.

"Just imagine what U.S. entrepreneurs, business and investors could be accomplishing if policymaking was shifted in a pro-growth direction of permanent and substantive tax and regulatory relief, less government spending, an aggressive free trade agenda, and sound monetary policy focused on price stability."

The Sarkozy Plan: Wrong Formula for Growth

Nicolas Sarkozy, the president of France, might have the best of intentions when it comes to business and the economy. But his ideas leave much to be desired.

Sarkozy wants to improve the competitiveness of French businesses and the nation's economy by providing some relief on payroll charges paid by business to fund various social benefits programs. The UK's Guardian News reported: "He hopes the changes will boost job creation and discourage French industry from moving abroad. ‘We have to re-ignite growth,' Sarkozy said. ‘We have to catch up in Europe and in the world. Our market share is declining. If we continue to burden our companies with charges that aren't theirs to pay, how can we compete?'"

The Associated Press also reported: "Sarkozy said French labor costs have risen 20 percent between 2000 and 2009, compared to 7 percent in Germany. He said the relative cost to employers for a worker who earns a gross monthly salary of euro2,500 ($3,200) was twice as high in France than in Germany."

Reducing such costs obviously would be a big plus for France's competitiveness. So far, so good.

Unfortunately, at the same time, Sarkozy is proposing assorted increases in taxes and misguided spending programs...

Read the rest of this SBE Council Cybercolumn by chief economist Ray Keating here.

Coming to the End on TV and in Business

by Ray Keating
Business Tips on TV #6

When sitting down to write a novel, I basically know how the story is going to end. In the world of television, however, very few creators of shows know how the story will end. In the larger business world, entrepreneurs should at least have a goal as to how they see their enterprise concluding, or perhaps how their own role in the business will finish.

It was the two-hour finale of NBC’s “Chuck” on January 27 that got me thinking about how various commercial endeavors end.

Those involved in creating and telling the story of “Chuck” actually were kind of lucky. Not in the sense of being cancelled, of course, but they were lucky to know when the end was coming, being granted a 13-episode run in its fifth and final season. As a result, the tale on each of the show’s characters could be wrapped up.

That, of course, is pretty unique in the television business. Just think of the end of “Las Vegas,” which was cancelled after a cliffhanger episode. How frustrating is that for those making the show and for viewers?

As for the “Chuck” finale, it was done right, with heart, action, and humor - all of the traits that made the show a favorite for so many devoted fans. In fact, few television series have ever finished the way “Chuck” did, with so much of the final two hours harkening back to the very start of the series and, therefore, very much being dedicated to the most faithful fans.

“Chuck” truly went out on its own terms. (By the way, those terms included leaving the door ever so slightly ajar so that some kind of sequel would be possible if the demand and dollars ever materialize.)

In one’s business and career, to go out on your own terms is the ideal. Of course, life and the marketplace often make that a real challenge. But both business owners and employees should set goals, make plans, and be prepared to adjust as time passes.

Some key questions must be pondered. For entrepreneurs: Do you plan to sell the business one day? Will the enterprise be passed on to a family member? If a partnership, are there special criteria to be agreed upon if the partners decide to go separate ways?

And for both business owners and employees: Is this what you want to do for the rest of your career, or are other ventures possible? What is your risk level at various points in life? Are you planning to retire, and if so, what are your retirement expectations?

As the market and your business change, it is important to recognize that goals and strategies will need to be adjusted, or perhaps even the end of your business story will have to be re-written.

But keep in mind the examples of “Chuck” and “Las Vegas.” Namely, you want the business to end on your terms. You certainly do not want to be left with some kind of unfulfilled cliffhanger beyond your control.

____________


Ray Keating is the chief economist of the Small Business & Entrepreneurship Council and the author of “Chuck” vs. the Business World: Business Tips on TV.

Access to Capital Measure Moving in U.S. Senate

The Stock Act is currently being debated in the United States Senate. Several good amendments will be offered on the Senate floor, including an important one by Senator Thune (Amendment #1477), which addresses a timely and critical challenge for America's entrepreneurs - access to capital.

Amendment #1477, otherwise known as the "Access to Capital for Job Creators Act," will widen the pool of potential funders for entrepreneurs. By lifting the antiquated and onerous "solicitation prohibition" contained in Rule 506 of Regulation D of the Securities Act of 1933, promising enterprises can approach "accredited" investors outside of their personal networks to seek and secure the capital they need to compete and grow. This rule modification is a sensible reform step as proven by the lopsided vote the "Access to Capital for Job Creators Act" companion bill received in the House.

SBE Council has urged all Senators to support #1477, and you can read our letter here.

Karen Kerrigan, President & CEO

Obama on Capital Gains Taxes: Confusion or Politics?

President Barack Obama is sending seriously mixed signals on capital gains taxes.

In the White House announcement of a "Startup America Legislative Agenda," it was declared that Mr. Obama wants a zero percent capital gains tax on small business investments.

That sounds great, right?

Details as to what this actually entails will come with the release of the President's 2012-13 budget plan. But if it is the same idea that Mr. Obama offered in his 2011-12 budget, then it will be so limited in scope as to be economically meaningless. Last time around, this measure imposed a five-year holding period, placed a limit on assets and a cap on applicable returns, and applied to only C corporations.

A holding period discourages the movement of capital to its most productive uses, as do restrictions on assets and returns, while limiting the measure to C corporations means excluding most small businesses.

Then there's the fact that Mr. Obama has been unrelenting in his desire to hike the capital gains tax rate on upper-income earners.

He has pushed for increasing the rate by 33 percent, from 15 percent to 20 percent. However, ObamaCare also is scheduled to impose an added 3.8 percent tax on capital gains for upper incomes, which would raise the Obama proposed capital gains tax rate of 23.8 percent - or an increase of 59 percent.

But it potentially does not stop there. In his State of the Union, the President declared that he wants high-income earners to pay an effective tax rate of no less than 30 percent. That means jacking up the capital gains tax rate even more. Indeed, it would seem that for some taxpayers it would require a capital gains tax rate of 30 percent - a doubling of the capital gains tax rate.

Factor inflation into the mix, and the real capital gains tax rate goes even higher.

From an economics standpoint, it's obvious that if you want entrepreneurship, business, competitiveness and job creation to flourish, then hiking the capital gains tax rate is grossly counterproductive. After all, starting up and investing in innovation, invention, businesses and jobs require the incentives and resources to do so. High capital gains taxes reduce the incentives and resources available for such critical risk taking.

As an economist, it's frustrating when elected officials miss such fundamental economic points, and push policies that will only hurt the U.S. economy.

But does Mr. Obama miss the economics of capital gains taxation, or is he merely playing a dangerous game of politics?

For example, there is the class warfare/envy card. That is, play the populist "bash the rich" card, and hope it translates into votes.

In fact, a recent CBS News/New York Times poll points to this possibility. It turns out that 70 percent of Democrats believe that upper-income Americans pay less than their "fair share" in federal income taxes, and 66 percent of Democrats believe that "capital gains and dividends should be taxed the same as income earned from work."

Putting aside how the questions were framed and the fact that capital gains and dividend taxes paid by individuals are part of multiple layers of taxes on saving and investment, the reality is that the President's political base buys into a tax system that ignores sound economics, and instead is based on envy/class warfare.

As a result, on capital gains taxes, we hear nice rhetoric about small business and entrepreneurship, but hostile rhetoric about upper-income earners. Unfortunately, economics makes clear that this does jibe with reality. In terms of how policy actually works, jacking up capital gains taxes on upper income earners quite simply means reducing the resources available for small businesses to build and grow.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Small Business Loan Demand

SBE Council chief economist Ray Keating was quoted in a CNN/Money article on the most recent survey of bank senior loan officers by the Federal Reserve.

The article noted: "The majority of banks did not see an increase in demand, because the uncertainty in the economy has made small businesses reluctant to take out loans, explained Raymond J. Keating, chief economist at the Small Business & Entrepreneurship Council."