Economist Austan Goolsbee on Small Business

Katie Morell talks to former economic advisor to the Obama administration about major small business issues.
Freelance Writer and editor, Self-employed
January 17, 2012

Austan Goolsbee makes being an economist look cool.

From September 2010 to August 2011, Goolsbee served as chairman of the Council of Economic Advisors for the Obama Administration. He appeared as a guest on countless TV programs, including some of my favorites: The Daily Show with Jon Stewart and The Cobert Report. He was not only witty, he answered economic questions honestly, a rarity for a presidential cabinet member.

Today, Goolsbee is a professor of economics at the University of Chicago Booth School of Business. He still shares his views on the economy with the media. In early January, I talked to him about small business.

How will the economy affect small businesses this year? 
I’m guardedly optimistic that 2012 will be a decent year for the economy and that it will spill over into the small-business sector. That is, as long as we don’t have another big negative come out of Europe or see China slowing down.

The last two months of data have been pretty optimistic on the job-creation front. The main thing is whether the aggregate economy is growing. Right now it is [growing], which is good for the small-business sector.

Why has the small-business sector been so slow to recover? 
There are several arguments here. One is the fact that so many small-business people were financing their businesses using equity on their homes. When the housing markets went down, it erased some businesses.

The second is the tightening of credit from banks and others. The housing values changed the net worth of startups, therefore small businesses have not been able to qualify for credit. That, and the fact that banks don’t want to take on risky loans.

And third, people are saying that when large businesses got squeezed in the recession they extended payment times and squeezed suppliers. This has been difficult for small businesses to deal with.

Do you believe small businesses are the saviors of our economy? 
I can tell you that the data over the past 25 years has shown small businesses both create and lose jobs at a much higher rate than large businesses. Large businesses count for a large share of employment, but they have been overall in decline as a share of the total.

With regard to small businesses saving the economy, it all has to do with new and fast-growing companies. Those are the businesses that really [drive] the economy.

Do you think that the millionaire tax would hurt small-business owners? 
The data does not support the view that modestly higher rates on incomes from $250,000 to $300,000 would interfere with the entrepreneurial spirit. Nearly 99 percent of small businesses don’t make that much income, so they wouldn’t be affected by such a tax. If you ask most small-business owners what the biggest problem is facing their business, they will say it's not enough sales, not income taxes.

What do you wish Washington would do to help the small-business sector? 
Overall, the most important thing Washington can do is to get the economy going. I wish Washington would embrace the startup and the new-venture-financing agenda. Small businesses need access to capital markets. The government needs to make it easier for fast-growing companies to go public and get access to credit.

I’d [also] like the government to pay attention to high-skilled immigration. I think it would help a lot of small businesses and encourage new ventures.

What can Washington do to get the economy going? 
The moment we are in is different than where we were in early 2009. Back then, the private sector was in a complete free fall. Now, we are growing, but not growing fast enough.

The private sector has returned to profitability and there is a lot of money sitting on the sidelines. Washington can enact policies to help the private sector lead the recovery.

I think we should be engaged helping the private sector spend its money. Anything we can do to help people use money and get back to the business of growing, including access to capital markets and encouraging technology transfers.

How can small-business owners access credit in today’s difficult funding environment? 
My first piece of advice: Keep trying. Some regional and community banks remain pretty healthy. They make money by lending and the data suggests that they are loosening. If you are a credit-worthy borrower, just keep trying. Try multiple regional and community banks.

Second: Look into exports. If you are a small business, think outside your normal market. The economy is clearly oriented toward exports and it is one of the key areas where people need to pay attention. If you are a small-business person, think about doing something you could sell outside the U.S. or a service you could sell to people from outside the country. Tourism and education are examples of huge export industries.

Third: Talk to a tax planner. There are a number of federal and state-level incentive programs geared toward small businesses that will help them get credit for various behaviors. The administration passed a tax credit for people who start their own business or invest in small businesses where it is possible to get zero capital gains. That program is a wonderful way to attract direct-equity investors. If you invest, all gains will be tax-free.