Por: Victoria López, ex-presidenta de la Asociación de Estudiantes de Economía de Ciencias Sociales (AEECS) de la Universidad de Puerto Rico, Recinto de Río Piedras
Small businesses are the backbone of U.S. economy. However, the U.S. economy finds itself in a fiscal cliff. There are problems like a $20 trillion debt with a GDP of $17.9 trillion, $440 billion annual deficit, outrageous healthcare costs, unaffordable education and an overabundance of defense dollars. But, why does the government overspend?
The more the government spends, the more it stimulates the U.S. economy (Government spending is part of the GDP). There are other countries willing to lend money to the U.S. and politicians get elected for the creation of jobs and obviously loose when they raise taxes and unemployment is high. Small businesses account for about half of the U.S. GDP output and about half of private sector employment. Small businesses owners are still struggling to bounce back from the great recession due to poor sales but, for the most part, because of taxes, regulations, compliance costs and the cost of health insurance. Additionally, and affecting small businesses, the U.S. is suffering from an entrepreneurship deficit, it erodes our quality of life and the national competitiveness.
Actually, entrepreneurs are very often left out of the policy debate. Since the last economic depression in 2008 business owners optimism for economic growth does not take off because the GDP does not show significant growth and new government actions impose more and more barriers each day. Small businesses also struggle with the issue of benefits; they do not have the structure to give more benefits to the employees, government help like the Affordable Care Act (or Obamacare) provides relief and it is soon to end. These situations are not different from Puerto Rico’s; the difference is that in P.R. we have the bureaucratic system to fight with. This is why there is a real need for a tax reform.
Not only in U.S. but in P.R. local economy is very important too, that is why small local businesses should not be paying more taxes than big corporations. For each employment generated in a megastore or chain, local businesses lose 1.5 jobs. What is the U.S. doing to resolve it? The Trump administration made an executive order on business regulations. He is cutting regulations massively for small businesses, described by “two-out, one-in”.
For each new regulation, the firm has to remove two. The deregulation tactic has been used before in the U.S. and there are a lot of pros and cons. Some of the pros are that it allows more innovation from small businesses allows the free market to set prices and makes processes of production easier. The cons are that it facilitates asset bubbles to build, exposes people to fraud and social concerns get lost. If we use a past example of deregulation like the Glass-Steagall Act, we can observe the downside of deregulatory measures. The GSA became a permanent measure in 1945, it prevented banks from using depositor’s funds for risky investments and it gave the FED the power to regulate retail banks. The repeal happened in 1999 by the republican vote. The banking industry lobbied for the repeal complaining that they could not compete with other securities firms and that they wanted to reduce the risk for their customers by diversifying their business. This led to banks becoming too big and it required their bailout in 2008-2009. Banks argue that reinstating the GSA would make them too small to compete on a global scale.
In Puerto Rico, the governor implemented a labor reform that removed various regulations to facilitate the employment process for small local businesses through the benefits given to employees. This happened with no proof of the correlation between fewer employee regulations and an economic benefit (to learn more about this legislation click here ). Every law that administrations make just expand the problems. For instance, this new reform makes the probationary period longer, shorter vacations and other issues that just incite young people, the salt of the earth, to migrate. Nevertheless, P.R.’s new administration is evaluating the repeal of the law of permits that requires big companies to make a regional economic impact study before establishing. These guarantee a fair competition to create a business balance in P.R. It is ironic because even with this law, there is no fair competence. In part.
These problems in P.R. are not new. The actual status has brought us where we are. 67 years ago, the Popular Democratic Party implemented the “Operación Manos a la Obra”, an economic development model that targeted the 1930’s problems, like migration, massive unemployment, poverty, and marginalization. The solution for this was a strategy of development that depended on investments of U.S., that way external investments would grow to a level that time would solve the problems with that money (Villamil, 1976). This strategy did not create the base to develop a local economy and skipped the part of substitution of imports. In other words, this strategy created a dependency that killed local development opportunities because government subsidies favored external investors. Not very distinct of today’s subsidies and exemptions. However, when “Operación Manos a la Obra” was implemented, it did not leave space for a local economy to develop.
This economic model was all about industrialization by invitation, local small businesses did not develop to an extent that it is a strong pillar of P.R.’s economy because the government has never provided enough space for its development. Nevertheless, it is important to note that while obviously employment levels in P.R. are lowering, self-employment had increased in 2015 but then continued decreasing in 2016 according to the economic summary for January 2017 that makes the Planification board of P.R. (you can find it by clicking here ). Self-employment or entrepreneurship is important for a healthy economy. We know that small businesses that have local owners generate money that benefits the local economy more than other mega companies and this I will explain. Mega companies in P.R. do what’s called “Transfer Pricing and income Shifting” and for the most part, earnings aren’t being invested back in P.R., they take earnings made in P.R. and invest in other places or areas of the company. There is a gap between what we know studies have shown and what the government does. For the most part, entrepreneurs are left out of the policy debate while big companies are being favored ( for instance, the new labor “reform”).
This brings us to a debate about where the government should spend the money. There is nothing wrong with the government spending money, the issue is how it spends it. The government should orient more into spending money that will generate new income to the Island’s economy. Entrepreneurs literally generate new clean income for the Island economy and it is much needed, migration keeps increasing. We need less urban trains that get you nowhere, fewer contracts to politicians rejected by the people and more investment in our small businesses.
