Not Enough Carrots or Sticks to Stimulate Small Business?

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carrot-stick.jpgIn the coming weeks, will be rolling out a special "Stimulus Watch" report, focusing on how the Obama administration's efforts to ease the United States economy from the grip of recession will impact small businesses and entrepreneurs. In preparation, I've been combing the internet and speaking to economists, government officials and business owners about the stimulus bill, a wearisome, 407-page piece of legislation entitled the American Recovery and Reinvestment Act of 2009.

Of everything, I was most amused to find out this: at the end of January, the Cato Institute sponsored full-page ads in The New York Times and the Wall Street Journal criticizing the proposed legislation. Printed below were the signatures of approximately 200 leading economists. Then the same week, the Center for American Progress Action Fund sent a letter to Congress encouraging the bill's passage, also signed by about 200 economists, including several Nobel laureates.

So is it a good idea or not? To Raymond Keating, chief economist of the Small Business and Entrepreneurship Council, that's a no. "You just have to understand the incentives at work to see that there's going to be a lot wasted." He explains that when small firms fail, they are punished and forced out of business. "Business owners have every incentive to keep a close eye on things, keep costs under control and make the best investment they possibly can. But in the public sector, you won't get the best bang for your buck, because there's no personal money at stake, and spending will be driven by political and special interests."

What, then, would make a better incentive? For starters, says Keating, rather than being targeted and temporary, tax relief should be substantial and permanent so that investors and entrepreneurs know it's not just a quick, one-time fix. "They need changes that will improve profits and provide an adequate trade-off for risks associated with investing in the expansion or startup of businesses."

Although there's scant possibility that the legislation will be amended to allow for these measures now, Keating thinks it's critical to keep these ideas in the policy debate, because it's only a matter of time before they'll be needed. "When we see that our economic recovery is lackluster and we're losing our competitive edge in so many areas, people will realize that what we're trying right now isn't working," he says. "And then it will start to make sense to implement more tax and regulatory relief for investors and business owners."

Entrepreneurs aren't exactly known for playing it safe, but it may boil down to how scared, collectively, investors are, and whether they perceive the rewards to be worth the risks.

To test out the power of incentives in your own life, I'd recommend making a "commitment contract" at, a website founded by Yale University economics professor Dean Karlan to help people achieve goals and New Year's resolutions, like saving more money, quitting smoking or losing weight. Stickk attempts to harness the idea that by providing the right incentives (as rewards or punishments) people will actually do what they say they will.

Take, for example, a hypothetical situation in which I watch The Hills on MTV. In an effort to grow as a person, I decide to stop. So I make a contract online, and fill out the terms and stakes: every time I watch an episode, I lose $5 (the minimum) to a designated recipient, which can range from a favorite charity to a foe.

If I choose my sister, I'm almost positive I'll fail. The threat of contributing to an anti-charity, on the other hand--let's say the George W. Bush Presidential Library--ensures that I will go to great lengths to meet my goals. With enough reflection, it should be possible for anyone to find the right set of incentives to achieve the best possible outcome.

It's a shame the bill has less wiggle room.

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