It's the Uncertainty, Stupid (Opinion)

It's the Uncertainty, Stupid (Opinion)
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Professor at Case Western Reserve University
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For those of you who think that the fiscal cliff deal has eliminated the political uncertainty holding back small business, think again. The latest briefing from the National Federation of Independent Business, a right-leaning small-business advocacy group, showed that 70 percent of small-business owners think now is not the time to expand their businesses, with one quarter of them highlighting the uncertainty in Washington as the reason. Similarly, the Wall Street Journal reports that one-in-three small-company owners responding to a survey it conducted with Visage International identified uncertainty as the greatest obstacle to their future growth.

Uncertainty is problematic because small-business owners’ economic decisions depend a lot on their psychology. If small-business owners can’t get a clear read on the future, then they do what all rational people do under uncertainty. They wait to see how things will turn out. Delaying helps small-business owners avoid hiring employees and buying equipment that would be unnecessary if conditions turned out to be less than rosy.

The catch is that the uncertainty-induced delays lead to low economic growth. Small businesses account for roughly half of private-sector employment and gross domestic product. If small-business owners sit on their hands, neither hiring nor investing, then economic growth and hiring tend to be sluggish.

Related: The Fiscal Cliff Deal and Small-Business Job Creatio (Opinion)

While most small-business owners know this intuitively, my scholarly research also shows it. About a year ago, Mark Schweitzer of the Federal Reserve Bank of Cleveland and I wrote an academic article that examined how the level of policy uncertainty affects small-business owners’ employment and capital-investment decisions. The punch line is this: The inability of small business owners to anticipate future policies coming out of Washington lowers the “net percentage” of owners intending to add employees (the percentage planning to add workers less the percentage planning to decrease workers) by 6 percentage points.

Right now continued policy uncertainty is holding back the small-business sector. Congress’s last-minute fiscal cliff deal reduced uncertainty about what taxes will look like in 2013, but it did little to clarify many other policy dimensions. What Congress plans to do about the deficit, how regulations affecting small-business owners will shape up, and the availability of financing, among other things, remain unclear. In the next two months, Congress and the President need to reach agreement on entitlement cuts in return for increasing the debt ceiling and avoiding roiling global financial markets, despite both sides currently refusing to compromise. Republicans and Democrats in Washington must identify specific spending cuts to be made. How much those cuts will be, and which part of the government will be trimmed remain unclear, making it difficult for small business owners who rely on federal contracts or federal reimbursement policies to make plans.

Related: What Entrepreneurs Need to Know About What's Ahead in 2013 for the U.S. Economy

Small-business owners remain unsure about many key government policies. The Securities and Exchange Commission has not yet written the regulations that would allow small businesses to raise money through crowdfunding, despite passage of the Jump Start Our Business Startups Act in April of 2012. Consequently, small-business owners still can’t raise money through equity crowdfunding. Small-business owners also don’t know whether to buy employee health insurance or pay fines for letting the government cover their workers because the health-insurance exchanges that would allow small-business owners to figure out those costs have yet to be established.

Most policy makers would like nothing more than for small business to boost hiring and investment, stimulating the economy, and allowing it grow out of its current problems. While there are no easy answers to our economic troubles, policy makers have one inexpensive tool in their kits. If they simply negotiated a grand bargain on the deficit once and for all, leaned on federal agencies to put in place the rules for the past laws they have enacted, and took a year off from passing any new legislation that would impact small business, they would allow small-business owners to get a clearer picture of the future. That clarity, in turn, would allow business owners to undertake the hiring and investment that excessive uncertainty has held them back from undertaking. While that alone wouldn’t solve our economic problems, it would be a step in the right direction.

Related: Are Small-Business Owners Going to Spoil the Mood? (Opinion)

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