Guest Post: Here's Why Small Business Isn't Hiring, Part II

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Here's Why Small Business Isn't Hiring, Part II

Here are four more structural reasons why small business isn't expanding/hiring.

Continuing our exploration of why small business isn't expanding and hiring: here are four more deeply pernicious structural dynamics crushing small business. Yesterday I addressed this issue in Here's Why Small Business Isn't Hiring, and Won't be Hiring; Part II covers three other three systemic issues:

1. The real estate bubble completely mispriced/overvalued commercial real estate. The Federal Reserve's policies of maintaining super-low interest rates and flooding the markets with easy-money leverage has distorted and poisoned the U.S. economy in multiple ways, one of which is the elevation of commercial real estate valuations to absurd heights.

Here's how the dynamic works. Landlord A bought his building back in the dog days of the early 1990s for $1 million; his tenants were struggling in the lingering recession and so he kept rent increases modest, or even cut them to keep tenants in a low-demand market.

Along comes the Fed-fueled credit and housing bubble, and suddenly his building is worth $2 million. Based on standard multiples of income to value, Landlord A calculates his building's rents are now grossly underpriced. With the economy bubbling along, demand is rising for premium commercial space; hey, isn't his restaurant tenant doing gangbusters business every night?

So he raises rents, and the small business tenants eat the increase. Business is getting better, and so they pony up the increased rent with a sigh.

As the bubble inflates, Landlord A gets an offer of $4 million for his building. Landlord A has no trouble accepting the offer from Landlord B, who raised the money for the purchase by leveraging another building of his to maximum debt levels and taking out a short-term loan on his new acquisition.

At the $4 million purchase price, the rents don't even cover the debt and expenses, as property taxes shot up along with the building's value. Landlord B nearly doubles the rent, and a few of the marginal small-biz tenants bail out for cheaper space elsewhere or just close shop.

Then the recession hits. The restaurant's traffic plummets to a shadow of its pre-recession level, and the other tenants are suddenly running negative cash flow, too. Meanwhile, Landlord B's other property--the one he maxed out to finance the purchase of this building--just lost its anchor tenant and he's deep in the red every month.

When the restaurant closes, that's the end of Landlord B's mini-empire. He turns both buildings over to the bank, who hires a realtor to find a new buyer.

The problem here is that the inflated $4 million price tag has become the "real value" and the inflated rents are the new benchmark. Thus the building is listed at the "bargain" price of $2.5 million, and rents are notched down a bit, but not to where they should be, i.e. 2/3 lower.

Adjusted for inflation, the building is "worth" no more at $1.3 million, and rents should be about 35% higher than the 1995 rent, which was a mere 1/3 of the top pre-recession rent.

All of this increase in value and rent is the result of super-low interest rates, which enabled speculation and leverage that drove up valuations, which then drove up rents as landlords raised rents to pay their bloated mortgages and property taxes.

The net result is commercial space is completely overvalued and thus rents are sky-high. Thanks to the Fed's misguided policies, small business has little left after paying rent, and overindebted landlords struggle to pay the gigantic bubble-era mortgage and property taxes: most of the income from small business flows to the "too big to fail" lender.

2. Financing is cheap to global Corporate America and costly to nonexistent to startups and expanding small businesses. If you're the CEO of a global Corporate America firm, borrowing $1 billion to acquire a smaller competitor is cheap, no problem: Corporate America has floated hundreds of billions of low-yielding bonds in the past year to fund buyouts and whatever else they want to do with cash.

If you're a startup or new firm seeking $10 million to expand--forget it. Your only chance is to give most of your company to a vulture capital firm and hope you end up with a slice at the end, after they window-dress it for sale or IPO.

The eventual buyer: global Corporate America, of course.

3. Crony capitalism doesn't like competition; it seeks monopoly or a shadow cartel, imposed and maintained by the regulatory agencies of the Central State. The naive and sentimental view of Capitalism is that it thrives on competition; this is incorrect. Capitalism actually thrives on monopoly, as that's what it takes to skim fat, low-risk profits. Competition mucks everything up, which is why Corporate America arranges for regulatory strangulation of small-business competitors via its partner, the Central State (Federal regulatory agencies).

Since government bureaucracies are a priori delighted to extend their reach, power and budget, it doesn't take much persuasion for them to tighten the screws on potential competitiors with absurdities like "food safety" regulations, which require hit-teams of government agents to descend on criminal conspiracies such as organic dairies.

Meanwhile, back in the real world, food-borne epidemics only spring from Corporate America's own agribusiness "factories," not from the small producers which the Federal government has tagged as "enemies of the State." It would be comical if it wasn't so tragic.

This game is transparent: cartels and monopolies lobby politicos and agencies to crush small business (potential competition) with overlapping regulations so onerous and costly that compliance alone will drive the small businesses under.

Take a look at the sickcare "insurance industry" for an example. Ours is supposedly a "free market" system, yet there are never more than two providers in any market. That's the definition of a shadow cartel.

4. Overlapping regulation designed to suppress competition, benign neglect/hostility from government bureaucracies obsessed with self-preservation and lack of financing make it impossible to scale up a success business in the real world. No wonder young entrepreneurs crowd into social media; it's the only space where startup costs are low, office space is a luxury (your living room will do just fine), regulation is light to nonexistent and you can scale up ideas and enterprises without jumping through dozens of costly regulatory filings and hoops where your Corporate America Overlords are sharpening their regulatory knives to eliminate any competitors before they get a chance to scale up.

Where are the real-world Facebooks and Googles? It's not that there are no opportunities; it's that there is a near-zero chance of raising enough money and political muscle to escape the regulatory and financial black holes imposed by cartels and their yes-men in regulatory agencies at every level of government.

Concentrated financial and political power stagnates the economy by suppressing new enterprise in favor of the Status Quo. That's one key reason why there are so few new small businesses that scale up; the forces of Cartel America and the government are arrayed against such threats. Protect the Status Quo at all costs and you've made lobbyists and their agency lackeys happy ("we did our job, the dangerous miscreants at the organic dairy were punished"), but you've fatally undermined the real economy.

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Hard1's picture

Sorry Bitchez, not hiring today!!!

Freddie's picture

2 words why they are not hiring especially after Nov 2008: Hope & Change

 

CH1's picture

I reordered my life and got rid of employees a long time ago. It is simply not worth the hassle. I'd rather make less money and actually enjoy my life... and enjoy my work.

Having employees sucks.

James's picture

Rage & Outrage coming to America!

 

http://youtu.be/uzgfzPMiDOc-6

Era Vulgaris's picture

I did the same. Should have done it a long time ago. Much happier now with a lot fewer headaches.

sethstorm's picture

No thanks for helping to destroy the US.

 

honestann's picture

HE didn't destroy the USSA.  The predators did.

sethstorm's picture

His actions to contribute to the unemployment rate did.

e_goldstein's picture

got 3 more.

"no longer participating."

Hard1's picture

Stage of denial

ArkansasAngie's picture

Paperwork efficiency has become a competitive advantage.

Take away that and their tax advantages and ... of course ... moral hazard and the small guy would be able to duke it out with them.  As it is innovation -- whether product or business mdel gets kicked in the teeth before the starter pistol goes off.

Oh regional Indian's picture

Too true ArkansasA.
I think both of the things you point out are huge tells.
1. If paper-work efficiency is rewarded, you know you are in a socialist system, classic hall-mark. The US is clearly USSA now, has been for decades.

2. Innovation is not encouraged unless it's clear that a large part of the benefits go to the cartel. I've been at the stamp-down boot heel edge of that for many years now. The system does not encourage innovation, especially not radical innovation.

ORI

http://aadivaahan.wordpress.com/2010/12/31/a-big-part-of-what-this-here-...

bigwavedave's picture

need a tax holiday to bring back that $1 trillion in overseas big corp profits to 'invest' in more m&a..... 

Freebird's picture

Hiring? Still firing.

sethstorm's picture

That's what you get when employers end up with inordinate amounts of power.

PaperBugsBurn's picture

So in other words Amerika is choking on its own greed. Gordon Gekko is long gone with the loot, bitchez! Now what?

NOTaREALmerican's picture

Now what?

 

Exactly.   Applied-socialism / crony-capitalism always end this way.   The politically connected loot,  everybody else is either oblivious or hoping they'll get in on the scams.

Nothing you can do about,  everybody denies the socialism they got rich off of was actually socialism.   Duplicity makes the world go round.

oogs66's picture

i still think there are no orders...people aren't buying crap because they either already have it, or don't have jobs, or both, so until people are lining up orders, businesses won't hire.  business people - ceo's of fortune 500 companies, and small business owners are no better at forecasting the next year than anyone else.  they extrapolate the past couple weeks, with the orders they know and annualize it.  they all over hired at the peak, and may be understaffed at worst time, but it has little to do with policies, etc, if they could sell more than they are producing they would hire...plain and simple

Auricle of Omaha's picture

Every day I think about walking away from my business and instead start delivering pizzas. Why work so hard just to make sure everyone else gets paid?

Anyway, got to go... I forgot that I have to head on over to EFTPS.gov to make my monthly deposit.

Kali's picture

Hear ya there.  Have liquidated and cut back to the bone.  I ain't working my ass off anymore to make sure gov thugs can earn their fat paychecks and golden bennies, while helping my rival corps. Another small biz person gone Galt.

sethstorm's picture

How about having your actions not do collateral damage?  Not everyone owns a business, but that doesn't mean everyone else is a bureaucrat.

Vlad Tepid's picture

And how many businesses do you run, Seth?  How many employees are on your beneficent payroll?

CH1's picture

Drop out, my friend. Stop making other people happy and start making yourself happy.

Status is a scam.

krispkritter's picture

Shuttered the corp and just started shaving all the 'excess' costs paid to BigGov, Inc. What a joke. Now everything I do is under the radar as much as possible. Want to tax my bartering? Good luck...BTW, EFTPS blows. Another gov't POS. And don't give them any password you use for any other purpose, their reps can see them all.

sethstorm's picture

Do what you want, but the government always will find folks that want to be thorns in their side.

Rainman's picture

I might be stupidly naive, but I still believe in that old " what goes around comes around " prophecy. The Bigs might blow up human dreams with their economic terrorism, but it'll eventually take them down in the process. Corrupt governments too. Over a long enough timeline enough hungry ants will kill and consume an elephant.

mynhair's picture

Why Small Business isn't hiring:

Osha

EPA

ADA

FDA

IRS

DOA

DOJ

DoE

BIA

you get the picture......

How many of you use water filters?

Jendrzejczyk's picture

Excellent list. May we add:

-local motor vehicle admins raising fees

-brutal parking enforcement,

-speed/red light camera fines

-unemployment insurance hikes because we had to lay off employees and the rates pole vaulted from 2% to 9%

-credit card interest now at 17%

-no credit available even if we wanted to risk expanding

-customers have less money and no credit left

-many of the newly unemployed must work at any price so freelancers are putting downward pressure on margins.

I'll stop now.

mynhair's picture

Yep, you get the picture.  Woe be us.

CH1's picture

And don't forget class envy. It poisons employees. You're a boss... of course you have enough money to give them more!

Grinder74's picture

don't forget the f'n SEC

a la #4:

 start-up hf sued for "fraud", has not assets to pay "penalty", goes bankrupt

 JPM sued for "fraud", pays penalty less than 5% of profits, stays in business to make billions more

 

Grinder74's picture

don't forget the f'n SEC

a la #4:

 start-up hf sued for "fraud", has no assets to pay "penalty", goes bankrupt

 JPM sued for "fraud", pays penalty less than 5% of profits, stays in business to make billions more

 

bob_dabolina's picture

#4 is huge and I can't stress that enough. 

It's ridiculous and the blame rests 100% on the shoulders of government. Take this one example. Inspectors shut down a 7 year olds lemonade stand because...get this, she didn't pay her $120 temporary restaurant license. 

http://www.cbsnews.com/stories/2010/08/06/ap/strange/main6748628.shtml

In Bethesda, Md., a lemonade stand near the U.S. Open was shut down because the kids operating it weren’t carrying a vendors license

http://blogs.wsj.com/in-charge/2011/06/17/lemonade-stand-gets-squeezed/

Another issue this touches on is this maniacal obsession with green energy. It is preposterous. The amazing thing about this obsession is that the government goes out of their way to make the carbon based energy complex non-existent. We haven't built an oil refinery in this country in 10 years. This behavior triggers two primary consequences; i. it hurts good paying domestic jobs; ii. it raises domestic energy prices. Here is the funny thing, this idea is heralded around to save the planet (which is bullshit) and you have countries like China that just do not give a shit. They will raise power plants all day long and pump all kinds of stuff into into the atmosphere like it's no ones business. I don't know if anyone knows which way the wind blows (jet stream) but all that shit blows in this direction. So we kill our jobs to save the environment and what happens?  China hires people and pollutes us anyway.  

The whole point of this green energy revolution (kicked off by Al Gore who is inline to make billions from this) is another form of government control. It's one more avenue they have to get up in your business and dictate your life. They want to tell you what type of light bulb to buy, how much you drive your car, how warm your house should be, etc, etc. Furthermore, they are poised to make lots of money from this scam. If they can tell you what products you must buy and they have a vested interest in companies that produce those products (Al Gore) than of course they are gona' make a killing. And if you think Al Gore is doing everything he can to reduce his own carbon foot print than I have some Lehman stock to sell you.

In the mean time we can all enjoy $50 light bulbs because that's what's good for us. 

If people let government decide what foods they eat and what medicines they take, their bodies will soon be in as sorry a state as are the souls of those who live under tyranny.”

-Thomas Jefferson

 

NOTaREALmerican's picture

Re : In the mean time we can all enjoy $50 light bulbs because that's what's good for us.

 

You can't pretend to want no socialism in one area and then turn a blind-eye toward socialism in another area.

 

Big-MIC:   The original Big-Gov scam.  Been going strong for 50+ years.   Completely captive to the crony-capitalists that own it.

Big-Ag:  Gentlemen farm subsidies (for the Emu's)

Big-Road, Big-Water:  For the developers.

Big-Airport:  More government concrete.

Big-FIRE:  Too big to fail. 

Big-AntiDrug:   How long as that scam been going?

Big-PoliceState:   The future.

 

Socialism is socialism:  capital (loot) allocated to politically connected cronies.  We lost the 2nd world war when we let Big-MIC turn the country into a crony-capitalist hell.  

 

 

NOTaREALmerican's picture

What they got rich on, the socialism, everybody loves.  

random shots's picture

Small business is the current bubble. Too many idiots who were laid off in the last recession go into business for themselves and are saved by the biggest consumption bubble in ages and cheap debt. When it stops they have to go back to the factory...oh wait.

Gatorman3's picture

Actually most of those idiots are long gone and already milking the system leaving us hard working fools.

random shots's picture

Those were the truely stupid. The ones that are left had some savings going into this recession...there are a lot of these folks who are now exhausting their funds and hoping we can go back to 2006.

sagerxx's picture

This small biz owning idiot is still here, thanks. Although income is down about 60% (went from arguing with the wife whether we should put in a hot tub or a steam shower to juuust barely making it). Now figuring out whether to renew our biz lease in 9 months (assuming the world is still here), or if I should get into small-scale sustainable farming. Prolly end up doing both...

TheMerryPrankster's picture

If you thought making a living with a small biz was difficult wait until you try farming. Mother nature has an infinite variety of pests that always seem to enjoy whatever you grow and of course rain, wind and hail rarely seem to cooperate with your planting schedule. Everything is perishable.

But of course nothing beats the magic of turning dirt into food with only time, effort and a little cooperation from nature. Watch out for chipmunks, they are the IRS of the food chain and will try to take 30% of every crop, while offering you nothing in return.

mynhair's picture

Why Small Business isn't hiring:

Cuz Boner brought up the "100W bulb" under circumstances where 2/3 majority was required to pass.

This calls for this one, just be over 18.

http://www.metacafe.com/watch/516478/lucy_pinder_topless/

Keep hoarding those 100W bulbs!

Unless you marry a pair.

zorba THE GREEK's picture

 Hey, them little bastards were cutting into my action. They had 

 unfair advantage not paying for license. Shut em down, it will be

 good lesson for them to learn about real business world.

 Now I can sell bottle water for $3.00 each. (cost .22)

tbone654's picture

Now let the local government (liberal city of milwaukee) add a requirement that ALL full time employees must have 12 paid sick days per year, and all part time employees must have 6 paid sick days per year...  and bye bye Harley Davidson, they've moved out to the local suburbs...

Now let the state government (was liberal governor Doyle) add a new requirement called "combined reporting" that allows WI dept of revenue to collect an additional $22 MILLION each year from Harley Davidson because they have assembly plants in York PA and KC MO...  and bye bye Harley Davidson, they will probably move to Texas...  or mexico...

ack!  who doesn't get this?

honestann's picture

Almost everyone doesn't get it, apparently.

The only way to make sense of everything that's happening is to get to understand the situation at the most fundamental level.  What is the fundamental level?

predators DBA government
predators DBA corporations
predators DBA central banks

In other words, the fundamental that virtually nobody identifies correctly is... they are predators.

Just consider the nature of predators.  They grab whatever they can, whenever they can, however they can.  They don't think long term, they leave long term thinking and action to the prey they consume.  The predators just get away with whatever they can.  They have exactly ZERO concern for honesty, ethics, justice or production... except to scam, coopt and destroy the first three in order to steal and consume the last.

This is how people must understand what is happening, or they will become utterly consumed and destroyed by the predators.  Predators CANNOT be reasoned with.  Predators CANNOT be bargained with.  Predators CANNOT be counted on to comply with agreements.

The only successful way to deal with predators is to cage or kill them.  Period.  As long as humans continue to treat predators like "good, upstanding citizens" because they wear fancy suits and walk upright, the predators will utterly dominate every honest, ethical, benevolent, productive individual.

And what stops the honest, the ethical, the benevolent, the productive?  Only one thing.  Their failure to recognize and identify exactly what is the fundamental phenomenon playing out in the world, which is...

predators gone wild.

And nothing else.

Freddie's picture

Harley makes shit that is screwed together by union thugs.  Total junk. 

The only good thing about Harley is it reduces SS and Medicare cuts because loads of old guys get killed riding those junk bikes.

Id fight Gandhi's picture

I thought Harley sourced to china, all their boots, shirts and jackets are made there.

Harley just equals a midlife crisis anymore

honestann's picture

It is really quite simple.  Anyone who is not utterly and completely insane would refuse to risk any significant time, effort, money or resources starting a small business in an utterly out-of-control predator-state like the USSA.

A lot of already existing small business owners have shut down because the predator behavior isn't worth dealing with.  Expect a LOT more people to follow suit.  40% of doctors claim they intend to retire or find other work if Obamacare goes into force, either because they refuse to care for their customers however government thugs demand, or because they refuse to be slaves to government thugs themselves, or because it just isn't worth it.

These are appropriate decisions.  I left the USSA while the leaving was good, and I'm very happy to be free of these considerations for my own life.