Business Climate

WPC's Center for Small Business focuses on improving Washington's small business climate by working closely with business owners and policymakers. The Center provides accurate information and analysis on the state's regulatory climate, tax structure, health insurance systems, and more.

What's New

Net Neutrality sneaking in under the guise of "stimulus"?

August 25, 2009 in Blog

The Hill today published a story saying that Julius Genachowski, the recently appointed FCC Chairman, will support "net neutrality" requirements and go after any company that violates its tenets. 

Colorado minimum wage drops as living costs fall

August 21, 2009 in Blog

This week The Seattle Times printed a story on an interesting case of voters passing a minimum wage law linked to the cost of living, but then having to deal with the prospect of seeing the minimum wage reduced in 2010 because the cost of living actually went down.

That's what is going on in Colorado this year. Colorado is one of ten states -- including Washington -- where the minimum wage is tied to inflation. Washington state's Department of Labor and Industries relies on the Consumer Price Index for Urban Wage Earners and Clerical Workers to determine the increase in the minimum wage each year. Since voters linked Washington's minimum wage to the CPI-W ten years ago, it has never decreased.

But Colorado's minimum wage law also had a clause t!
hat stipulated the minimum wage be adjustable based on the cost of living, even if it decreased. No one really thought the cost of living would actually decrease.

But it did. Minimum wage workers should have seen a reduction in their hourly pay of about four cents per hour, but the federal minimum wage of $7.25 means the drop will only be three cents.

This again shows that, from an economic standpoint, wages should not be based upon a cost-of-living scale. Even attempting to tie workers' wages to a controversial basket of goods/services, such as the CPI, introduces a variable in the wage/productivity formula that does not belong.

This type of thinking is exemplified by a worker interviewed in the story:

"They shouldn't be allowed to do that, pull the wage down," said Josette Koger, 34, an out-of-work paralegal looking for a job in Denver. "It's hard enough to get by now. You can't make it on minimum wage, m>so the minimum wage needs to go up a lot regardless of what !
they say about the cost of living." [emphasis added]

It appears Ms. Koger is attaching the minimum wage, or the price of labor for the most inexperienced workers, to something that cannot be objectively measured -- her opinion of what she needs. The theme of need is cited often in the minimum wage discussion.

The theme of skills or production is conveniently ignored because the reality is that many inexperienced workers, especially teenagers, are not equipped with the skills or experience at this time to warrant a higher wage. However, that reasoning is often thrown out the window in favor of classic bromides such as "pay people what their worth," or "dignity for all," and the erstwhile "living wage = social justice."

One of the concerns over Washington's minimum wage law is that it artificially inflates the cost of labor at the expense of those trying to enter the market, and has!
led to the highest minimum wage in the nation. But if we're really hellbent on coupling wages with cost-of-living indices then minimum wage reductions should be a good thing because for once the cost of living actually went down.

More on the subject of minimum wage's effects on teens and inexperienced workers in Washington and Oregon, and the "living wage" movement.

Cutting through the red tape "smartly"

August 17, 2009 in Blog

Jonathan Ortmans, over at the venerable Kauffman Foundation, posts today about the need for "smart" regulatory reform. He rightly points out that a common fallacy amongst policy wonks, both in and outside of government, tend to put innovation and entrepreneurship in one corner and any government regulation in another corner -- as if the two are mutually exclusive.

But while intrusive government regulation can surely dampen entrepreneurship and innovation, an intelligent regulatory environment will seek to maximize innovation and entrepreneurship without abandoning the subjects the regulation was intended to protect.

The best way to do this? According to Ortmans,

"Regulation that utilizes market-oriented approaches rather than direct controls is often more cost-effective bec!
ause it enlists competitive pressures for social purposes, according to an Office of Management and Buget study."

More information on regulatory reform in Washington state.

Borrrowing from the future

August 12, 2009 in Blog

A few notes from yesterday's Economic & Revenue Update issued by the Economic and Revenue Forecast Council:

Sure enough, the "Cash for Clunkers" (CARS) program proved more popular than anyone had anticipated, with the initial funding running out within a week. The $2 billion infusion should further boost car sales over the third quarter. But the report also mentions that,

"...we expect a total of around 750,000 unit sales under the program. Assuming that a third of those would have happened anyway, the marginal impact of the CARS program would be to generate about half a million car sales in the third quarter that would not have happened otherwise. But, since under the same assumption, a third of the sales are also likely to have been "pulled forward" from the fourth quarter, we expect Q4 sales to be 250,000 less than they would otherwise h!
ave been
." [emphasis added]

This has always been one of the concerns over stimulative programs such as CARS, or the several stimulus packages passed the last several years. Essentially, the concern has been "initial growth at the expense of future growth." This is the same whether it is funding for cars, road projects, public art, broadband rollout, etc. Do higher government expenditures spur economic growth above and beyond what would have normally happened without the extra infusion? Or does stimulus give a temporary bump to the economy but decrease future prospects? Will the economy not grow as much over the next few quarters as if government had not spent more?

Another quip from the ERF:

"We expect that (CARS) will provide a temporary boost to third quarter GDP, but at the cost of fourth quarter GDP. The longer term effects of increased showroom traffic on car sales are likely to wa!
it until the labor market improves." [emphasis added]

!

And what do they say about the national job market?

"The [national] unemployment rate fell from 9.5% to 9.4%, but that was the result of fewer people looking for jobs, and should not be interpreted as an improvement. Job growth lags activity growth, and we expect the unemployment rate to continue to rise, even after the recovery is underway."

NY state sets the tone for regulatory reform

August 11, 2009 in Blog

New York, often thought of as the poor man's version of California when it comes to cautionary tales, last week managed to set a good example when Governor David Paterson handed down an executive order aimed at cutting unneeded regulations on businesses.

"Executive Order No. 25 establishes a Regulatory and Review Program to eliminate or revise antiquated and burdensome regulations on businesses, local governments, health care providers and other regulated entities, and focus the State's regulations on those necessary to retain and strengthen critical protections for public health, safety and welfare."

The press release states that the executive order is a significant part of an overall agenda to reduce unnecessary burdens and mandates on local governments and businesses to help stimulate the economy and keep taxpayers'!
liability down.

Among some of the program particulars:

  • The Review Committee will invite comment from the public on whether existing regulations are unnecessary, unbalanced, or unwise.
  • Participating Agencies will compile the list of complaints and prioritize those the public is most concerned with.
  • Within 45 days, the Participating Agencies will complete their analysis of the affected regulations and use cost/benefit analysis to recommend action.
  • The Review Committee will report its progress regularly to the Governor

New York has had an Office of Regulatory Reform since 1995. In fact, WPC has referred to it as something Washington state should consider. We have the Office of Regulatory Assistance in this state -- and while it is good that Washington policymakers recognize the business community needs some help handling regulations, the better option would be to have an office of regulatory reform -- an office tasked with making regulations easier to understand, less burdensome and our systems more efficient.

Policymakers in Washington have passed various bills in the past to help alleviate undue regulations that disproportionately hit small businesses. However, a lot of these do not have teeth. In other words, agencies may have to do an internal report on how any new major rulemaking will affect small businesses, but there is little to keep that new regulation from be!
coming a reality, much less any incentive on the agency's part to limit the impact its rules have.

There is a lot to be done on regulatory reform in Washington state and not to sound cliche but it is going to take some out-of-the-box thinking to try and reform our system so that state government treats businesses more like a customer, rather than a subject.

We can reform our regulatory structure to minimize the burden they place on businesses while still maximizing the intent of those regulations -- health, safety and environmental protection. Emulating New York's Office of Regulatory Reform would be a good place to start.

National unemployment rate of 9.4% pales in comparison to teen rate 24%

August 10, 2009 in Blog

A Wall Street Journal story today highlights the summer of discontent for teens wanting work. Unemployment of people ages 16 to 19 was a seasonally adjusted 23.8% in July, according to the Journal. This is down a tick from a 25-year peak of 24% in June. Last summer's teen unemployment rate peaked at 20.5%.

But it gets a little more depressing. White teenagers' jobless rate, aged 16 and up, is at 22.2%; whereas the jobless rate for African-American teens is almost 36%. Over one-third of teens in the African-American community are unemployed -- that's more than three times the national average. That's absurd.

Instead of implementing policies that encourage the hiring of inexperienced teens we get policies that raise the minimum wage year-after-year. In Washington's case, our minimum wage is linked to the Consumer Price Index -- giving us the highest minimum !
wage in the nation -- and raises the cost of labor and therefore makes it less likely that employers will hire inexperienced teens.

Case-in-point: In the WSJ article one teenager said she sent out 20 applications this summer but heard back from only one employer, who ended up turning her down because, "[we don't] have the resources to train someone without experience."

So, higher minimum wages might help the few out that get them, but the teens this year who wanted some pocket change and experience are out of luck and end up with neither.

Microsoft moves data center out of Washington - taxes largely to blame

August 7, 2009 in Blog

In what should be a larger news story than it is so far, Microsoft on Tuesday announced via its blog that they will suspend construction of their Windows Azure data center and re-locate to another state (right now the prevailing rumor is San Antonio, Texas).

Will small businesses see an extra tax for national health care reform?

August 3, 2009 in Blog

Newspapers the past few weeks have been carrying op-eds from small business owners on both sides of the national health care reform fight. Some small business owners want to see a public option because they believe it will help their bottom line without compromising their employees' health insurance plans. That is a noble goal even if it is misguided -- as I point out here.

But one of the reasons for concern, besides quality and quantity of health care, is the cost of the program. This is important because if small business owners are trying to ditch the cost of health care on the back end, how will higher costs on the front end affect their business? Essentially, what happens if small businesses are no longer burdened with the cost of health care at $X cost, but then the national plan requires either a pay or play option or a surtax? That cost cou!
ld easily be $X + $Y, and the business owners who were concerned about the skyrocketing cost of health care for their employees would then have to worry about the skyrocketing taxes to pay for the program.

Case-in-point: The Heritage Foundation's WebMemo on how the House bill would hit small businesses with a surtax. According to the paper, about 2 million tax filers would be hit by the potential surtax of 1% for joint filers over $350,000, 1.5% over $500,000 and 5.4% over $1 million. About sixty percent of the 2 million tax filers affected receive at least some of their income from small businesses, and over 400,000 of them report that a majority of their income comes from a small business. And considering Congress is, at this point, expected to let the Bush tax cuts expire, the surtax could lift the marginal tax rates on small businesses to over 50 percent in the states when combine!
d with state and local taxes.

From the paper:

quote>

"Small business is the backbone of the American economy. Half of all private workers in the U.S. are employed in firms with fewer than 500 workers. These small firms have also created 60-80 percent of all new jobs in the last decade. Higher tax rates discourage investment in small business by increasing the hurdle rate for investors...Higher hurdle rates mean that fewer small businesses will be created and fewer existing businesses will expand."

Update: I should have also linked to this week-old Puget Sound Business Journal article which also talks about the possible health insurance surtax and it's effect on small businesses. They quote the National Federation of Independent Business as saying,

"[NFIB] estimates that one-third of small business owners with 20 to 250
employees make more than $280,000. Taxable income at small and
medium-size manufacturers averages $570,000, according to the National
Association of Manufacturers."

Who are entrepreneurs and what makes them tick?

July 31, 2009 in Blog

The Kauffman Foundation released a new study entitled, "The Anatomy of an Entrepreneur: Family Background and Motivation." The purpose of the study is to delve into the backgrounds of some of America's successful entrepreneurs, to see what makes them tick, and if there are ways to spread their knowledge of what it takes to be a successful entrepreneur to the thousands of new businesses founded each year by intrepid entrepreneurs.

A few of the report's findings include:

  • Company founders tend to be middle-aged and well-educated, and did better in high school than in college
  • These entrepreneurs tend to come from middle-class or upper-class backgrounds, and were better educated and more entrepreneurial than their parents
  • Most entrepreneurs are married and have children
  • Most had early interest in becoming an entrepreneur
  • The most popular motivations for becoming an entrepreneur included building wealth, owning a company, participating in the startup culture and capitalizing on a business idea
  • Most entrepreneurs had significant industry experience when starting their companies

It is always fascinating to other entrepreneurs, or those like myself who study them and ways to make them more successful from the policy-oriented side of things, to see how the successful ones made it. A lot of the success can be traced directly to the space between an entrepreneur's ears -- the mindset it takes to overcome the long odds of starting and maintaining a successful business is key.

But providing an environment that is conducive to these entrepreneurs is important as well. Policymakers oftentimes need to be reminded that tax and regulatory policies have real-world implications and can provide unnecessary burdens to entry for entrepreneurs. And in this day and age, we should make sure the barriers to entrepreneurship are as low as possible.

Come learn more about what makes entrepreneurs tick and make your own suggestions on how Washington could be a better place for small businesses at WPC's 2009 Statewide Small Business Conference on November 10th in SeaTac.

West Virginia's Privatized Workers Comp System Turns One

July 31, 2009 in Blog

While the state labor council points to Washington state as a supposed model for workers comp systems, West Virginia's newly-privatized system turned one year old recently. And guess what, the sky did not fall.

Quite the opposite as a matter of fact, as the Insurance Journal reports:

"West Virginia Insurance Commissioner Jane L. Cline says her state's one-year old privatized workers' compensation system is offering better claims administration, lower costs for employers and better treatment of injured workers."

West Virginians experienced a number of improvements since the switch a year ago:

  • claim protests have fallen 68 percent
  • the overall appeals process has been streamlined resulting in claims disputes being resolved in a shorter period of time
  • claimants have received better claim management by claims adjusters having fewer claims to manage, and
  • the unfunded liability no "old fraud" claims has dropped from $3.1 billion to $1.5 billion

West Virginia's open market for workers comp has also resulted in:

  • overall premiums have dropped 30 percent, or more than $150 million
  • 198 different workers' compensation insurance companies have filed rates and forms
  • There are 120 policies in the residual market representing premiums of about $1.9 million
  • More than 90 percent of all claims are ruled upon within 30 days

And then there's this assessment from earlier in the year from Workers' Comp Insider:

"Thus far, West Virginia's transition to a competitive market seems to
be going smoothly. The pain has been distributed across the board: to a
population of workers that had long viewed comp as an entitlement, to
employers in favored industries who long benefitted from suppressed
rates for coverage and to some of the former state employees who ran
the old, rather bloated system. No one would describe the new approach
to workers comp as perfect, but the competitive market appears to offer
a reasonable balance between the often conflicting interests of workers
and employers. The creation of an assigned risk pool for poorly
performing employers is simply one more necessary step in the eternal
search for an effective and equitable system."

I'm sure that the folks defending our status quo will point to West Virginia's workforce (761K compared to 2.9 million) and average weekly earnings ($785 compared to $892) as evidence to keep the state monopoly system intact. But, if the goal is to assist injured workers in the best way possible while maintaining a competitive business environment, shouldn't we look at examples where both are apparently taking place?