Friday, December 12, 2008

End of Work, End of Affluence V: Government--Reinvention or Insolvency

Government at all levels has a stark choice: either reinvent itself to serve a financially diminished populace or become insolvent and perish. Some local governments "get it" and are seeking new sustainable, entrepreneur-based models, most are not and will go bankrupt.

In a way, only someone who has risked all as an entrepreneur/small business owner can truly understand this entry--but everyone else will gain a valuable insight into the End of Work, End of Affluence Depression we are entering by reading this.

Small business is the real workhorse of the U.S. economy. Wall Street and multinational corporations get the headlines, but for context, compare global colossus IBM's entire global workforce of 386,000 with the U.S. workforce of 135 million. (The majority of IBM employees work outside the U.S.)

The plight of small business is partially illuminated by this entry, When Belief in the System Fades (March 12, 2008). Here is an excerpt:

In every case, the person takes on the burdens in the belief that their career will be enhanced and they will make more money/gain more prestige. Yes, we all understand this. But they also must believe in the structural fairness, justice, opportunity, security, meritocracy, etc. of the machine they willingly serve--even if their belief is subconscious or rarely in their conscious thoughts.

This belief is far more vulnerable than the Powers That Be seem to understand. You see the alienation, the bitterness, the disbelief, in factory workers when the factory shuts down, and their livelihoods are gone--and all too often, so too are the pension and benefits they were promised.

You see it in the face of an academic who worked long hours for years "on the tenure track," carrying much of the department's teaching load, when she/he is ultimately denied tenure. Thank you for working for $40,000 a year for years alongside people doing the same work for twice the salary; good night and good luck.

When the most dedicated servants of the system awaken to the realization that they are not benefitting from their service as they'd once believed, that their near-religious faith in the System has been bruised by the grim knowledge that the few are benefitting from the lives and sacrifices of the many, then they simply quit, or move down the chain to an undemanding position. (end of excerpt)

Government and its employees fundamentally assume the workhorse of small business and its millions of employees will always be there to pay for government via taxes. I think government and its employees are about to discover that small business "belief in the system" is fading fast or has already been depleted.

At some point, the pressures on the people carrying much of the responsibility--be they Army captains, division managers, or entrepreneurs--reach a point where the person realizes, "This isn't worth it." That is, the sacrifices made to sustain The System (U.S. Army, the business, the division, billings, etc.) are not being compensated by either the inner rewards (sense of purpose, sense of being appreciated, prestige or respect factors, etc.) or the tangible rewards (financial compensation, security, etc.)

Employees of small business can also fail to grasp the knife-edge the owner/ entrepreneur lives on. When my partner and I were building dozens of houses a year (22-25 years ago), we had a standard answer whenever an employee would "crack wise" about how much money we were making (actually, we were losing money): we would hand them the keys to the office and say, "Payday's on Friday."

That would bring them up short, because we were exhausted and therefore serious. Go ahead, here's the keys--you figure out how to make payroll. (Many times we had to take cash advances on our personal credit cards to make payroll.)

Contrast this soul-draining burden with the complaints typical of government offices: somebody's playing their radio too loud, somebody didn't kick into the birthday kitty for the supervisor, etc. etc.

Many in high-stress government jobs also feel the asymmetric burdens. Those who work in law enforcement and emergency medical care (for instance) carry huge responsibilities, and the increasing workloads can raise the same question: "Is it worth it?"

Even though it's devastating for an entrepreneur to close the business they've dedicated their life to, it's also an enormous relief; the long struggle to maintain solvency is over, and whatever comes along will be easier. There's always a way to pick up the pieces, and always a niche in the underground/barter/cash/informal economy.

What gets blown off is skyigh rents, taxes, employees, paperwork and stress. It's astonishingly easier to make a living as a sole proprietor in the informal economy than it is to make a living with employees in the formal economy of junk fees, high rents, etc.

Note to commercial landlords and local government: you think we need to operate this business? Well guess what, we don't. Here's the bankruptcy papers, have fun trying to collect a dime. We're too tired to care how it all pans out, we're moving on to a life without employees, rent, regulations and taxes.

Now multiply this scenario by a million and you get a taste for what lies ahead. Beneath the headline-grabbing greedfest of the past 20 years--one bubble after another in the make-believe debt-fueled world of high finance and flipping houses you never even lived in--those struggling to make a living in small business have seen the rewards decrease and the hassles, taxes and other costs increase.

Government is about to discover "the impossible" is happening: nobody's paying taxes anymore because they no longer have a job or formal small business. The City and County of San Francisco has about 800,000 residents and a budget of $6.5 Billion. The enormity of that number doesn't faze the politicos or government employees at all; everything they say tells us they think "that's as it should be." Never mind the budget was only $4 billion not that many years ago--now $6.5 Billion is the new baseline, and anything less than that "will cause dramatic cuts in core programs," blah blah blah.

The state of California's budget was less than $100 Billion earlier in this decade. It rose to $130 Billion, and now the governor is bleating about "financial Armaggedon" because there's a $14 Billion deficit which might turn into a $30 Billion deficit by next year.

Question to S.F. and Calif: how did you survive on $4B and $90B a few short years ago, and now a 10% reduction is "financial Armageddon"?

I hate to tell you, S.F. and California, but you better be prepared for a city of S.F. budget of $3 Billion, not $6 Billion, and a state of California budget of $60 Billion (if you're lucky) not $130 Billion. And frankly, I consider those revenues estimates extremely generous, because starting or running a small business is asymmetric, i.e. a losing proposition now: revenues are falling but fixed costs and taxes are rising.

Let's turn to knowledgeable correspondent R.W. for an insider's perspective on the costs of starting and operating a small business in urban America:

"I have read your posts for a decent while now, and your latest regarding the new informal businesses of the future really struck a nerve w/ me. I found its targeting and penetration uncanny. Most particularly, your allusion to the stubbornness of some landlords (and I may be taking license w/ your views here) bears some further mention.

It seems that this country has become--in its controlling capital class--a nation of rents, in that the owners of capital seem to have but little respect for the average citizen really trying to make a go of things. This is a huge subject which can be discussed in so many facets, but suffice it to say that your observations of the cost of business creation and continuance as being prohibitive is plus perfect. Your estimation that rents are two-thirds too high brought me out of my chair pumping my fist.

Quickly now... I purchased the assets of a prior owner of a take-out restaurant (over-paid for them I see, now) and agreed to run the operation for a time, retaining him as an employee while he sought other work. (The only reason I purchased the assets was because the wholesale food product regulations of my state required that, for preserved or canned products, any vendor must have a separate facility w/ two exits, a bathroom, etc., etc., etc.) After a time I planned to transition to manufacturing and marketing my product and worked very hard (70 hours per week) to may this work for pushing a year.

The rent on this establishment was way too high for what it was--I would say at least 2/3, but I did not know this at the time because this was my first experience operating or working in a food enterprise. (The floors were insanely slippery; there was no air conditioning, which pushed the indoor temp. to 115 degrees in the summer; there was no separate office and a v. small bathroom, etc.) I also had to pay utilities separately.

Well, for a novice, I worked to develop a menu and cleaned the place like a maniac every night. I advertised, introduced new items, and tried to energize the establishment--all so that I could eventually make and market my special product (which already had good-faith commitments from local groceries to carry, not to mention an Internet presence that I was working to establish).

But the rent and overhead was simply insane. The fire marshal showed up and demanded inspection and testing which cost me several hundred dollars (though the prior inspection hadn't expired--it was tripped by my being a new owner). The county food safety performed their surprise inspections, and I was required to pay, within one year, $800 for an expiring license, then a renewal for this lousy little place. The costs of employing the prior owner and a driver for delivery (I did a fair amount of driving myself) was crushing. Though the customers liked our fare I didn't come close--though the work was exhausting--to supporting the establishment, much less myself.

I fell behind on rent and, by the time I was (illegally) locked out I was close to a bit over 1/3 of the rent behind. On a monthly basis I was approx. 2 1/2 mos. late. Due to the crush of costs I closed the take-out business (chicken, Reubens, burgers, specialty hot dogs (w/ homemade coney sauce), Chicago dogs, salads w/ my own dressing, pulled pork sandwiches, and more). I informed the landlord that I was transforming the restaurant to a food wholesale operation for my product, which was undergoing testing by a special lab. After certification of my product by the lab the state would approve the establishment, and I could begin, finally, doing what I, originally, set out to do. (I also sold the three-vat fryer to a restaurant chain in another city and informed that landlord that I would give him 2/3 of the proceeds.) I also informed the landlord that I had received my product certification (on the day that I was locked out); beyond that, my trademark was approved by the U.S. government, and I had completed the labelling artwork and text. (Just the packaging dimension was tons of work.)

Well, I arrived one day to find myself locked out of my establishment (though law requires that I be given three days notice). I called the landlord and he assured me that, should I sign a security interest in my equipment over to him (refrigerators, tables, scales, canners--lots of stuff well exceeding the past rent due in value), he would restart things from there. Since I only cared about my product's venture, I agreed.

I signed the agreement, and the landlord agreed to give me a new key in the next day, or so. I called again and made an appt. for the new key. Contemporaneous w/ that appt. I scheduled things so that the group buying the fryer could meet me at the same time and remove it, since the agreement exempted the fryer.

Well, I arrived on the agreed-upon evening for the key and the landlord never showed. He refused all phone calls, and I had to inform the people that had purchased the fryer to turn their truck around and return home.

My personal possessions, computer, assets not pledged, etc. are now gone. I have no money w/ which to pursue a lawsuit, and the slot where that restaurant was still sits empty. I lost everything to that criminal (and discovered later this is a mob tactic). (Btw, he was always telling me how he couldn't carry me and that my slow rent was "killing him", though the place stands empty over a year later.)

My point is this: what hope do we have in this country to climb out of this mess when we have the disgusting citizenry that we do blocking our way: government is too costly, crooks abound, and decent, hard-working people can't acquire capital w/ which to compete and create wealth and value? The central planners in Washington forget about the social dimension to all of this which encompasses and throttles all effort. They assume that everyone wants to help everyone else out when, in fact, everyone wants to destroy everyone else. For one, the mentality of the lords of rent are killing us--commercial real estate owners VASTLY over value their holdings in relation to the income that can be remotely generated from them. All this does is freeze capital in place--it is a consequence of the on-going concentration of wealth in this country.

I don't know, Charles... The killers of captialism are everywhere, and I wholehearteldy endorse the vision of your future because I am living it. "

Thank you, R.W., for a sobering account of "capitalism in the real world."

In sum: once it no longer makes any rational sense to start and operate small businesses, then they will vanish like raindrops in a Death Valley heatwave. I think that point is fast-approaching for hundreds of thousands of small businesses.

A very few local governments are responding to reality rather than screaming for more taxes to raise more revenue. Correspondent Freeacre from the excellent Freeacre & Murph blog, sent me this story about Salt Lake City's drive to create a "Sustainable Economy" city code: SLC mayor wants green rules in black and white.

Here is Freeacre's comment, and the relevant excerpt from the article:

:Thought it was interesting, especially the city making it easier to have entrepreneurial in-home businesses and selling stuff from front porches, etc. "

from the article linked above

"It's kind of reshaping the way we look at our city ordinances and our policies," says Becker, who characterized the enterprise as fast but appropriately sensitive. "We are the first city in the country to have a comprehensive sustainability ordinance."

Bennett hopes to spur urban gardens by making it legal to sell backyard produce in front yards. "Make that a right that they could have a small-home business," she explains. She points to talk from the pioneer era that people were told they needed two fruit trees to boost the food supply as the valley was settled. "Wouldn't it be neat if we had that much fresh fruit."

Clearly, this kind of ordinance is a baby-step, but at least it's a baby-step in the right direction in two key ways: by encouraging/enabling "legal" informal business and by encouraging the small-scale production and profitable marketing of food.

Astute correspondent Kevin M. sent in this account of how informal businesses once had places to gather and do business: and not just at the open-street farmer's markets:

"Your entry today on the potential for the growth of informal businesses is supported by a similar development which occurred in the U.S. decades after the Great Depression. In the economic malaise of the late 1970s/early 1980s, many big box retailers closed down stores leaving a vast oversupply of large retail centers. Many of those retail spaces were converted to flea markets and swap meets, as scores or even hundreds of independent and often informal vendors filled WalMart-sized buildings selling everything from popcorn and soft drinks to jewelry and TVs. More significantly, at the crest of the wave, many of the buildings would be packed with thousands of patrons on weekends, crowds comparable to or even exceeding typical weekend mall activity today. This was even more pronounced leading into the Christmas holiday season.

As I remember, you could lease a space for an extended period of time, months maybe, or you could rent a table for a day or a weekend. There was a level of flexibility which is completely lacking in the current economic picture, as well as a chaotic environment reminiscent of a Middle Eastern bazarre. It was free enterprise at it's best, working from the ground up, occurring at the same time that large corporations were laying off hundreds of thousands of workers. Some of those laid off workers were running stands or shops in the flea markets--it was the only source of income once unemployment benefits ran out.

One of the things I remember most about the flea market phenomenon was the enthusiam it engendered on all sides. Obviously it was an opportunity for building landlords to generate cash flow on properties which had something close to zero chance of bringing in a single large tenant, as well as to local authorities who ran the risk of lost tax receipts on dormant buildings. Many people were selling, but many more were looking for deals on anything they could find. I can still remember people bragging about how many things they bought and for how little, while many others brought goods in to sell, some making a side or full time business of it while expressing a real sense of accomplishment at finally having their own businesses. Initially people were emptying their attics and basements, selling second hand goods; but very quickly stands opened up selling new (usually off-brand) goods, which seemed to fit well in a declining economy.

We have to hope that there's still enough of the entrepreneurial spirit left in the American soul to make such a thing happen on this go round, but only time will tell. 25-30 years ago there were still enough depression babies in the work force available to take the lead in adapting to the reality of extreme economic shifts. Our best hope today may be in the millions of immigrants from third world countries, who may soon be in a position to lead the American economy to some level of stability by taking the centuries old mom and pop capitalism of their home countires and re-introducing it to the "New World".

Your blog is a breath of fresh air in confronting the new realities before us--keep it going!"

Thank you, Freeacre and Kevin, for important commentaries.
So local and state government, here's your choice: reinvent and re-scale your ordinances and operations to what our economy can support, or continue squeezing every last dime out of small business and watch your tax revenues plummet to the point where bankruptcy is the only option left.


Thank you, Michael M. ($50) for your outrageously generous donation to this site. I am greatly honored by your support and readership.

Thank you, Alfred C. ($50) for your exceptionally generous donation to this site. I am greatly honored by your support and readership.

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