Unexpectedly Intriguing!
November 28, 2005

What happens when a bunch of political hacks want to use economic data to paint a picture they want to see? Well, I won't keep you in suspense. What you get is a pretty dazzling display of ignorance - a highly filtered view of reality that uses the con man's tool of distraction to hide the inconvenient truths that otherwise repudiate their political objectives, all while plainly demonstrating that the hacks in question only care about paying lip-service to a political constituency without actually caring about their real needs or even understanding how the world works at all.

The Congressional Democrats' recently released "Small Business Index" (detailed in this 180KB PDF document) is a case study in smoke and mirror economics. But, you don't have to take my word for it - here's what small business and entrepreneurial expert Jeff Cornwall of Belmont University had to say on the nature of how Democratic representative in Congress are distorting the nation's current environment for small business people (emphasis mine):

The Democrats' SBI stands in stark contrast to other reports recently released, including one by the NFIB that shows a robust outlook for small business.

So why does the Democrats' SBI, once again, give a different picture than most other reports of its kind? The answer is in what they include in their index.

Many of the factors that they load into their index are macro economic variables that have never been shown to really have much a direct impact on small businesses, including balance of trade and federal deficits. While there may be legitimate reasons to be concerned about these types of measures, there is no evidence that they have any direct impact on small business start-ups or growth.

Other variables that they include are inconsequential or even meaningless for small business:

- They include the Russell 2000 index, which is a measure of stock prices of smaller public companies. The vast majority of small businesses employ fewer than 20 people and they are not publicly traded.

- They include venture capital activity. While this is an interesting factor for some discussions, VCs fund only a small fraction of one percent of businesses.

- They include a broad measure of commercial credit, rather than the more specific measure of small business credit reported by the SBA that most recently showed a 5.5% increase in bank funding of small business.

Probably the most important reason to be skeptical about the Democrats' SBI is what it does not measure. The cost/scope of regulation and tax rates have been proven in studies from around the world to be the two most important predictors of entrepreneurial activity. While the Democrats' SBI does include cost of regulations as one of their seventeen variables, they do not include a single measure related to taxes or tax rates.

Why don't the Democrats want to include tax rates in their index? Could it be that it does not fit their agenda? Who cares what really matters to small business and entrepreneurial economic development? This is politics!

Was there ever really any doubt of this final assessment?

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