Shutdown is Latest Challenge for Small Firms

According to this article in the Wall Street Journal, the government shutdown is just one of many troublesome obstacles small firms have been faced with. With museum doors and park gates back open, and federal money for preschool programs flowing once again, one must remember to consider the long run repercussions of the two week federal hiatus, especially on the struggling small businesses of America. Budget cuts and market uncertainties are leading dropping revenues and ultimately layoffs, and in some cases, employees are voluntarily leaving in fear of the questionable future which makes it difficult to retain a talented and skilled workforce.

The SBA reported that there has been an 8% decline in contracts awarded to small firms from the federal government because they are consistently looking for a "lower price" rather than the best value when purchasing. Another trending disadvantage to small companies is increased competition among the number of firms allowed to bid on contracts and an increase in paperwork to prove compliance with the growing list of federal requirements. Ultimately the time and labor that is put in to preparing the proposals increased by more than 150 hours or the equivalent of 1-2 additional employees. This demonstrates that in the short and long run, average and total costs are increasing without the guarantee that the contracts will be fulfilled. This is encouraging layoffs of skilled employees, diminishing the quality of work, and requiring small firms to attempt to remain competitive by seeking work in the private sector and abroad.


Dave Tufte said...

MJ: 100/100

MJ has got a lot of business in this post, but not much economics. Let me take you there ;-)

For a business to get "big" it needs two things: 1 a demand way out to the right, and 2) large fixed costs that need to be spread over many sales. What makes a business "small" is either one of those conditions not holding.

Governments tend to create "bigness" by imposing additional fixed costs. MJ gave an example of this with the time to do paperwork.

And, government bureaucrats, who can be lazy just like anyone else, prefer big vendors because then they may only have to deal with one.

Stef Bassett said...

Any republican looking for some fuel for their political fire can make great use out of this article. In my opinion this article is a powerful illustration of the negative impact government intervention has on a free marketplace. The government now operates very similarly to how a classic monopoly would. They are not required to abide by the same rules every other business is required to follow. As a part of this freedom, they require exorbitant amounts of work for small business to bid for and fulfill government contracts. With increasing uncertainty on capitol hill (not to mentioned the increasing question of their credit worthiness and solvency) small businesses are starting to think twice about whether they will go after government contracts.

One example in the article (which MJ mentioned) was the fact that the required amount of paperwork has increased to the point that employers are needing to bring on extra staff just to meet the growing demands of the government. This has forced business to start looking elsewhere for work. As a result, businesses are laying people off who would otherwise be hiring people on. The government has disrupted so much of what should be happening in our market economy that businesses and individuals are becoming increasingly confused about how to run their operations in this ever complex world. In a nutshell, this article articulates well the inefficiencies associated with a monopoly.

nickwb said...

Any Republican looking for fuel for their political fire will get a lot of use out of this article. MJ has found a gem of an example illustrating the monopolistic guise under which our federal government operates. Because this huge entity makes most of the rules, they are somehow able to exempt themselves from many of those rules.

While economists have been suggesting for decades the negative impact government intervention has on the invisible hand in a free marketplace, we're really now starting to see the long-term repercussions of the government's actions. MJ points out a few key examples from the article one of which is the fact that due to the amount of required paper work for small businesses, would-be-government contractors are opting for other sources of work. As small businesses search other places for work, often they let employees go in the process some of whom were justified almost entirely by the exorbitant amount of regulations surrounding government contracts. Inefficiencies abound in our federal government and this article makes no mistake about it!

Dave Tufte said...

nickwb: 50/50

I tend to disagree. I don't like paperwork, and I think it may be inefficient ... but I really don't know.

What I do know is that paperwork that is done efficiently is probably no more of a problem to our economy than a lot of other stuff that we do: Facebook, actively managing our portfolios, watching reruns we've seen before, making special orders in restaurants, and so on.

I think that the whole bit about government inefficiency is a very overrated urban myth. If you ask people in individual programs if they're personal area is inefficient, most of them will say no. I do think that there are lots of programs that need sunset provisions (i.e., they expire unless reconsidered and renewed).

As ManEc students I think you'd all be better served by paying more attention to the fixed costs crowding out smaller business argument, and the deadweight loss argument. These are of primary size. The inefficiency argument that is so common pales in comparison.