The Surprising Truth About Where New Jobs Come From


The Surprising Truth About Where New Jobs Come From

September 15, 2016

"Don't letanybody tell you that it's corporations and businesses that create jobs,"Hillary Clinton said last week in Boston. "You know that old theory,trickle-down economics. That has been tried, that has failed. It has failedrather spectacularly. One of the things my husband says when people say, 'Whatdid you bring to Washington?' He says, 'I brought arithmetic.' "

The remark,writes my fellow Forbes contributor, Clyde Wayne Crews Jr., Policy director at CompetitiveEnterprise Institute, "echoes President Obama's 'You didn't build that.Somebody else made that happen.'"

"The mainquestion," writes Andrew Ross Sorkin from a different perspective in the NewYork Times, "was whether Mrs. Clinton's words were more about politicalmaneuvering than reshaping her beliefs."

Several dayslater, at a campaign rally in New York, Hillary Clinton said she had misspoken."I shorthanded this point the other day, so let me be absolutely clear aboutwhat I've been saying for a couple of decades. Our economy grows whenbusinesses and entrepreneurs create good-paying jobs here in an America whereworkers and families are empowered to build from the bottom up and the middleout—not when we hand out tax breaks for corporations that outsource jobs orstash their profits overseas."

Where donew jobs come from?

Amid thepolitical maneuvering, there is, happily, some serious work being done by the Kauffman Foundation and the Institutefor Competitiveness & Prosperity to figure out where new jobs actuallydo come from. The surprising truth is that over the last twenty five years,almost all of the private sector jobs have been created by businesses less thanfive years old.

"In fact,between 1988 and 2011," write Jason Wiens and Chris Jackson of the KauffmanFoundation, "companies more than five years old destroyed more jobs than theycreated in all but eight of those years."

From the Kauffman Foundation's Entrepreneurship Policy Digest, reproduced with permission.

Existingfirms are net job destroyers

"Both onaverage and for all but seven years between 1977 and 2005, existing firms arenet job destroyers," write Wiens and Jackson, "losing 1 million jobs netcombined per year. By contrast, in their first year, new firms add an averageof 3 million jobs."

"Newbusinesses account for nearly all net new job creation and almost 20 percent ofgross job creation, whereas small businesses do not have a significant impacton job growth when age is accounted for."

"Policymakersoften think of small business as the employment engine of the economy. But whenit comes to job-creating power, it is not the size of the business that mattersas much as it is the age. New and young companies are the primary source of jobcreation in the American economy. Not only that, but these firms alsocontribute to economic dynamism by injecting competition into markets andspurring innovation."

"Many youngfirms exhibit an 'up or out' dynamic," write Wiens and Jackson, "in whichinnovative and successful firms grow rapidly and become a wellspring of job andeconomic growth, or quickly fail and exit the market, allowing capital to beput to more productive uses."

"Our publicpolicy emphasis," writes RogerMartin, Academic Director of the Martin Prosperity Institute at the RotmanSchool of Management, "should be on enabling entrepreneurial firms to driveinnovation and prosperity."

Why Fedpolicy isn't creating net new jobs

This researchsheds light on another key economic issue of the day: why doesn't the Fed'spolicies of low interest rates and "quantitative easing", which shovel hundredsof billions of dollars into the economy, create net new jobs? One part of theanswer is clear: the money is only accessible to established firms, whichhaven't been creating net new jobs. It's simply not accessible to the youngfirms which are the genuine job creators.

What do theseestablished firms use the money for? We know that the big firms don't use itfor investment as much as one might expect. In a Financial Times articleentitled "Corporate investment: A mysterious divergence" RobinHarding helped resolve a conundrum that had puzzled the world's top economists:why is net investment at a measly 4 per cent of output when pre-tax corporateprofits are now at record highs – more than 12 per cent of GDP?

In standardeconomic theory, this makes no sense. When profits go up, companies should beseizing investment opportunities to lay the groundwork for even more profits infuture. In turn, that investment should create jobs, generate more capital goodsand lead to higher wages. That's how capitalism is meant to work.

As ithappens, we have the kind of thing that you rarely see in economics—a studythat enables us to pinpoint the problem by offering "with" and "without" data.

It'sbrilliant work by economists from the Stern School of Business and HarvardBusiness School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, in anarticle entitled "Corporate Investment and Stock Market Listing: A Puzzle?"which compares the investment patterns of public companies and privately heldfirms. It turns out that the lag in investment is a phenomenon of the publiccompanies more than the privately held firms.

"They findthat, keeping company size and industry constant, private US companies investnearly twice as much as those listed on the stock market: 6.8 per cent of totalassets versus just 3.7 per cent." Large publicly-owned firms are simply notinvesting enough to grow the economy.

Guesswhere all that money goes?

So if theFed's money doesn't go into job creation or investment, where does it all go?One part of the answer is that the firms are just sitting on the money, notseeing opportunities for investment. Another part of the answer is given byWilliam Lazonick in HBR and the New York Times: an astonishing amount goes to sharebuybacks.

"From 2004 to 2013,454 companies in the S&P 500 Index expended 51 percent of their profits, or$3.4 trillion, on repurchases, on top of 35 percent of profits on dividends…More than three-quarters of compensation for the 500 highest-paid executivescame from stock options and stock awards."

"So who gainsfrom open-market repurchases? Their sole purpose is to give a company's stockprice a manipulative boost, and prime beneficiaries are the corporate executiveswho decide to do them… For corporate executives, stock-based pay is a ticket tomembership in the 0.1 percent top-income club. So why do we let executivesmanipulate the stock market?"

As The Economist has written, the Blue Chips' use of sharebuybacks is the equivalent of becoming addicted to snorting "corporatecocaine."

"We arereaping the bitter fruits of the 'shareholder value' revolution," as MatthewYglesias at Slate writes. "Executives at publicly traded companies arepaid to generate higher share prices, which is done by hitting quarterlyearnings targets. This leads to underinvestment relative to the behavior ofmanagers of privately held firms."

As Hardingconcludes, it is "time to stop thinking about corporate governance andexecutive pay as matters of equity and to regard them instead as amacroeconomic problem of the first rank."

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GAO Report: Government Spends Millions to Defend Against FOIA Requests, but Actual Cost Difficult to Determine


GAO Report: Government Spends Millions to Defend Against FOIA Requests, but Actual Cost Difficult to Determine

The New American
September 15, 2016

According to a newly released report by theGovernment Accountability Office, the federal government spends millions ofdollars to defend itself from Freedom of Information Act requests. The reportalso notes that while it is the responsibility of the Department of Justice totrack agencies' compliance with FOIA requests, there are not enough mechanismsin place to capture the specific details related to the costs of theselawsuits.

The investigation was requested by theHouse Committee on Oversight and Government Reform and the Senate Committee onthe Judiciary in a directive sent to the Government Accountability Office inApril. "Requesters repeatedly report to Congress the problems they haveencountered with the FOIA process. These problems include indefinite delays,excessive redactions, and other unnecessary barriers to accessing information,"the letter states.

The letter goes on to cite an AssociatedPress analysis, which found that 77 percent of all requests last year producedeither censored files or none at all.

The committees asked the GAO to perform anumber of tasks in its investigation, including conducting audits of agenciesin compliance with the FOIA requirements, cataloging the number of exemptionsand how they were used by each agency, and uncovering the methods used toreduce backlogged FOIA requests.

The GAO report analysedcosts spent on fighting 1,672 Freedom of Information Act (FOIA) lawsuits thathad decisions rendered between 2009 and 2014. For the purposes of theinvestigation, the GAO examined only the 112 lawsuits in which the plaintiffsprevailed, across 28 federal agencies. The report indicates that the costsassociated with these lawsuits are comprised of the DOJ's costs for defendingthe suits on behalf of the agencies involved, the agencies' costs, and attorneyfees and costs based on settlement agreements.

However, even in the examination of thissmall fraction of the total number of suits, the GAO found that the specificcosts associated with the lawsuits could "not be fully determined."

Though the FOIA requires that the JusticeDepartment report on the costs, the GAO found that there were no mechanisms inplace to keep track of the costs. "Justice does not collect and track all ofthe costs that its attorneys and staff incur for individual lawsuits in whichthe plaintiffs prevailed," the report reads. "Moreover, agencies involved inthe selected lawsuits did not have mechanisms in place to track FOIA litigationcosts where the plaintiff prevailed, thus hindering their reporting of thesecosts for 55 of the selected lawsuits."

Upon request for the information, the DOJresponded that without the tracking capabilities to produce the information,significant resources would be required in order to gather data from each ofthe 93 U.S. Attorneys' Offices across the country.

On several occasions in which records weremaintained, the amounts of attorneys' fees and costs specified by the DOJ weredifferent from the amounts reported by the defending agencies. The JusticeDepartment contends the discrepancies are caused as a result of the appealsprocess and settlement agreements. The inclusion of those costs is not requiredto be reported to Congress.  

Meanwhile, guidance from the Department ofJustice asks agencies to provide their total litigation-related costs to thedepartment as part of the reporting process, the report notes. Agenciesreported a total of $144 million in costs related to FOIA lawsuits from fiscalyears 2009 to 2014, but as to the 112 lawsuits in which the plaintiffsprevailed, only the costs related to 57 of the lawsuits could be provided. Thatfigure was a staggering $1.3 million.  

"For the remaining 55 selected lawsuitswhere the plaintiff substantially prevailed, litigation-related costs were notprovided by the responsible agencies," the report explains. "Officialsrepresenting these agencies generally stated that they did not have themechanisms in place to track FOIA litigation-related costs where the plaintiffsprevailed."

Those agencies defended their failure bypointing to the Justice's guidance, which does not require them to collect andreport the information.

The GAO makes several recommendations basedon its findings:

• That Congress require the JusticeDepartment to track and report on appeals and settlement agreements so thatthere are no discrepancies

• That Congress either require that theJustice Department and agencies to report on the actual cost information onlawsuits in which the plaintiffs prevailed, or that Congress require theJustice Department to at least provide a cost estimate for collecting andreporting information on costs incurred so that it can be an informed decisionas to whether the FOIA should be changed to mandate this requirement.

The GAO notes that the added costs relatedto the addition of that requirement might be a substantial enough reason towarrant not keeping track of that information: "Although requiring Justice andagencies to report actual cost information could lead to better transparencyregarding federal operations, costs would be associated with such reporting,"the GAO report said. "Considering these costs, as well as potential benefits,could help Congress in determining whether such a requirement would becost-effective for enhancing oversight of FOIA litigation-related operations."

Perhaps instead of opting against thisrequirement because of the additional costs that would be associated with suchreporting, however, Congress should consider why the reporting process would beso expensive in the first place. Congress should also be curious as to theexorbitant costs of defending the federal government from FOIA requests in thefirst place, and whether it is in fact worth it in most cases. What is sosecretive that the federal government feels justified in spending millions ofdollars in keeping it from the public?

The purpose of the FOIA is to increasetransparency, a point that is noted in the report. "FOIA establishes a legalright of access to government information on the basis of the principles ofopenness and accountability in government." By establishing the "right toknown" standard, the FOIA made it so that agencies are required to providejustification when denying access to a record. However, the failure on the partof the Justice Department and the defending agencies to maintain and report thecosts connected to these proceedings fails to fulfill the purpose of the FOIA.Allowing this to continue will simply lend to the already prevalent notion thatthe federal government can cloak itself in an air of secrecy. 

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Feds Spend Millions Fighting FOIA Lawsuits, GAO Finds


Feds Spend Millions Fighting FOIA Lawsuits, GAO Finds

The Daily Caller
September 15, 2016

Federalagencies spend millions of tax dollars opposing Americans' successful lawsuitsseeking public records under the Freedom of Information Act (FOIA), but can'tsay exactly how much, according to a new GovernmentAccountability Office (GAO) report.

Department ofJustice (DOJ) officials responsible for tracking agencies' FOIA compliancedon't know how much agencies spent fighting 112 cases from 2009 to 2014 inwhich the plaintiff "substantially" prevailed, according to GAO. Of the 57lawsuits agencies could track, agencies spent $1.8 million.

But that'sjust a drop in the bucket compared to the $144 million agencies estimated theyspent fighting 3,350 FOIA lawsuits from 2009 to 2014, according to GAO.

Current DOJpolicy doesn't require department officials to track spending by agencies onspecific lawsuits, or whether the plaintiff or agency prevailed, leaving gapsin federal records about FOIA lawsuits, according to GAO.

"Althoughrequiring Justice and agencies to report actual cost information could lead tobetter transparency regarding federal operations, costs would be associatedwith such reporting," the GAO report said. "Considering these costs, aswell as potential benefits, could help Congress in determining whether such arequirement would be cost-effective for enhancing oversight of FOIAlitigation-related operations."

FOIA is themain tool for journalists and members of the public to request governmentdocuments, and agencies have 20 business days to respond. But agencies oftenfail to meet that deadline, at which point the requester can file a lawsuitagainst the government. (RELATED: Agency Admits It Destroyed Records After Six-YearFOIA Stonewall)

The Department of State is the slowest agency in responding toFOIA requests, taking 111 days on average, according to a DOJ report releasedearlier this year.

The number ofFOIA lawsuits against federal agencies continues to climb. Plaintiffs filed 290FOIA lawsuits against agencies in 2006, but 456 in 2015, according to GAO.

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Pentagon Funding Bill Includes Language to Dismantle Small Business Programs

Press Release

Pentagon Funding Bill Includes Language to Dismantle Small Business Programs

American Small Business League
September 14, 2016

PETALUMA,Calif., Sept. 14, 2016 /PRNewswire-USNewswire/ -- Senate Armed ServicesCommittee Chairman, Senator John McCain, has included language in the 2017National Defense Authorization Act (NDAA) that could virtually repeal the SmallBusiness Act and put thousands of small businesses out of business.

TheNDAA bill includes three provisions that could dismantle federal law thatmandates American's 28 million small businesses receive a minimum of 23%of all federal contracts. McCain's version of the 2017 NDAA (S.2943) would excludesmall businesses from participating in all foreign contracts. It would alsocreate a loophole that would allow the Pentagon to falsify compliance withthe federal government's 23% small business goal.

McCain'sversion of the 2017 NDAA also includes language that would makethe Pentagon's controversial 27-year-old Comprehensive Subcontracting Plan TestProgram (CSPTP) permanent. TheCSPTP was adopted in 1989 after the Pentagon was forced to release smallbusiness subcontracting reports that indicated Pentagon prime contractors werenot complying with federal small business subcontracting laws and regulations.

TheTest Program was adopted under the guise of "increasingsubcontracting opportunities for small business." In reality,it eliminatedall public transparency on small business subcontracting data. It alsoeliminated penalties that had existed for prime contractors that violatedfederal contracting law. The Pentagon has now been "testing" whetherthe elimination of transparency and penalties for prime contractors will"increase subcontracting opportunities for small businesses."

ThePentagon has refused to release any dataon the Test Program for 27 years. In 2015, the Pentagon finally produced astudy that admitted the CSPTP had actually dramatically reducedsubcontracting opportunities for small businesses since 1989. The AmericanSmall Business League (ASBL) estimates since1989 American small businesses where cheated out of up to two trillion dollarsin federal subcontracts as a result of the CSPTP. Pentagon prime contractorsthat violated federal contracting law faced no penalties.

ProfessorCharles Tiefer one of the nation's leading experts on federal contracting lawreleased a legal opinion of the CSPTP describing it as a "sham."In his legal opinion Professor Tiefer states, "Theprogram is a sham and its extension will be seriously harmful to vitalopportunities for small business to get government contracting work... Let itexpire."

TheASBL filed suitagainst the Pentagon for refusing to release data on the CSPTP under theFreedom of Information Act. During the ASBL's suit against the Pentagon FederalDistrict Court Jude William Alsup stated,"So it would be more like a David and Goliath. You get to come in thereand be the underdog again against the big company and against the biggovernment… They are trying to suppress the evidence."

TheASBL has launched a nationalcampaign to encourage Senator McCain to remove the language from the2017 National Defense Authorization Bill that would dismantle federal smallbusiness contracting programs.

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Clinton and Trump Asked To Address Problems in Federal Small Business Programs

Press Release

Clinton and Trump Asked To Address Problems in Federal Small Business Programs

American Small Business League
September 13, 2016

Presidentialcandidates Hillary Clinton and Donald Trump have been asked by the AmericanSmall Business League (ASBL) to address abuses that have been uncovered infederal small business contracting programs. The ASBL has sent openletters to both Trump and Clinton on the issue.

The ASBL haslaunched a national campaign to try and focus more media attention during theelection on abuses that have been uncovered in federal small businesscontracting programs. Federal law mandates a minimum of 23% of all federalcontracts be awarded to small businesses. Congress has established anadditional 5% small business contracting goal for firms owned by women andminorities, as well as a 3% small business contracting goal has beenestablished for service-disabled veteran owned firms.

The SmallBusiness Administration Office of Inspector General released Report5-15 on the diversion of federal small business contracts to Fortune 500firms and other clearly large businesses. It stated, "One of the most importantchallenges facing the Small Business Administration (SBA) and the entireFederal Government today is that large businesses are receiving small businessprocurement awards and agencies are receiving credit for these awards."

During hisfirst campaign, President Obama released a pro small business statementthat ended with the sentence, "It is time to end the diversion of federal smallbusiness contracts to corporate giants."

On July 25,2016, Mother Jones magazine released an article by Josh Harkinson on the issuetitled, "Giant Corporations Are Reaping Billions From Federal 'Small Business'Contracts."

TheGovernment Accountability Office (GAO) investigated the federal program forService-Disabled Veteran-Owned Small Businesses (SDVOSB). Their report GAO-10-108stated, "By failing to hold firms accountable, SBA and contracting agencieshave sent a message to the contracting community that there is no punishment orconsequences for committing fraud or abusing the intent of the SDVOSB program."

ProfessorCharles Tiefer served in 2008-2011 as Commissioner on the Congressionalchartered, Federal Commission on Wartime Contracting in Iraq and Afghanistan.He issued a statementto ValueWalk on the issue in April 2014 stating, "Billions of dollars are atstake for small businesses in America… They are, frankly, being cheated out oftheir opportunity to provide goods and services to the American people becauselarge companies such as Verizon, Citigroup, Boeing etc, have figured out how tomanipulate the system. Worse, when people such as Lloyd Chapman, the head ofthe American Small Business League and a true champion in this field try toexpose these unsavory practices, they are held up to scorn and ridicule."

In additionto their efforts to encourage Donald Trump and Secretary Clinton to addressabuses in federal small business programs, the ASBL will be contacting Chambersof Commerce and media outlets in battle raid states until November 8th.

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