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Kauffman Smallbiz Expert On Taxes, Fiscal Cliff

A. It's probably finally dawning on lots of people, especially on the political right, what a large portion of the economy government spending is. In say, the 1960s, (a percentage of) government spending was what's called productive spending â¿¿ the highway system, universities, infrastructure, and entitlements. What could be classified as consumptive spending â¿¿ entitlements (like Social Security) then were a small share. Now it's radically different. Entitlements are a gigantic chunk and productive spending is really decreasing as a percentage of government spending. Nonetheless, that decreasing share of productive spending and even that consumptive spending on entitlements, that's still a massive chunk of the U.S. economy. And there are tons of U.S. businesses dependent on the government.

Inc. magazine every year does a list of the fastest growing companies. Government services dominated the list in the last decade. Washington D.C. is the top metro area for Inc. 500 companies since 2000. If a substantial of that is cut, you'll have a massive effect not just on small businesses, but innovative, fast-growing companies. History certainly shows that government spending, whether it was through contracts or through research grants or whatever, has certainly played a very important role in innovation and economic growth. National Institutes of Health-funded research at universities is hugely important. Small Business Innovation Research grants at federal agencies are hugely important. It's not simply the case that government spending equates with waste. It has its own role to play in an innovative economy.

Q. What kind of chance does a young company have to sell a product or service to the government in this climate?

A. There are still government programs that mandate that a certain percentage of government contracts have to be given to small business. Those percentages are probably not going to go away. But it does mean the dollar amount probably declines. It's not just a federal issue. State government budgets have been seriously affected the last few years. They're getting healthier but they're certainly not back to where they could be or should be. It's probably increasingly hard.

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