Small Businesses are not hiring or borrowing, because... there's no demand!
This has been a long hard recession for small business. And though, officially, the recession is over, it has not ended for small businesses.
They are hesitant to take any risks or borrow more money, and most cannot even consider hiring new help. Things really began to slide downhill for small businesses and their owners after the financial meltdown of the Big Banks. And now they are fighting for their very survival.
The Big Banks are back to making money thanks to the largess of the taxpayers. But small businesses have received no help from the taxpayers or Congress.
Production has improved. Hours worked have increased slightly. But neither of those improvements have helped small businesses. The perceived slow recovery has not benefitted small businesses either.
It has become a matter of survival for millions of small businesses throughout the country. From manufacturing and services, to retail, restaurants and entertainment, demand for their products and services is flat or down. And, until that demand picks up, small businesses will not take on more debt to expand nor will they hire on just expectations that the slow improvements will continue.
Therein lies their dilemma.
Loan demand is down and line's of credit are being drawn on sparingly as small businesses remain cautious due to an uncertain future.
Evidence of the struggles small businesses are facing surrounds us in most cities and towns and counties throughout the country. Vacancies are rising in industrial complexes and business centers at increasing rates; beautiful new buildings sit as ghostly reminders of a flagging economy.
Last month's Small Business Economic Outlook Survey turned pessimistic after several months of modest gains. The National Federation of Independent Businesses monthly survey fell by 3.2 points as members cited "deterioration in the outlook for business conditions and 'real' sales gains." The survey showed that more firms are looking at declining sales than are expecting higher sales.
In essence, small businesses are telling a different story than Wall Street and the business talk shows; a disparate difference between the positives on Wall Street and the negatives on Main Street.
Politicians have been talking about helping small business for nearly two years but have different opinions on how to accomplish that. While they banter, the situation continues to deteriorate. By contrast, it only took Congress a few days to pass a $700 billion bill to help Big Banks. They have yet to do anything that truly helps small business.
There have been a few things that have helped small businesses and to help them retain employees, but they have only slowed the devastation. A reduction in taxes gave some relief from the burdens of a failing economy, but, definitely did not go far enough.
Some politicians advocate tax credits for hiring new workers while others want to cut taxes for all businesses. Either would give businesses short-term relief but would do little to encourage hiring.
Most small businesses are struggling to retain those employees they are still able to employ. Tax breaks and tax credits are of no consequence if demand does not improve. That can be shown in a simple example:
The flaws in politician's thinking are obvious in this simple example. If the demand for widgets does not increase, and in fact may decline, there is no incentive to hire.
The problem in this country is demand, not supply!
Considering that small businesses account for the greatest number of new jobs, a different, more innovative approach must be taken to stimulate jobs and the consumer and it must involve helping small businesses.
Congress needs to change their thinking!
The answer here is quite clear. Stimulate at the bottom. Stimulate those that will spend on the necessities of life, putting the money back to work immediately, therefore, increasing demand and stimulating the overall economy.
Stimulate small businesses, stimulate 'the people' and the benefit will surely trickle up!
Follow Jim Worth on Twitter: www.twitter.com/authorofmystery
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As a former small business owner I can tell you that there was one and only one factor that determined my business decisions: cash flow! And if customers weren't coming in the door of my restaurant I couldn't care less about fed policy, stock market fluctuations or whether Fannie Mae was screwing Freddie Mac.
People aren't buying because jobs, indeed entire industries, have been shifted overseas, and for those advocating more tax breaks for the rich, my question is: How's that working out for us? We've been giving tax breaks to the very wealthy for over 30 years and they've created jobs allright - overseas.
Mr. Worth should be on TV debating those well paid pundits who either don't understand the simple matrix of demand or who choose to ignore it for fear of exposing the ugly underbelly that's causing our economic diarrhea.
Somehow, the obvious answers -- please let us go back to the way it was -- are not allowed. Somehow, the green jobs that could at least accomplish something positive for consumer pocket books and the nation's cash flow are deemed not good enough, so we who support them have to endure verbal abuse.
If I could persuade myself to risk our retirement by starting a business, I would go straight for the energy efficiency angle, straight for the brave, new, non-materialistic world. We were sold a service economy, so let us buy and sell services! If this means that we create an alternative, parallel economy that drains the old one, then so be it. The real innovation will not emerge until enough players have lived and breathed this better world to get the hang of what is possible. What has small business to lose by giving it a
Very well said. We have ways of coming out of this economic morass but there is an unseemly reluctance on the part of Congress to address the 'real' issues.
I wrote about the value of green jobs on The Cutting Edge Blog on my web site, It's Worth an Opinion: http://worthanopinion.net.
It is near the bottom of my article entitled "So...Where Are the Jobs?"
Take a look at it and keep up the fight. It doesn't look like Congress is going to fight for us.
Jim
Yes, this article is the first sensible account of what's going on. There's no demand. Small business needs customers, but no one is buying.
Reason? They are losing money from their houses, so they feel poor. The answer is to raise up the floor, by cutting income tax on everyone making less than $100,000 down to 5 percent (5%).
Then states need to cap sales tax at 5 percent maximum. We also need to eliminate and lower property taxes on lots less than one-quarter of an acre.
It's more important to get business going than to fund six figure salaries for bureaucrats, yet that's the state we are in.
The intent of the article was to provoke thought and find new, innovative answers, this time hopefully from the bottom up.
Your suggestions are excellent examples of what congress should consider with emphasis that the bush tax cuts in the top two brackets must expire. The tope two brackets are only paying an effective tax rate of about 17.6% after all their deductions.
Let's give your ideas a shot and see whether trickle up is as effective as I think it would be. On this path we are still headed for some sort of depression. Time to try something new.
Thanks for your ideas and solutions.
Jim
Thank you for a very interesting article.
I would like to make a few points on your observations:
Firstly, I would argue that small businesses have been very hard hit by the Obama administration. A host of new healthcare regulations, minimum wage increases, and poor economic polices have created an atmosphere of uncertainty among these businesses, as such, they are saving more and being more cautious in how they expand. Higher potential labor and regulatory costs make them even more keenly focused on headcount then previously.
Secondly, worries that the Democrats will not extend Bush-era capital gains taxes creates additional stress on their ability to generate an appropriate risk-adjusted return. As such, they do not reduce their return downward, they just reduce their costs downward, i.e. labor, or they shut their business down.
Finally, stimulus at the bottom is good, but it has already been shown that short-term stimulus in consumption fails to ignite a virtuous economic cycle. Business mangers realizing that such stimulus us temporary opt to force their employees to work overtime rather than gear up for stimulus that is artificial.
Kai
Thank you for your comments and thoughts.
You make some very valid points and there is some fear and uncertainty about future regulations, but small business has been struggling for nearly three years and these regulations have not had any real effect on small businesses thus far.
I don't believe that Capital Gains is as big a concern for anyone who wants to start a business. Even at 20% those gains, if the business is run properly will not come for several years and has no bearing on someone wanting to start their own business.
You are rigth about stimulus at the bottom. If given in small amounts it has a short term gain, but will not sustain itself. People like myself are de-leveraging as fast as I can so my 3 small business will survive. But demand has fallen for my book because traffic at bookstores has declined by almost 50% over the last two years.
So as I said in the article, if demand does not pick up small businesses are going to continue to close and the downward spiral continues.
Thanks for taking the time to respond to my post.
You are right, to a degree. While I agree that the government should continue with ‘modest’ work-for-cash based stimulus initiatives, unless we make our businesses competitive and sustainably profitable, no amount of domestic demand will make them expand. To that point, handouts, UI, welfare, anything that pays people for not working is, in effect, not sustainably productive and will have a very limited ‘virtuous’ effect on the economy while creating a moral hazard and disincentives to work.
Secondly, like you, companies are de-leveraging. This is due to regulatory and political ‘uncertainty’, in part driven by a fear future Democratic reforms, augmented by a lack of clear economic fundamentals. Rather than risk applying capital in this environment, they may be waiting to see if they have to move their operations overseas to avoid the potential punitive taxation, regulatory costs and labor policy costs expected in future lame duck initiatives. Or they may expect that that the debt being piled on now will start to have a disadvantageous effect on the economy as it has in Europe forcing them to rely on savings rather than a robust credit market.
Finally, I disagree on taxes: Lower taxes equals either higher profit or lower cost goods, equals more employment or more consumption, equals more robust ‘sustainable’ economic growth.
Never-ending deficits to spur aggregate demand is part of the reason we are where we are today.
Kai
1. The HCB gives me a tax break for the health insurance I pay for my employees. There have been plenty of tax breaks included in various bills that I would love to take advantage of, but even if Congress gave me a two year tax holiday from all taxes, all that would do is make my life a little easier so I can pay my bills. Without more business it doesn't matter. Uncertainty is a republican talking point.
2. Capital gains has never affected my business, and just like with tax cuts, tax increases don't change anything either. My effective tax rate will not differ either way, and I never use tax rates as deciding factor in business. Doesn't matter. Anyone who is in business knows, tax rates for the business is never what you pay after expenses and deductions.
3 As for your bottom up stimulus statement, since this appears to be your opinion, there's not point arguing, but I have to agree with the writer of this article, trickle has proven itself to be a total failure for the middle class, and supply side will never get us out of this recession.
Thank youf or your response.
Hard for me to anchor a rebuttal since I do not know the type of industry or economic factors influencing how you decide to run your business. However, I have run businesses in the past as well as started several in China, and I can tell you that taxes (or lack thereof) are very much a driver in how businesses decide how/where to expand, with labor & regulatory costs being the other factors.
IMHO, Keynesian economics (stimulus) has been at work for years/decades, with the government borrowing and stimulating to augment private consumption. This along with loose monetary policies (Clinton/Greenspan and Bush/Greenspan) are probably what got you/us where we are today since much of that spending and economic growth was, well, artificial; borrowed from the future to supplement growth today. A recent article by the CEO roundtable reaffirms that they want to grow but they just are being prudent based on a difficult potential regulatory environment and worries that they will have to rely on their own internal cash sources to fund future growth/survival.
I support stimulus to a point, but it has yet to deliver. And the total price of getting to a point where it does may be offset by the cost to future generations as they have to live in concretionary economy similar to what is happening with Greece. In short, it may make future unemployment at 9.5% structural rather than cyclical or extraordinary. Disastrous.
Kai
Once again, America missed a huge opportunity to help small business.
The problem is not "a lack of bank loans," but the illusion that "money lent = an inexhaustible asset." (It might well look that way on a balance sheet, but it's not that way in real life.)
Now, please Feel Free to attach to me whatever label you like for being "so (insert adjective here)" to put it this way, BUT . . .
There is O-N-E way that any true Economy can work, and it consists of four words:
"MADE IN (RIGHT HERE)."
Go ahead, lecture me about how "I just don't understand how The New Economy works," and I will calmly reply that I know why it isn't working for anyone, anywhere, who does not happen to own a shipping company.
The people of Chattanooga, Tennessee were ecstatic to learn that VW was going to build a plant here, until they slowly realized that: it would mostly employ German workers, not Chattanoogans; and it would use engines from Mexico.
"Look at the pretty fields of wheat, hungry boy. But they're not your fields, and you can't tend them, and what they produce you cannot eat."
"Everybody's a hungry boy, hungry boy. Everybody but me and anyone you are able to elect."
The vaunted "comparative advantage" of Ricardo is from an era of unique colonial commodities. In Norway, for example oranges are called Chinese Apples for name. Today what passes for comparative advantage is "wage arbitrage" where the big corporations and the producing countries cheat for each other's benefit while the American citizenry gets the expletive delleted. You'd think there'd be an economist somewhere that could recognize this.
http://wjmc.blogspot.com/2010/05/future-of-small-business-in-america.html
The future of small business in America is bleak under both Democrats and Republicans -- the Democrats will need all the remaining resources from Main Street to bailout the state governments, and the Republicans will need any available resources left on Main Street to salvage Wall Street, Fannie Mae, and Freddie Mac -- frankly, even after all the resources on Main Street are appropriated by government, there will still probably not be enough to save the "big government" and "big business" -- sorry...
While you let the tune of Billy Joel's "Angry Young Man" roll around in your head, surf to sites like "opensecrets.org," or to the Federal Government's own websites if you don't believe that one. Read how a few thousand people make it their full-time job to "contribute" (sic) more than $4 billion a year to the Congress. Consider, now, that "the Congress" consists of about 650 people. "You Do The Math."
(Hint: if your calculator barfs at $4,600,000,000, which is ten digits [that are not in your pocket], do it for millions and then multiply by $1,000.)
Ignore the fact that this is only the tip of the iceberg ... only the acknowledged piece. Probably a tenth of it or less.
"If you are making $26,000 an hour during the course of an eight-hour day, do you hear or care about ... anyone?" N-O!
"If you walk around all day surrounded by gold and mahogany and hundreds of people fawn on you, giving you all the wine and women and drugs and cash that you can 'do,' do you hear the people cry?" N-O!
Human Nature does not work that way; never did. If it did, Victor Hugo would have been writing magazine articles for Reader's Digest.
I am waiting for the other shoe to drop. As jobs disappear more families will become one-earner. Think about the sociological and economic implications.
I doubt very much that most taxpayers took a willing part in that largess. The problems facing small business, are the same problems facing our shrinking middle class. Not too surprising, given that most small businesses are part of the "middle class".
IMO Government represents the interests of those that pay them best. A member of congress is paid a salary of $174,000 a year. Lobbying totaled 3.49 billion dollars in 2009. That works out to about 65 million dollars per member of congress.( $174,000
Power corrupts, wealth equals power. The disparity in wealth distribution in the US has been increasing dramatically since about 1990. Corruption in both business and government has been increasing lately as well. I submit the two are closely related.
The United States came into being over taxation without representation. I wonder just how much the average small businessman has in the way of representation in Congress today. When 1% of the country's population controls 42% of its' wealth, I strongly suspect they are represented much better than I. I know they enjoy a much lower tax rate than I do.
"All animals are equal, but some animals are more equal than others" (Animal Farm 1945)
It was true in England in 1945, and it's true for both business and people in America today. I suspect until that issue is adequately addressed, our current malaise will linger.
(Note: I found out something by accident. The less than sign on the computer keyboard will delete all words written beyond it. That's the reason for this broken disjointed comment. Sorry, I learn something new every day)
And: "money cannot exist 'by itself.'"
This has nothing to do with political parties: it is basic math, as has held true for thousands of years.
Recently a president of a company told me his state was providing salary coverage for the first 6 mos for new hires. This credit is very welcomed and will help as they hire which they are because they are busy.
Another business I financed, just recently needed to buy a lot of equipment which they had to pay for themselves because no loan could be acquired and nothing was being offered to small businesses that would help with those purchases. Now they want to expand and once again no bank is willing to help. Of course upon inception of this business nobody was willing either and thus why it was privately financed.
Everybody including our president, needs to walk the walk of being a small business owner. I guarantee the world would run a lot better if every person had that experience.
http://wjmc.blogspot.com/2010/07/main-street-depression-has-descended.html
What we need is a trickle up economic policy, which is the way things are supposed to be anyway...
All you had to do is look at the fact 70% of our economy was driven by people spending now see if big business can survive with out the people having JOBS!