THE BLOG
11/14/2012 03:40 pm ET | Updated Jan 14, 2013

In Wake of Election, SMBs Expected to Serve as Engine of Economic Growth

With the uncertainty of election season out of the way, small businesses can again focus on growth and innovation -- and, as in past recessions, help pull the economy out of its prolonged slump.

2012-11-13-small__4959829652.jpg

Post-Election Market Fear

On the first trading day after President Barack Obama was re-elected to a second four-year term, the U.S. equity markets saw their biggest one-day decline in almost a year. While pre-election polling predicted President Obama as the favorite, his re-election, coupled with the re-election of a Democratic-controlled Senate and Republican-controlled House appeared to rattle the stock market. The S&P 500 fell 2.4 percent on the day, while the Dow Jones Industrial Average experienced a similar decline.

The oft-cited buzzword from corporate leaders over the past few years has been "uncertainty," and there is fear that this election cycle actually did little to resolve it. In particular, concerns over the impending fiscal cliff in the U.S. (the expiration of the Bush-era tax cuts and automatic federal budget cuts are expected to push the economy into recession without legislative action by early 2013) again have jumped to the forefront. Political pundits, economists, and the general public appear to have little faith in the ability of a divided Congress to come to a quick resolution. This uncertainty has increased volatility in the financial markets and has caused larger businesses to curb hiring and expansion plans, which in turn hinders economic growth.

Small Business Solution

Rather than looking to Wall Street or Washington for the answers to the country's economic woes, the solution might be in the hands of the nation's small business owners on Main Street. In the aftermath of the recession in 2001, small businesses played a critical role in re-starting the country's job creation engine. According to data from the Bureau of Labor Statistics (BLS), during the eight quarters in which overall employment declined from April 2001-June 2003, firms with 500 or fewer employees accounted for 40 percent of net job losses; these same firms accounted for 64 percent of the total net job gains from September 2003-March 2005. In other words, small business employment declined less during the recession and yet still saw more rapid growth coming out of the downturn.

Although small businesses still face meaningful uncertainty, the election surely hints at the federal government's likely direction on key issues. With respect to taxes, the top personal tax rate is likely to increase to as high as 39.6 percent (impacting some small business owners), and the corporate tax rate is likely to drop from 35 percent to 28 percent. With regards to health care, key provisions of Obamacare will be implemented, including the requirement that businesses with more than 50 employees offer health insurance to workers. And the list goes on. Small businesses now must make some assumptions about policy decisions and move forward. They are too important to the country's economic recovery to remain in limbo.

Recession Sows the Seeds of Recovery

If established small businesses aren't able to accelerate the pace of economic recovery, perhaps newer small businesses will. Ironically, the recession itself might have helped spur the solution to the nation's economic troubles. According to the Kauffmann Foundation's Index of Entrepreneurial Activity, there were 60,000 more businesses started per month in 2009 than in 2007. Factors such as lower wages, cheaper rents and higher productivity from advances in cloud computing and outsourced technology, foster an environment conducive to starting a new business, which can help kickstart the economy.

And the entrepreneurs that founded these businesses are different than those that came before them. A study by Forrester Consulting published in June 2012 revealed that the economic downturn in 2008 spawned a new type of entrepreneur. Highly-educated and technologically literate, these entrepreneurs founded their businesses out of financial necessity -- and hence exhibit a different degree of commitment to ensuring that they succeed. High unemployment rates, like the U.S. has experienced since the financial crisis in 2008, result in lower wages, leading to high rates of underemployment. Rather than taking a job at a more established company and being underpaid for their experience, qualified workers founded new businesses. Moreover, they are anxious to grow. According to Symantec, "Of the small businesses founded after 2008, 46 percent expect to double their employee base over the next two years and 75 percent expect to grow revenue by more than 10 percent."

Although far from ideal conditions, the uncertainty that is causing large corporations to scale back and the financial markets to decline, can spur innovation and the launch of new businesses. Crowdfunding platforms such as CircleUp support these new small enterprises as they seek capital to execute their growth plans -- and in so doing, help to push the economic recovery forward one small business at a time.