Small Businesses Play Important Role in Recovery

In his Web blog, Rich Karlgaard, publisher of Forbes, recently wrote about the importance of the small-business sector in avoiding a double-dip recession. Of his four potential causes for a second economic downturn, two of the causes have to do with lack of expansion among small businesses:

If our apparent third-quarter economic recovery proves weak and gives way to a second leg of recession, here is how it will happen:

1. Small businesses, constrained by lack of expansion capital and fearful of possible regulatory changes in health care, energy and union membership, sit on their hands and don’t hire.
2. Unemployment creeps above 10% and stubbornly stays there.
3. Because small businesses aren’t expanding, commercial real estate values sink more than expected.
4. Regional banks with commercial real estate paper on their balance sheets fail by the hundreds.
In other words, a second leg of recession will occur if the American small-business sector doesn’t expand. It’s about the small-business economy, stupid.

Mr. Karlgaard offers up a solution for avoiding these causes that I very much agree with:

What small business needs most is not bailouts, but relief on taxes and benign legislation (or no change) on health care, energy and unions. A wish list, in other words, that runs counter to everything the Obama administration is trying to pass.

New companies typically are the first-responders in economic recoveries, as capitalization forms from lowered opportunity costs and increased investment confidence. According to a recent article in the Wall Street Journal, “businesses in their first 90 days of life accounted for 14% of hiring in the U.S. between 1993 and 2008.”

However, the same article makes a grim comparison between business starts after the Technology Bust in the early 2000s and, now, during our current phase of the recovery:

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts — including new businesses and units of existing businesses — fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.
This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.
The recession may have ended, but history suggests business creation won’t rebound quickly. The 2001 recession officially ended in November of that year. But business starts didn’t begin growing again until mid-2003. A sustained lull in company formation “could have huge implications for the economy down the road,” Mr. Headd says.

It is important that our leaders in Washington consider the implications of these facts. Real economic recovery and job creation can only take place in the private sector, and encouraging small business should be our first step to ensure that.


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