The recession appears to be over: two quarters of positive GDP growth, including 5.7% in last year's fourth quarter. So why aren’t small business owners feeling more optimistic, according to the widely-respected NFIB Index of Small Business Optimism? Because they know that in order to survive, they have to grow. Grow or die. And it has been very difficult to expand in an increasingly consolidated, credit-scarce and tax-burdened environment.
There is anecdotal evidence that our economy is becoming more unequal — meaning big businesses are growing while mom-and-pop shops struggle. The “knee jerk” explanation points to bank and auto industry bailouts, but the reality is more complicated than that. Consider these factors: lack of a coherent antitrust policy; large companies benefiting from scale economies (“contestable competition”); credit rationing away from the smallest firms; and tax policies that continue to favor capital over labor — or, put another way, larger small businesses over smaller labor-intensive entities.
Notice that health care is missing from the list. Or perhaps it could be included in the “externalities” associated with larger businesses (e.g., larger small businesses with more negotiating power continue to get a break with cheaper health care premiums per employee).
Industry deregulation has played a role in creating an unequal playing field in business. Less government oversight of the transportation sector, for instance, fostered massive expansion in airline travel, trucking and associated sectors. Employment grew rapidly in startups at first — then stopped. The result has been airline consolidation and predatory pricing. Owner-operated truckers, for instance, can't compete against large companies. And what about jobs? Check employment trends in the transportation sector for the past 20 years (all point down).
Unfortunately, this story is repeated in many other sectors of our economy. Mergers and acquisitions have led to massive consolidation in telecommunications, publishing, office products and retail. As bigger firms gobbled up smaller competitors, the federal government did little to prevent job losses even as output and productivity increased.
As banks consolidated and grew bigger, credit card loans under $100K to the smallest businesses soared during the past 20 years. However, when adjusted for growth, the dollar volume of these loans actually declined. Larger small businesses got most of the larger loans. SBA’s Office of Advocacy has done a wonderful job of documenting the banks’ clever segmentation — keeping small firms small by limiting credit lines and loan sizes.
Finally, there's the problem of tax inequality. Depreciation rules have always favored capital. Only recently could small businesses expense $250K of equipment in the year it was put into service, if they could afford the investments. But depreciation for a worn-out worker (FMLA, etc) has been much slower in coming.
Tax increases at the state level — hidden in all kinds of user fees and property taxes — hits small businesses very hard. And let’s not forget state-mandated insurance programs like UI and workers’ compensation, which usually rank among small firms' most difficult problems.
The outcome seems to be that it is harder to start a business and compete when loans are hard to come by and competition from "bigger fish" is so fierce. Creative people will always succeed. But while aggregate GDP may now be growing, the fact remains that many of our nations smallest businesses are still threatened.
Email
ShareThis