The Demise of American Small Business

“Is the recession over?” “Probably.”

We have been hearing since late summer and early fall – that the recession is/was over. Is it true? Let’s hope so. But why do we not see things getting better?

The fact of the matter is simple. It is all in the definition of “recession;” - A significant decline in activity spread across the economy that lasts longer than a few months.

When it is being stated that the recession is over, what is being declared is that the decline has stopped; nothing more and nothing less. Liken it to face planting off a 3 foot porch. You don’t fully feel its effects until you hit the bottom. Will it leave you with a bruised ego, a bloody lip, broken nose, or kill you from an undetected subdural hematoma? You don’t truly know until you try to get up.

Thus far we have experienced all of the above with the worst effected being small business. The divergence was most apparent last June when large companies, though still constricting began hiring a net average of 32,000 employees per month while the small business was losing 158,000 jobs in the same period of time. The difference between a bloody nose and subdural hematoma was glaringly obvious. Worsening the situation for Americans is the fact that 41% of the American workforce is employed by small business. The banks have since been incentivized by government to “not loan” and the once curable condition has become a death sentence not only for small business, but for any hope of a rapid recovery. It was almost as if someone placed a DNR sign outside the door of the American small business.

The recession being “over” is lauded by big and getting bigger government. It is hailed in a grandiose fashion as if to say, “We have made it through!” The reality is that it is just starting point in terms of difficulty. Having a recession end is followed by slower constrictions within small business. Businesses today are still shutting their doors. After the unemployment rate dropped to 9.2% it again climbed to 9.9%. This is a residual effect of small business where many have made it through the “worst” they lacked the equity to sustain in a persistently tight market.

The administration sought a jobs bill that was designed to extend unemployment benefits; not create jobs. Economic studies show that the more unemployment benefits are extended, the longer unemployment persists. Even the Obama administration economists have extensively written about the reality of unemployment benefits in terms of how they hinder employment recovery efforts. Take a look in your local paper and you will find available jobs. Take a look in your communities and you will find record unemployment levels. Go back to your local help wanted ads and you will find something that may surprise you, it is not small business running the help wanted ads; it is big business. This is because the small business constriction is still taking place.

Small business in America made a fatal move; reliance on credit. Credit both for the business itself and credit on behalf of their customers. As the recession began to take a firm foothold, demand decreased causing a drop in revenue. As credit tightened, the small business found itself with even less customers and credit to sustain itself on. The American small business owner soon learned that he or she was a mere ward of the bank and not a true owner. Unlike the early years when small business relied on cash transactions, they followed the new national standard of having more debt than equity. For this error in practicality, recovery will be prolonged. Big business has far more equity and thus buying power. Small business cannot get the loans that big business can. As big business begins its recovery, it will have less competition from small business which in turn will drive pricing up. Big business, the once willing participant in the market taker position, becomes the market maker with less competition for its products in a given geographic region. They once had to buy in bulk to undercut the small businesses prices who lacked the equity and buying power to take advantage of best pricing practices from distributors. Without the completion of small business they will assume 39% of the long term value creator which will have a direct impact on regional price variations. This all before the VAT and Cap and Trade.

Big business no longer has the need to grow to control. Their desire is to get back up to capacity rating, not grow beyond that due to cost variance of productivity. As they return to the profitable cost curves they will begin to conserve, not expand. The long term impact on small business is obvious. A person opening a small business with a product similar or identical to that of a large business will be instantly undercut as to not allow them to enter into a positive position in a cost curve (that they probably have never planned out to begin with). A small business will have a short run life expectancy. The failures will only further tighten small business lending.

Citing that 41% of Americans are employed by small business, which is still in its constricting phase; unemployment could fluctuate around 8.3% for a prolonged period of time. Remembering that the job loss/gain ratio between small and big business is almost an 80% differential, we can safely assume cresting 10% unemployment again is likely and as unemployment begins to ease thereafter, the decline will be slow and steady until such a time that big business sees its cost curves actualized at which point a new established unemployment standard will be established. An unemployment rate that is likely to be considerably higher and far more persistent that those of the past.

Under employment will become the new acceptable standard. Lost in the melee’ of job and budget cuts are those that have sought “lesser jobs” and part time employment to stay afloat. Moreover, the representations become more obvious with the increase of the marginally attached workforce who are NOT counted as “unemployed” because they “have not looked for work in the preceding four weeks” of the national unemployment survey conducted by the Bureau of Labor and Statistics. This population grew from 2.1 million to 2.4 million; in essence increasing unemployment to more than 10% by administration standards. Between those discouraged workers, the marginally attached workforce and the under employed, the situation becomes one of dire straits that is not fully appreciated.

In response, the Obama administration searches for relief for the unemployed. The unemployed do not relief, they need jobs. They do not have jobs because the demand for products and services is low. As demand begins to increase, the needs of the consumer are being increasingly met by big business. What the current administration has failed to realize is that legislation cannot increase demand. Only freeing up US dollars to US households can do that. A jobs bill that is statistically proven to ONLY lengthen unemployment only serves to further ensure the decline of the American small business and in turn devastates unemployment realities. Further complicating employment through demand is the new taxes the American consumer now faces. The smart consumer has begun to save under the threat of knowing how much products and services in the future will cost. The smart consumer knows their electric bill will increase 90% and the gas bill increase 55% under Cap and Trade while gas pump prices are likely to increase 74%. Couple that with the Bush tax cuts expiring and you have a fiscal issue within the American household that scares consumers. The likely hood of the VAT, the increase in premiums to pay for the “UnAffordable Care Act” that has crested the trillion dollar cost mark and you not only have the destruction of small business, but no opportunity for true recovery – ever. This is what happens when government attempts to spend its way out of a recession.

Bush spending was terrible, but Obama has out spent the Bush years seven fold in less than a quarter of the time. This is how we as citizens and taxpayers pay for the lack of governmental fiscal responsibility. Just as small business has relied on credit over equity, government has done the same. To offset the damage of government, the burden is placed on not government, but the taxpayer. This forces the taxpayer to focus on paying government for their wasteful ways and not supporting the economy. The demand decrease this will cause will not be fully felt until next year at which point it could contribute to a double dip recession. If the economy were to again ebb, the likely hood of a full recovery could prove impossible – even a recovery to the point at which the economy began its second recession.

Small business as it was once known could well be done in America. As much a victim of its own misgivings in financial prudence as it is victim of rouge government spending over two consecutive administrations. In its place, big business with big prices and big controlling interests in their communities.