Small Businesses Need to Face the Music

8/5/20

On August 3, in a letter to congressional leadership, Howard Schultz (@HowardSchultz) of Starbucks along with more than 100 current or former CEOs petitioned the government to provide additional federal support for the small businesses sector. The letter cited the fact that small business represents 44 percent of the economy and almost half of private sector employment.

“Small businesses are too critical to our country’s economic strength to let fail. From retailers and restaurants to consulting firms and manufacturers, small business owners are facing a future of potential financial ruin that will make the nation’s current economic downturn last years longer than they must.”

The very same day, the NY Times ran a story by Matthew Haag (@matthewhaag), “One-Third of New York’s Small Businesses May Be Gone Forever.” New York isn’t an outlier. It’s emblematic of what’s happening nationwide. Unfortunately, it’s a problem that’s not likely to be solved by directing additional aid to this sector. The reality is that the pandemic isn’t a blip. The pandemic has changed the calculus of doing business; and the fact is, in a post-Coronavirus world, a good portion of small businesses that may have been sustainable pre-Coronavirus no longer are.

In many cases, efforts to prop up non-sustainable businesses are doomed to fail. Moreover, those efforts will retard other adjustments that would otherwise serve to pave the way for a more robust recovery once the public health crisis ebbs. As callous as it may seem, unsustainable businesses have to adapt; and unfortunately, closing down may be the best option.

Consider virtually any business involving in-person, face-to-face commerce (e.g., bars and restaurants, gyms, retail, etc.). Many if not most will have to reduce the occupancy for their indoor services dramatically, and few will be able to do that while still paying current rents. Some landlords may ameliorate the problem and allow existing operations to continue by reducing the rent; but unless that happens on a widespread basis, we can expect the number of operating establishments to stay at current moribund levels or worse for the duration of the pandemic — and likely beyond, as a new normal takes hold. The key to reviving this sector lies in allowing the market to work. Non-viable businesses will fail; rental values will adjust to the point where new enterprises can operate profitably; and new (or past) entrepreneurs will step in to respond to the new economic circumstances. Efforts to support existing businesses without regard to viability will simply retard this process and delay the recovery that we’re all eagerly awaiting.

An important caveat is that many businesses owners might very well be able to weather the storm with an infusion of capital; and as a public policy, I endorse efforts to allow credit-worthy enterprises to access capital markets. The Fed’s main street lending program, for instance, serves this purpose, and it deserves to be availability more broadly. (See my post of 4/30 on this program: https://medium.com/@igkawaller/musings-9c912ff9939.) I draw the line, however, on loan forgiveness or grants to this sector. Such aid is corporate welfare, and that aid would be better directed to individuals and households. People need to eat, businesses don’t.

Business owners who can’t survive in the current economic environment should stand in the same line as everyone else who has suffered economically under this pandemic, without differentiation.

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Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.

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Ira Kawaller

Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.