Archives For small business

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Mark Jamison, (Director and Gunter Professor, Public Utility Research Center, University of Florida and Visiting Scholar with the American Enterprise Institute.).]

The economic impacts of the coronavirus pandemic, and of the government responses to it, are significant and could be staggering, especially for small businesses. Goldman Sachs estimates a potential 24% drop in US GDP for the second quarter of 2020 and a 4% decline for the year. Its small business survey found that a little over half of small businesses might last for less than three months in this economic downturn. Small business employs nearly 60 million people in the US. How many will be out of work this year is anyone’s guess, but the number will be large.

What should small businesses do? First, focus on staying in business because their customers and employees need them to be healthy when the economy begins to recover. That will certainly mean slowing down business activity and decreasing payroll to manage losses, and managing liquidity.

Second, look for opportunities in the present crisis. Consumers are slowing their spending, but they will spend for things they still need and need now. And there will be new demand for things they didn’t need much before, like more transportation of food, support for health needs, and crisis management. Which business sectors will recover first? Those whose downturns represented delayed demand, such as postponed repairs and business travel, rather than evaporated demand, such as luxury items.

Third, they can watch for and take advantage of government support programs. Many programs simply provide low-cost loans, which do not solve the small-business problem of customers not buying: Borrowing money to meet payroll for idle workers simply delays business closure and makes bankruptcy more likely. But some grants and tax breaks are under discussion (see below).

Fourth, they can renegotiate loans and contracts. One of the mistakes lenders made in the past is holding stressed borrowers’ feet to the fire, which only led to more, and more costly loan defaults. At least some lenders have learned. So lenders and some suppliers might be willing to receive some payments rather than none.

What should government do? Unfortunately, Washington seems to think that so-called stimulus spending is the cure for any economic downturn. This isn’t true. I’ll explain why below, but let me first get to what is more productive. 

The major problem is that customers are unable to buy and businesses are unable to produce because of the responses to the coronavirus. Sometimes transactions are impossible, but there are times where buying and selling is simply made more costly by the pandemic and the government responses. So government support for the economy should address these problems directly.

For buyers, government officials should recognize that buying is hard and costly for them. So policies should include improving their abilities to buy during this time. Sales tax holidays, especially on healthcare, food, and transportation would be helpful. 

Waivers of postal fees would make e-commerce cheaper. And temporary support for fixed costs, such as mortgages, would free money for other things. Tax breaks for the gig economy would lower service costs and provide new employment opportunities. And tax credits for durables like home improvements would lower costs of social distancing.

But the better opportunities for government impact are on the business side because small business affects both the supply of services and the incomes of consumers.

For small business policy, my American Enterprise Institute colleagues Glenn Hubbard and Michael Strain have done the most thoughtful work that I have seen. They note that the problems for small businesses are that they do not have enough business activity to meet payroll and other bills. This means that “(t)he goal should be to replace a large portion of the revenue (not just the payroll expenses) those businesses would have generated in the absence of being shut down due to the coronavirus.” 

They suggest policies to replace 80 percent of the small business revenue loss. How? By providing grants in the form of government-backed commercial loans that are forgiven if the business continues and maintains payroll, subject to workers being allowed to quit if they find better opportunities. 

What else might work? Tax breaks that lower business costs. These can be breaks in payroll taxes, marginal income tax rates, equipment purchases, permitting, etc., including tax holidays. Rollback of current business losses would trigger tax refunds that improve businesses finances. 

One of the least useful ideas for small businesses is interest-free loans. These might be great for large businesses who are largely managing their financial positions. But such loans fail to address the basic small business problem of keeping the doors open when customers aren’t buying.

Finally, why doesn’t traditional stimulus work, even in other times of economic downturn? Traditional spending-based stimulus assumes that the economic problem is that people want to build things, but not buy them. That’s not a very good assumption. Especially today, where the problems are the higher cost of buying, or perhaps the impossibility of buying with social distancing, and the higher costs of doing businesses. Keeping businesses in business is the key to supporting the economy.