Whitney: The Small Business Credit Crunch
Meredith Whitney sounds off in today’s Wall Street Journal about small businesses. She is worried about the lack of credit they are getting and its effect on the tenuous economic recovery in keeping the unemployment rate high.
[S]tates will approach their June fiscal year-ends and, as a result of staggering budget gaps, soon announce austerity measures that by my estimates will cost between one million to two million jobs for state and local government workers over the next 12 months.
Typically, government hiring provides a nice tailwind at this point in an economic recovery. Governments have employed this tool through most downturns since 1955, so much so that state and local government jobs have ballooned to 15% of total U.S. employment.
However, over the next 12 months, disappearing state and local government jobs will prove to be a meaningful headwind to an already fragile economic recovery. This is simply how the math shakes out. Collectively, over 40 states face hundreds of billions of dollars in budget gaps over the next two years, and 49 states are constitutionally required to balance their accounts annually. States will raise taxes, but higher taxes alone will not be enough to make up for the vast shortfall in state budgets. Accordingly, 42 states and the District of Columbia have already articulated plans to cut government jobs.
So the burden on the private sector to create jobs becomes that much more crucial. Just to maintain a steady level of unemployment, the private sector will have to create one million to two million jobs to offset government job losses.
Herein lies the challenge: Small businesses, half of the private sector (and the most important part as far as jobs are concerned), have been heavily impacted by this credit crisis. Small businesses created 64% of new jobs over the past 15 years, but they have cut five million jobs since the onset of this credit crisis. Large businesses, by comparison, have shed three million jobs in the past two years.
Small businesses continue to struggle to gain access to credit and cannot hire in this environment. Thus, the full weight of job creation falls upon large businesses. It would take large businesses rehiring 100% of the three million workers laid off over the past two years to make a substantial change in jobless numbers. Given the productivity gains enjoyed recently, it is improbable that anything near this will occur.
Unless real focus is afforded to re-engaging small businesses in this country, we will have a tragic and dangerous unemployment level for an extended period of time. Small businesses fund themselves exactly the way consumers do, with credit cards and home equity lines. Over the past two years, more than $1.5 trillion in credit-card lines have been cut, and those cuts are increasing by the day. Due to dramatic declines in home values, home-equity lines as a funding option are effectively off the table. Proposed regulatory reform—specifically interest-rate caps and interchange fees—will merely exacerbate the cycle of credit contraction plaguing small businesses.
This is a must-read piece on jobs and recovery and the role credit plays in this. Whitney is right about the looming state and local cuts and the difficulty the private sector will have in creating enough jobs to replace those lost in the public sector. I do have one quibble, however; while small business is the driver of new hiring, it is also the driver of job loss because small businesses simply go out of business at a much greater rate than larger enterprises. So, I think it is a misnomer to say that small businesses created 64% of the jobs when we don’t see an equivalent percentage figure of how many jobs were lost in small businesses. This is a small quibble, but I think it bears noting because a lot of people cite this statistic.
A lot of the rest of her arguments are political as they are aimed at the debate on financial reform. I am going to stay out of this one for the time being.
Please read the full piece at the link below.
The Small Business Credit Crunch – Meredith Whitney