The last time America suffered an economic meltdown, in 2008, we came out of it poorly.
Yes, the economy and the stock market recovered. So did the banks, with a big assist from Uncle Sam. But millions of homeowners were left with mortgage debts that squeezed their disposable incomes to the vanishing point.
The unshared recovery proved a downer in two ways. First, the recovery was unusually sluggish. Second, it gave rise to simmering class resentments. Arguably, it led to the election of Donald Trump.
How can we avoid a similar shock this time? Economist Ken Rogoff says, ‘small businesses are getting slaughtered.’
Every depression is distinct, but I’d argue that the victims of the COVID-19 depression — this year’s version of households drowning in mortgage debt — are America’s small businesses. This time, the economist Ken Rogoff says, “the small businesses are getting slaughtered.”
A decade ago, the subprime crisis blew up the entire economy. This time, the shock to small business has led to a vicious multiplier effect: Those shuttered hair salons aren’t ordering supplies or investing in new hair dryers.
The federal government recently enacted a small-business rescue package in the CARES Act. But it’s already exhausted and beset with bureaucratic problems. Relatively few mom-and-pop businesses got loans. By contrast, the Federal Reserve’s emergency measures such as buying debt have immediately propped up large corporations. Government aid aside, larger firms are naturally better suited to weathering the storm. Larger companies can tap capital markets, which are used to translating future prospects into current dollars. Even if McDonald’s isn’t selling as many hamburgers today as it did before, investors know that eventually its business will recover.
Small businesses, however, are on their own. The corner pizzeria cannot borrow against the future, because by the time the recovery arrives it may not exist.
There are some 30 million such businesses in the U.S. (41,000 do sell pizza). Most are tiny, but cumulatively they employ 60 million people.
Since these firms account for 44% of the gross domestic product, to lose even a sizable fraction would be an economic catastrophe. Millions of employees would lose their jobs. Thousands of ideas would go up in smoke. Small business is the laboratory for big ideas.
The cultural fallout would be just as serious. If every coffee shop were rebranded a Starbucks, the caffeine would still be there, but it wouldn’t taste or feel the same.
Reports from the tapestry of small business around the country — a grocer in New Orleans, newspapers from Oregon to West Virginia, an art gallery in my home city of Boston — suggest that small businesses everywhere are fighting for their lives. In Camden, Maine, the lone bookstore shut its doors for good.
Each of these businesses represents the savings, the sweat and the dreams of an entrepreneur or family. On average, their proprietors earn only about $50,000 a year. But they symbolize something larger — call it the dream of plausible opportunity.
Part of that dream got destroyed or badly damaged in the mortgage crisis. But we don’t have to repeat the mistakes of 2008.
