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April 2009
Small Businesses Key to Economic Recovery
By John Paul Galles

     The economy has shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone. Pulling this economy out of recession will only be accomplished by creating jobs—the overwhelming majority of which will ultimately be created by small businesses across this country. As a nation, we must enable the small business community with the tools to turn this economy around.

     According to the most recent data, using the Small Business Administration’s definition of a small business as having fewer than 500 employees, small businesses represent 99.9 percent of the roughly 27 million total businesses.

     Small businesses are incredibly important to the U.S. economy. Two important facts: (1) Small businesses employ about half of all U.S. workers. (2) Since the mid-1990s, small businesses have created 979,102 net new jobs or 78.9 percent of net new jobs. Small businesses also:

• Pay nearly 45 percent of total U.S. private payroll.

• Create more than half of nonfarm private gross domestic product (GDP).

• Hire 40 percent of high tech workers (such as scientists, engineers, and computer workers).

  Are 52 percent home-based and 2 percent franchises.

• Made up 97.3 percent of all identified exporters and produced 28.9 percent of the known export value in FY 2006.

• Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

     Market research also shows small businesses are primarily financed by commercial banks and other depository institutions which together account for almost 65 percent of total traditional credit available to them.

     With the U.S. economy in a tailspin, bank lending to small businesses has dwindled and even dried up in some regional markets. With higher lending standards, reduced property values and dramatically diminished secondary market lending, there is little wonder that small businesses are hurting and failing in greater numbers.

     Even in non-recessionary times, research from the last decade shows the survival rate of new employer establishments to be only 67 percent in the first two years; 44 percent at four years, and a mere 31 percent at seven years. Critical to any business survival is an ample supply of capital.

     In a recent announcement, President Obama promised $15 billion aimed at freeing the secondary credit market. That is NOT enough. That really is only priming the pumps because what is needed goes well beyond that figure. The president has also promised to eliminate the capital gains tax on small businesses. Thus far, his budget has postponed that action until 2014 given the economic crisis and growing budgetary deficits. It is necessary to implement this sooner.

     How do you get small businesses growing again? In the words of the movie Jerry Maguire, “Show me the money!”

     There must be rewards for the risk, the investments, the time and energy that small businesses require. Small businesses want a level playing field. They want to compete for quality workers, but hiring and retaining workers has become increasingly tough given the skyrocketing costs of health care, payroll taxes and pension plans. More often, larger firms can provide health care plans and pension programs at substantially lower costs than smaller businesses. And, increasingly, hiring workers is much less expensive in marketplaces outside the United States.  Lowering employment costs will speed our economic recovery for the longer term.

     Thus far, the emphasis for recovery has been focused on the banking system. Banks must be repaired to become finance agents for businesses, but small businesses create jobs and build wealth. Business owners and entrepreneurs must see the incentives lined up for them to invest in new ideas and new jobs and new markets. It is essential that there be rewards for risk, investment and jobs.

 

Sources: U.S. Dept. of Commerce, Bureau of the Census and International Trade Administration, U.S. Small Business Administration Office of Advocacy, Federal Procurement Data System, U.S. Dept. of Labor, Employment and Training Administration, Bureau of Labor Statistics

John Paul Galles is the publisher of Greater Charlotte Biz.
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