Article: Recession Relapse??

Forbes.com
Digital Rules

Recession Relapse?
10.19.09, 12:00 AM ET

If our apparent third-quarter economic recovery proves weak and relapses into a second recession, the causes will be:

--Small businesses, constrained by lack of expansion capital and fearful of possible regulatory changes in health care, energy and union membership, sit on their hands and don't hire.

--Unemployment creeps above 10% and stubbornly stays there.

--Because small businesses can't or won't expand, commercial real estate values sink more than expected.

--Regional banks with lots of commercial real estate paper on their balance sheets fail by the hundreds.

In other words, a second leg of recession will occur if America's small-business sector doesn't expand. It's about the small-business economy, stupid.

Recoveries from recession in the U.S. are typically led by small businesses. We now have reached the inflection point--i.e., the recession is ending, but the recovery is embryonic--when small businesses historically jump to the lead and pull the American economy along. It is precisely at this time that small businesses ought to be emerging from their bunkers to lease or buy cheap commercial property as they start gearing up for growth. Six months from now unemployment should be back down to 8%--and headed toward 5%--and Americans should be toasting small businesses for creating four out of five new jobs.

Small-Business Recovery Is Lagging

But small businesses aren't hiring yet. We should be asking why not. Somebody high up in the Obama Administration must make the health of small business a top priority; otherwise the recovery will die, and unemployment will persist at 10%. If that happens the President can say good-bye to his large majorities in Congress 13 months from now.

Last month I gave a speech at an industry conference for restaurant owners and fast-food franchisees--typical American small-business owners. Recovery skeptics filled the room, even though some of the franchises represented, such as McDonald's, had weathered the recession fine and others, such as Panera Bread and Green Mountain Coffee, were growing impressively.

Their chief worries are those I described in the first paragraph. One is the difficulty of obtaining working capital. Restaurants need and use credit lines just to operate. Another is the set of cost concerns around President Obama's big plans for health care, energy and union labor. Another is the uncertainty of inflation and commodity prices that determine the cost of food production. Together, these worries are enough to dampen the spirits of small-business owners in the food-delivery industry. True, food delivery is just one industry, but it's a big one.

When the Blue State Obama Administration thinks of small business, it undoubtedly dreams of promising startups churning out solar panels for office buildings or turbine blades for windmills. If its dreams are serious, the Administration should get behind a crackling good idea proposed by entrepreneur Paul Graham. It's called the Founder Visa, and the idea is to make it easy for the world's entrepreneurs to come to the U.S. As Paul Kedrosky describes it on the Web site Growthology: "The particulars are still getting worked through, but it has to do with getting a modicum of [private] funding ($250,000) and approval from an independent board that this represents a real startup deal, not some back-room finagling for a visa, and that's it: You're in the country and you're off and running."

This is a heck of a good long-term idea, and let's hope the Obama Administration embraces it. But for the short and medium term, high-tech startups alone will never return America to 5% unemployment and defuse the commercial-property bomb. Most existing small businesses don't need assistance from the government. What they need is across-the-board relief on taxes. They need benign legislation (or no change) on health care, energy and unions. A wish list, in other words, that runs counter to everything the Obama Administration is currently trying to pass.

Small businesses have always infuriated some liberals. Sinclair Lewis was awarded the Nobel Prize in Literature for Babbitt--the story of a small-minded Realtor in the 1920s. The word "Babbittry" soon became synonymous with "philistine." Liberal writer Michael Lind argues on Salon.com for sacrificing small business at the altar of corporatism in order to pass Obamacare:

"The solution may be corporatism or corporate paternalism--by which I mean the mandatory universalization of private-employer benefits. If the politics of ethnic diversity makes movement in a universalist, social democratic direction impossible in the U.S., then the alternative might be to mandate that all employers provide certain benefits to all employees, with no exceptions. The costs of such unfunded mandates might drive some small businesses out of existence. But small-business owners are the most vocal opponents of wage and benefit reform in the U.S. The replacement of Scrooge & Marley by a smaller number of bigger private and public employers who treat Bob Cratchit and Tiny Tim better would not necessarily be a tragedy."

There you have it: small business as Scrooge! If Obama defender Lind represents the thinking of President Obama and congressional Democrats, then our small businesses are in for a long siege. Hunkered down, they will not expand, hire or defuse the commercial-property bomb. That's a formula for a second recession.