The decline of America’s small businesses and countless jobs

By Jo Weber

Unemployment remains painfully high, even as GDP, corporate profits, and stocks sit near all-time high.

Two years after his spectacular electoral victory, President Obama and the Democrats faced a rout in the U.S. polls. Indeed, Obama and his party are like a rabbit on the railroad track that is hypnotized by the light of an oncoming train. Whereas Obama seemed to do all the right things in his quest for the presidency, he seemed to make all the wrong moves as chief executive.

His prioritizing of healthcare reform, a massively complex task, has been identified as a key blunder. This decision certainly contributed to the debacle. But other important factors related mainly to his handling of the economic crisis, a primary concern of the electorate, were perhaps more critical.

The stimulus package of $787 billion was simply too small to bring down or hold the line on unemployment. Here, Obama cannot say he lacked good advice. Paul Krugman, the Nobel laureate, and a whole host of Keynesian economists were telling him this from the very start. For comparison, the Chinese stimulus package of $580 billion was much bigger relative to the size of the economy than the Obama package. For the White House now to say that the employment situation would be worse had it not been for the stimulus is, to say the least, politically naive. People operate not with wishful counterfactual scenarios but with the facts on the ground, and the facts have been rising unemployment with no relief in sight.

Another reason is the decline of America’s small businesses, which struggle to compete against the scale of the world’s multi-national, multi-billion dollar corporations.

Here’s Nathan Sheets, Citi’s Global Head of Interenational Economics:

The travails of the U.S. small-firm sector. Our past work has emphasized the important role of small firms as engines of growth for the economy and, particularly, as job creators. The upper-left panel of Figure 8 documents this relationship. From the late 1970s to the time of the financial crisis, the share of net job creation accounted for by small firms declined some, but remained above 60 percent.

During the financial crisis, small firms bore the brunt of the job loss, as they were hit hard by the decline in construction and real estate (where small firms predominate) and by a sharp pull-back in bank lending (the red line in the right panel). Since early 2010, small firm employment has rebounded but has not yet come close to reversing the job losses sustained during the financial crisis. This is an issue that we are watching as a key indicator of the cyclical performance of the U.S. economy. Another concerning development is the steady decline since the early 1980s in the rate at which small businesses are being established. Research indicates that young firms—new start-ups—are especially powerful engines for job creation and real GDP growth. Another way of framing this observation is that it appears that the United States in the 1980s had some “secret sauce” that was effectively incentivizing the start-up of small firms. Better understanding what economic policies facilitated this outcome strikes us as a useful endeavor for future research.

Check out the charts:

small business jobs

Citi Research

Obama and Federal Reserve Board chairman Ben Bernanke deployed mainly Keynesian technocratic tools — deficit spending and monetary easing — to deal with the consequences of the massive failure of market fundamentalism. During a normal downturn these countercyclical tools may suffice to reverse the downturn. But standard Keynesianism could address such a serious collapse only in a very limited way. Besides, people were looking not only for relief in the short term but for a new direction that would enable them to master their fears and insecurities and give them reason to hope.

Obama failed to locate his Keynesian technocratic initiatives within a larger political and economic agenda that could have fired up a fairly large section of American society. Such a larger agenda could have had three pillars: the democratization of economic decision-making, from the enterprise level to the heights of macro-policymaking; an income and asset redistribution strategy that went beyond increasing taxes on the top 2 percent of the population; and the promotion of a more cooperative rather than competitive approach to production, distribution, and the management of resources. This agenda of social transformation, which was not too left, could have been accommodated within a classical social-democratic framework. People were simply looking for an alternative to the Brave New Dog-Eat-Dog World that neoliberalism had bequeathed them. Instead, Obama offered a bloodless technocratic approach to cure a political and ideological debacle.

Finally, there is no such thing as an objectively determined situation. The art of politics is using the contradictions, spaces, and ambiguities of the current moment to shape structures and institutions and create a critical mass for change. Class, economic, and political structures may condition political outcomes; they do not determine them. Who will ultimately emerge the victor from this period of prolonged capitalist crisis will depend on smart and skilled political leadership.

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About Jo Weber

Economist and marketing professional with strong understanding of economic theory and its practical implications. Possesses excellent oral and written communication skills, able to handle several projects simultaneously, and meets tight deadlines. Has knowledge and experience of accounting and bookkeeping . Operates with a strong sense of urgency and thrives in a fast pasted environment. Fascinated by entrepreneurship, workplace and careers, economics and risk analysis, business strategy. Fluent in German and English. Specialties: International Economics, Research, Forecasting, Risk analysis, Macro-economic scenario building, Website design, Internet marketing, Internet branding, Social media, Web Analytics, Administration & Economical advice to small & middle sized companies, Professional networking & matchmaking. View all posts by Jo Weber

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