Why the Economy Won't Soon Improve

Prospects are dim for an economic rebound unless the Obama Administration takes off its blinders long enough to see that its policies are undermining small businesses.  Without vibrant small business growth, the economy will never be able to generate the jobs needed to significantly lower unemployment.

The jobs data for June was a further indictment of the president's handling of the economy.  Unemployment ticked up to 9.2 percent, rising for the second straight month.  The economy grew a puny 18,000 jobs in the month.  Job growth at small businesses was virtually nonexistent. 

To understand the scope of the problem, consider this analysis from Heritage Foundation.  Using data from the Bureau of Labor, the think-thank estimated that employers must create an average of 260,000 net jobs every month until August, 2014, to lower unemployment to the normal rate.  Job growth hasn't approached those numbers since the tech bubble in the late 1990s, so the odds are not good it will happen.

Changing the current direction on job growth depends on small businesses with under 500 employees.  These firms represent 99.9 percent of the total of 27.5 million business operating in the United States.  Large companies, including the Goliaths in Fortune's 500, account for far fewer enterprises, about 18,311 firms, according to the Small Business Administration (SBA).

Department of Labor data also shows that small businesses employ more people than their big company cousins. Fifty-two percent of the nation's workforce is employed by small businesses.  In rural areas of the country, small firms' share of employment is even higher.   

Nothing underscores the importance of small businesses to the economy better than job creation statistics from the SBA and Labor Department.  These small firms have generated 65 percent of the net new jobs in the economy during the past 17 years. 

To put that into perspective, small businesses accounted for 9.8 million of the net new jobs created between 1993 and 2009.  By comparison, the corporate behemoths generated 5.2 million jobs during the same period.  Clearly, small businesses hold the key to job growth.

Small businesses create their share of high tech jobs, too.  Government data shows that smaller firms hire 43 percent of the scientists, engineers, computer programmers and other professionals with high-tech skills.  The little guys are also more innovative, producing 13 times more patents per employee than the big boys.

Despite the obvious importance of small businesses to the economy, the Obama Administration has mostly ignored them.  Billions of dollars in bailouts went to the Wall Street crowd, including big banks, financial institutions and even some of the world's largest automobile manufacturers.

While emptying the U.S. Treasury for big businesses, the president's answer for the little guys was the "Small Business Jobs Act of 2010."  By any measure, the legislation has done nothing to address small businesses' problems.  The National Federation of Independent Businesses, the largest association representing small firms, has pronounced the law an abject failure, falling short of dealing with "the most significant problems" facing its members. 

Instead of a helping hand, the federal government has piled on more regulations for small businesses.  The SBA found that the smallest firms, those with fewer than 20 employees, spend 36 percent more per worker on average to comply with federal regulations.  By some estimates, the price tag for government regulations is $1.75 trillion annually.

In the latest example, the Environmental Protection Agency (EPA) has unleashed 30 new costly regulations that will further cripple small business job growth.  The rules were handed down without a vote in the Congress and with no study on its impact on small businesses.

That moved the chief executive of the Small Business And Entrepreneurship Council to scold Washington for its heavy handedness.  "More government spending, increased regulation and higher taxes are not economic tonics.  But that is what small business owners are getting from Washington.  The White House needs to wake up."

Unfortunately for small businesses, regulatory burdens aren't the only thing tamping down growth.  Banks have been slow to open their vaults to small businesses desperate for capital.  Business loans for under $100,000 have declined 18.1 percent during the recession, reports the Federal Reserve.  The overwhelming majority of those loans are made to businesses with under 500 employees. 

Small business firms rely heavily upon bank credit for injections of cash needed for everything from office space to inventory.  Without financing, small businesses have to make tough choices.  In 2009, the SBA reports that 660,900 small firms shuttered their doors.  Another 60,837 declared bankruptcy.  That same year only 552,600 small business starts up were counted by the SBA, putting growth in negative territory.

New financial regulations, many contained in the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, have further crimped lending.  Yet the billions of dollars in taxpayer bailouts handed to banks were supposed to allow these institutions to continue to loan money to forestall an economic catastrophe.  As far as small businesses are concerned, banks are not showing them the money. 

Another round of wasteful stimulus spending by the Obama Administration won't cure what ails the economy.  Small businesses don't want a handout.  All that is needed is for the government to lift  burdensome regulations and make it easier for banks to resume lending at normal levels.

Don't expect an about face from the administration.  It has shown a callous disregard for all things small.  Big businesses have feasted at the government money trough, sucking up most of the financial aid.  In an election year, it's not surprising the Obama Administration has chosen to lavish more attention on large firms because it gives them access to fat cat political donors.

By abandoning small businesses, the president has not only jeopardized the nation's chances at regaining its economic footing, but he has exposed his ignorance about job creation in the United States.