Recovery Only Widening the Gap Between Haves, Have Nots

| About: CIT Group (CIT)

On Monday, Catherine Rampell of the New York Times authored a story in the Week in Review that quoted an economist who stated that there are “as many views of the economy going forward as you have letters of the alphabet to describe the recovery.” I was disappointed by the article because, rather than focusing on the shape of the economic recovery (which is interesting to wonks but irrelevant to most Americans), the national debate needs to be whether or not the benefits of economic recovery are being concentrated in only a few hands to the detriment of average Americans.

On the surface, last week’s economic news was pretty good. Third quarter GDP was up more than most people expected, manufacturing productivity increased at a strong pace and inflation remains tame. Even so, the recovery is starting out as a jobless recovery with a real separation between the “haves” and the “have nots.”

The haves are employed and live in the world of big business and Wall Street while the have nots make up the majority of Americans that work and own businesses employing less than 500 workers. It is not coincidental that the haves are feeling like the recession is ending; the government helped them either directly or indirectly with trillions of dollars of aid while the have nots have had to make their own way through this crisis.

Wall Street bail outs, Federal Reserve programs and TARP subsidized brokerage firms but also had the unintended consequence of providing a competitive advantage for companies that can borrow money by issuing bonds. Only large companies can directly access the bond markets and it is large companies that are the clients of brokerage firms.

On the other hand, smaller companies obtain their financing by borrowing from lenders that make direct loans and not through capital markets activities. These lenders are the small and mid-sized banks whose ranks are getting smaller every time the FDIC seizes another bank, and from non-bank companies like CIT Group (NYSE:CIT), which filed for bankruptcy on Sunday, and is illustrative of what has happened to many non-bank lenders. The recovery of the bond market, which is a direct result of government action, is almost irrelevant to small manufacturers and service companies. Small companies are the “odd man out” of this economic recovery.

It’s great news that the economy has started to recover. However, it doesn’t make a lot of difference what shape the recovery takes (i.e., if it is a “W”, “V”, “U” or “L”) so long as the benefits of the recovery are concentrated in only a few hands. And right now the recovery is highly concentrated and in fact providing unintended advantages to big business over small companies.

Many economists believe that when the economy grows it is always the case that “a rising tide lifts all boats” and therefore everyone benefits. But, as any skipper will tell you, boats that are tied to a fixed dock sink when the tide rises and that is what is happening to small and medium sized businesses and their workers. They are tethered to lenders that aren’t rising with the economic tide.

The U.S. is at a kind of cross roads that it hasn’t faced in decades. Unless the Administration works quickly to level the playing field so that small businesses can get the same access to capital as big businesses, there are going to be unintended consequences to U.S. society for generations to come. The distribution of income, the evenness of economic growth and the unintended consequences of the bailouts are a lot more important stories than reporting on a bunch of economists musing about the shape of the recovery.

PS: A number of readers noticed that on September 3rd I wrote an article that pointed out that economists were churning out an alphabet soup of predictions and that the recovery will be very uneven As it turns out, on Monday I hit pay dirt twice: The New York Times reported on the alphabet soup of economic predictions (only two months after I did and said that the alphabet letter analogies weren’t very important) and Secretary Geithner said that the economic recovery would be choppy and uneven. Sometimes it is better to be lucky than good.