The Real Job Loss Story: Death of Small Business

As I said on Larry Kudlow’s CNBC show Wednesday night (see link in previous post), the big issue in the US economy is the massacre of small business. That’s why the household survey shows that 558,000 Americans “became unemployed” during October, while the establishment survey of payrolls shows a decline of only 190,000 jobs. The establishment data, which are collected from larger businesses, are more reliable; the household survey is based on telephone interviews with randomly-selected households. But the numbers are so large as to make clear that small businesses are shutting down.

With commercial and industrial lending by American banks down 13% since September 2008, and most banks continuing to “tighten lending standards” in the Fed’s official poll, this is not surprising. Wal-Mart will make it through a recession; not the tea-cozy shop down the mall corridor, much less the real-estate agency in the half-abandoned exurb. The global speculative grade default rate, as Moody’s reported this week, has risen to a post-Great Depression high of 12%. Credit lines for small businesses (including home equity, credit cards, and all the other devices entrepreneurs use to fund themselves) will continue to shrink.

Numerous analysts have made the point that in all previous post-war recoveries, it was small business that led job creation. During the 1980s and 1990s large businesses lost employment and small businesses grew. The fact that job losses at small business are evidently far higher than those at large businesses does not make this look like any recovery at all.

Comments

[John Galt:]

Small business keeps getting straw after straw put on their back. Pretty soon, they will be forced by Nancy Pelosi to pay more taxes for health benefits per employee. How do you think that's going to work out? Will that be the last straw?

These small businessed don't get bail outs, and the small business owners I know are all hurting now.

Nov 06 11:20 AM

[User 353732:]

1. The assault on small business via taxes, regulations, denial of credit, hostility to innovation is part of the broader systematic assault on the Middle Class. The US Regime now adores control for both the concentration of wealth and power it affords and for its own sake: the sheer delight in treating America as its private plantation.
Everything is permitted for the plantation owners while everything not compulsory for the plantation captives and workers is prohibited.
Small business is the final and defiant Middle Class barrier between the US Regime and its diseased dream of an oligarghic kleptocracy where the very few not just tax and regulate but reduce to whimpering servility the many.

2. Net job creation depends on a continual shift of resources, based on tens of millions of decentralized decisions and free and fair market signals, from lower valued to higher valued resources. This is can only be accomplished via the combination of efficiency(or commercial failure) to free up resources from current uses and innovation to redeploy them into higher valued uses.

Big business increasingly focuses on efficiency gains in the US while it is small business, new business and start ups that focus on innovation. Medium sized enterprises are entities that have either found and occupied a fairly stable niche or making the transition from revenue growth via innovation to productivity driven earnings growth via efficiency( or are large companies gradually failing and shrinking as they change their business model or shrink to adapt to shrinking market segments).

Thus big business can create profit growth without employment growth. It is the medium, small, new and start up businesses, by their very nature, that create job growth.

The policy of the US Regime is to provide limitless, free credit, to favored Big companies(those that excel in negative value added , organize themselves around failed business models and are led by incompetent but politically protected executives and boards) and to assorted social parasites, while denying credit to almost everyone who can actually create sustainable value in the Productive Economy.

3. Govt can appropriate, transfer and misallocate resources. It can destroy value; on the net, it cannot create it. The bigger the Govt, the more net jobs it destroys because the more resource malallocation there is. Once a Govt becomes too large relative to the economy, Govt spending has a negative multiplier.
Instead of "saving and creating " jobs, per the Big Lie of the US Regime, it inhibits and destroys jobs. The more Big Govt , the fewer real jobs.

Nov 06 11:24 AM

[tripleblack:]

Atlas Shrugged ALERT!

This is NOT a recovery, it is a counter-revolution - and the good guys are losing.

Nov 06 11:30 AM

[John Galt:]

On Nov 06 11:30 AM tripleblack wrote:

> Atlas Shrugged ALERT!
>
> This is NOT a recovery, it is a counter-revolution - and the good
> guys are losing.

I've read about some angry small business owners that are unwilling to cooperate with the looters.

"I'm rich"? "My business makes 250K per year in revenue"? " You want to increase my taxes"? There are plenty of Joe the Plummer types that aren't really rich but run small businesses. I've read of some of them making sure they make 249K and then stopping for the year. What's the point? Why take on the additonal stress when you could just hang out and have off a few months? They will be ok... some of their workers might not but...

Sure it will cost your workers a paycheck and revenue, but is this whole thing called work even worth it? Increase their taxes, throw a trillion dollar health care tax their way, call them greedy...

I just hope that when these small business workers get laid off, they will realize that it wasn't because the small business owner was a jerk, or because they weren't productive workers... it's because of Pelosi, Obama, Reid, Frank, and the crooks in Washington.

Nov 06 11:41 AM

[market ace:]

Small business does not make giant payoffs (campaign contributions) or have lobbyists padding congress peoples pockets so the gov't does not think they need them, The power hungry socialist in Washington, which are married to Wall Street, are too high up in their glass towers to see or care about the foundation crumbling beneath them.

As usaul the Gov't thinks small business is struggling because they cannot get credit as they think debt is the answer to everything. Why would small business borrow to expand in a dieing econmy? Econmoic policies, tax laws and true healthcare reform (Not the Pelosi tax, regulate and screw business) model are desperately needed, but it will never happen with elitist clowns running the country.

Nov 06 11:43 AM

[notsosmart:]

the new "capitalism" is intent on getting rid of the middle class. the poor are meaningless & offer little resistance so the rich are better off with only poor around. of course the dumb-dumb middle class sheeples have no idea whats happening as long as there is beer to swill & " coliseum" seats to be filled.notice the crowds for the yankee parade in nyc today.the private schools here in ct are booked solid @ $30-35,000 a year while the drop out rate for publibc high school is app.50%.(those that make it to college drop out @ 50% the first year).those still working have to produce more to make up for the laid off(some of whom may never work again)state & local taxes will suck the little middle class has left.anybody notice that there is little or no immigration from europe to this country anymore.the wall st ponzi/casino will continue to fleece any & all that are not insiders.the recent sec activity is just a little propaganda to show they arent completely dead.too little too late.sad.

Nov 06 11:57 AM

[Mad Hedge F...:]

fgh Ouch! Another 190,000 jobs went down the crapper in October, taking unemployment rate to a new 27 year high of 10.2%. Add in discouraged job seekers, and that puts the jobless rate at gut churning 17.5%, and over 20% in California. Along with yesterday’s stunning, gob smacking 9.5% increase in Q3 productivity, the figures point a giant arc spotlight on what is really happening in the economy. Companies are still firing workers en mass to boost profits. After getting blood from a stone they are returning to the same rock for one more drop. I guess if I fire myself, the profitability of my business would go through the roof too, and maybe even my stock would rise. At least then I would then be rid of my oldest, most expensive but least productive employee, who is the worst to get along with, max’s out his sick and vacation days, and wears the same clothes to work every day, even when there lipstick on the collar. But then who would write this daily letter? Maybe Cecelia, my cleaning lady, would do it. She’s cheap. This explains why when you go into Office Depot these days, there is only one minimum waged employee standing at the cash register, the hours on the phone I have to wait to get technical support from Dell, and the endless unmovable lines at Citibank. America’s service economy has become all about denying service to customers. The scary thing is, with companies firing their way to prosperity, what happens when we get another dip? My theory is that the US has entered an era of chronically high employment that is never going away, no matter what the government does. Goodbye USA, hello Germany!

Nov 06 01:31 PM

[Graham and ...:]

No one gives a hoot about small business.

Everyone in power seems to prefer big business, for bigness' sake.

Then they wonder where all the jobs have gone.

Nov 06 02:22 PM

[Tom E.:]

Its time to break up the big multinationals.

Nov 06 02:42 PM

[Socialism c...:]

Where's the incentive to work harder??? I have ZERO incentive to start a new company right now...only to see my profits taxed away to pay for someone else's healthcare!!! Or to have a massive Cap & Tax bill shoved down my throat and throttle my ability to keep afloat. Forget it.

Instead of growing government, stripping our freedoms, and jacking up taxes...some drastic downsizing of government, coupled with REAL TAX CUTS would have this economic ship righted in no time!!!

Nov 06 03:02 PM

[steveusa:]

@David
thank you for your post

it underlined that our Another Great Depression is swiftly worsening

Nov 07 09:12 AM

[TeresaE:]

Thank you David.

Four or five years ago, the effect of "competition with China" was becoming apparent as my mailbox was stuffed with auction notices from my customers, suppliers and competition.

I tried and tried to get a reporter, expert, politician or anyone to wake the hell up.

"Global competition is good for us... just look at our tax revenues" was the most common answer.

99% of the population, politicians included, have no idea the horror that owning a business brings. Lawsuits, regulations, taxes, paperwork, whiny entitled employees - everyday we are hit in the head with something.

Unless you have had to make payroll with $100 sitting in the bank or owed the IRS $10,000 when you couldn't even draw a paycheck and have $100 in your bank accounts, you cannot understand the reality of owning a business.

We are being slaughtered so that big business can pay the highest tax rates. And really, when you boil it down, that is what Congress decided - one company paying 40% plus their CEOs paying 40% is worth more than 1000 companies paying 20-40%.

This is what "progressive" tax rates bring. Those that pay the largest percentage make all the rules. Soon, they are going to see the truth...

small business wasn't just competition, they were customers, your best customers.

And they are gone.

Nov 07 06:40 PM

[User 283977:]

Well said Teresa!

Nov 07 06:44 PM

[SmBlkBob:]

Feb 2008 was the month I called it quits after almost 40 years as a small contractor.
Insurance rates had just gone up again as the pool of companies had gone down and someone had to make up the loss of profits.
Suppliers were doing away with some of their discounts due to how many of their customers were WAY behind in their balances.
When accounts were canceled, contractors began running their businesses based on their credit card balances at Home Depot and Lowes.
Banks began withholding periodic payments for a longer time on projects using every excuse in the book to justify making people wait.
End customers had just watched their investments tank and were canceling projects, even some that were in the initial phases of construction.
Cities began charging higher permit fees to make up for the loss of revenues.
Workers began working part time on weekends competing against the very companies they worked for.
Credit lines were reduced and often contractors were forced to back away from a project as they were still waiting to get paid for the last completed one.
Contractors began bidding work for amounts that were designed to just meet payroll forcing down the ultimate and fair price of the work. Forcing other companies to close.
So, in Feb. I sat down and figured out what it would cost to weather the coming storm and it just didn't make sense anymore. Past downturns were not as bad as this one was going to ultimately be.
This is not the past tense quite yet.
We have not seen the worst of this melt down. Unemployment insurance and working part time under the table have kept many alive. That will soon come to an end as well unless the government continues to prop up the unemployed.
The figures on the unemployed are conveniently fudged to make it look better than it really is.
I actually think Christmas might not be as bad as some think as many people still have credit and will be trying to get in one more normal Christmas before withdrawing completely from buying anything.
True, contracting is not the entire picture in the economy but all of us look at the current picture and can see NO green shoots anywhere.

Nov 16 05:35 AM