Saturday, April 18, 2020

Unemployment To Soar As Small Business Firings Start

Unemployment Is Set To Soar!
The Paycheck Protection Program or PPP was funded with $350 billion in the last stimulus bill, this money is now gone. Of the thirty million small businesses in America, only 1.7 million received money from the 2.3 trillion dollar aid package passed to help sustain America during this difficult time. If the government blew through this money and was only was able to help only around 5% of small businesses it is difficult to think another 250 billion dollars will set things straight. Clearly, because the government made promises it delayed the wave of firing while companies waited for help. 

The government has failed to keep its promise so now we should expect unemployment to soar as reality sets in. One of the largest problems facing small companies is they are often underfunded and have difficulty getting financing at reasonable rates. Banks find larger companies much more profitable. The sector of the economy most damaged by the covid-19 shutdown is small business. When this is over America will find many small businesses have been decimated and are not able to reopen. Others will never recover and be forced to close within months. Since small businesses employ over 54 million people in America and their importance in the economy should not be underestimated.

Rest assured government employees and bureaucrats will still continue to get paid but small business, the most productive part of the economy has a knife to its throat. As a landlord and small business owner, I can tell you the program was structured in a way that will be of little help to most small businesses. The government slammed expensive legislation through with no idea of the damage they were doing and how it will cause hundreds of thousands of businesses to close their doors forever. Washington has become so attuned to dealing with lobbyist from mega-companies it has lost sight of the fact small is small, and when this comes to business, this means usually under twenty employees, not hundreds.

The government's answer to keeping people employed was to promise small businesses an easy to get, rapid maximum loan amount of two and a half times a company’s average monthly payroll expense over the past 12 months. This loan would turn into a grant and be forgiven if a company did not fire its employees. Sadly, legislators failed to take into consideration that not all small businesses are labor or payroll intense. Some businesses with large or expensive showrooms are getting hammered by rent, others by inventory, or things like taxes, utilities, or even by having to toss products due to spoilage. 

The PPP also failed to address the issue of what these employees are going to do while the company has no customers and business barely trickling. In the past, these employees were expected to pursue activities that earned revenue and garnered profits for the business but with no costumers, this is difficult to do. The PPP also ignored the fact that by keeping these employees on the payroll a generous employer is left open to the harsh mandates laid out in the government's previous bill. The hastily drawn up 110-page federal covid-19 economic rescue package, which Trump fully supported dealt a hard blow to small business. For a small business this is a disaster, the bill requires; 

  • Employers with fewer than 500 employees and government employers offer two weeks of paid sick leave through 2020.
  • Those same employers must now provide up to 3 months of paid family and medical leave for people forced to quarantine due to the virus or care for family because of the outbreak

As expected, this measure,  named "Families First Coronavirus Response Act." resulted in millions of workers to suddenly lose their jobs. Ironically, it was held before the voters as proof lawmakers could work together during a crisis.  By framing the poorly crafted pork-packed bill this way promoters positioned themselves to demonize those unwilling to support it. Remember, this bill is was in addition to the $8.3 billion emergency spending bill first approved to curb the spread of covid-19.

The Private Sector Is Shrinking (click to enlarge)
As government has grown larger it seems to have become totally oblivious to the fragility of many small businesses and how much it can cost a community when they close. By framing these pork-packed bills as bipartisan their promoters imply they are fair and balanced. This is not true, small business is the big loser and hundreds of thousands will soon have to close.  With so many tenants looking at foregoing rent small landlords that don't have deep pockets also face huge problems. We have our heads in the sand if we think companies that exist on events where people gather will overnight regain their luster. It is not like someone can simply flick a switch and things will return to normal. 

Reality undercuts the idea of the “V-shaped recovery” theory and the idea after the economy has come to a dead stop it can quickly reboot and be back at full speed in a few months. The government has presented us with an extension of crony capitalism structured to throw just enough to the masses to silence their outrage but in the coming weeks, we will see it failed. Large businesses with access to cheap capital are the winners and the big losers are the middle-class, small businesses, and social mobility. All those people that want a higher minimum wage can forget that ever happening if we don't have jobs.

As for just how much small business owners make, according to figures from 2015 from the Small Business Administration the median income for self-employed individuals at an incorporated business was $49,804 and $22,424 for unincorporated firms. According to PayScale’s 2017 data, the average small business owner's income is $73,000 per year. But, total earnings can range from $30,000 – $182,000 per year. This means it varies greatly depending on where and just how big the business is, however, it is important to remember these people have "skin in the game" and most risk losing everything if their business fails.

It is important to recognize that starting your own business has always been about the opportunity to design and build your own future. It is a symbol of freedom not a guarantee of wealth. Many people choose this path proudly, not to make more money but as a way to express their individuality. For these competent and talented people, a job in government or at a large company often offers more security and benefits but far less freedom. Do not underestimate the value of small business and what it contributes to our society. Companies such as Amazon are the anti-thesis of small business making their workers a cog in a machine and stealing their soul.

Based on the government's promise to small businesses a great many held off on letting employees go but with each passing day in order to survive they are now in the process of letting hundreds of thousands of employees go. This is a ticking time-bomb. By telling these businesses to close and then through its failure to carry out its promise of helping them the government has created a situation with massive negative economic ramifications. To make matters worse, people going on unemployment look to get almost as much as those that do work. Why will anyone want to work, especially government workers when they can get paid to stay home? This is not about wanting more money for small business, it is about the reality that the firings are just beginning.

12 comments:

  1. Our wealth comes from the peoples ability to labor cooperatively. Governments do not produce wealth, the people do. Government is the real consumer in the equation. Sadly, as the dollar drops further in value, we will all continue to be force to use it for trade, and those affiliated most closely with govt will be greatly enriched. This can only change when the dollar is no longer used for savings, trade, and to value our labor. It will be a painful transition. The longer we delay, the more painful it may be.

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  2. I have a friend who works for Sysco foods and calls on restraunts in SF Bay area. He says close to half are saying they will not reopen.

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  3. Thanks for the comment.
    A tenant that stopped in my office told me several restaurants have already removed their tables and furniture in my city. Stop-work orders have caused construction work to slow.
    His company sells hardware and other things to companies, He estimates things are off about 80%

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  4. I really appreciate your work on this. It simply begs the question, "why is it that politicians don't understand, well...., anything?" This is not a democrat or republican thing. This article demonstrates that politicians are generally ignorant and understand virtually nothing about economics. They are completely and utterly corrupt. A country built on the principles of limited government and free commerce has been eviscerated by venal and selfish politicians enabled by an equally ignorant public that will not demand accountability.

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    Replies
    1. Prov.1
      [1] The proverbs of Solomon the son of David, king of Israel;
      [2] To know wisdom and instruction; to perceive the words of understanding;
      [3] To receive the instruction of wisdom, justice, and judgment, and equity;
      [4] To give subtilty to the simple, to the young man knowledge and discretion.
      [5] A wise man will hear, and will increase learning; and a man of understanding shall attain unto wise counsels:
      [6] To understand a proverb, and the interpretation; the words of the wise, and their dark sayings.
      [7] The fear of the LORD is the beginning of knowledge: but fools despise wisdom and instruction.
      UNFORTUNATELY POLITICIANS DO NOT FEAR THE LORD my dear Andrew.

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  5. Many small business owners are in their 50's and 60's. Where are these middle aged former business operators going to find employment if they have to shut down their businesses?

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  6. I do/did hi technology across a lot of different industries. Friends (that are consulting) of my are all ready seeing lay-offs of full-time employees in major companies. They are saying that when everyone comes back to work the real lay-offs are going to start. Also, a lot of IT and other development projects are being canceled, delayed or scaled back. The major VC firms have sent out notices to the startups that they most likely will not get any more funding in the short term or not at all. Remember the dotcom crash they went from wanting 500,000 engineers to 350,000 on the street in less than 90 days. We all know what the economy is going to do when this shoe drops.

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    1. And there will be winners that prepared, and will take market share from those unprepared. Can't cry the sky is falling fro everyone

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  7. Here's the real issue! This Covid 19 isn't going away and will come back every Flu season. The W.H.O. decided to call Covid 19 a pandemic and the media and Govt's around the world responded by shutting things down.

    Now people are freaking out because now they are thinking Black Plague II, Spanis Flu II. So here's the problem, because this has been labeled a Pandemic, Govt's will be forced to shut things down again and again when the population is told about Covid 19 cases springing up.

    We are probably headed for a "nasty" Depression and it possibly could be permanent if Gov'ts are forced to respond by making everyone hide while waiting for the all clear.

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  8. One of customers in Sarasota Fl who owns a jewelry store informed me, he's forced to close his doors permanently.

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  9. When I looked out from my office last week only 2 out of 9 offices showed any activity. If this goes on long, many business owners will close. At some point they will see going on unemployment as a better option than feeding a money losing business.

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  10. I run a small business out of my home and it's automotive based but I'm pretty sure many small business owners have got to be asking the question. Are they going to have to deal with this again during Flu season and can they weather the storm, again and again because the Coronavirus has been labeled a Pandemic?

    And they probably have to be asking themselves, is it worth it !

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