The Cure for a Sluggish Economy: More Entrepreneurial and Small Business Support

Real Gross Domestic Product (GDP) in the United States increased by 2.4% in 2015. The Bureau of Economic Analysis' advanced estimate of GDP for the first quarter of 2016 released on April 28 was an increase of 0.5 percent following an increase of 1.4 percent in the fourth quarter of 2015.

While these are positive numbers in the aggregate, for the past 15 month the United States economy has been sluggish and appears to be moving into the economic doldrums.

Even though the U.S. economy has outperformed most other mature economies in its recovery since the Great Recession, there still must be considerable improvement in order to grow the economy in a manner that will impact the jobs, wages and lives of the average American worker in a meaningful way.

Just a few short years ago, it appeared that reshoring (bringing jobs back from overseas to America) might be going to outpace offshoring (taking American jobs and shipping them overseas) on an annual basis. There was hope that this would be a significant driver of increased economic activity and a source of good paying employment - especially in the manufacturing sector - stateside.

Put that thought aside. A recent study released by A.T. Kearney revealed that in 2015, offshoring "failed to keep up with" reshoring for the fourth consecutive year. In fact, the difference between the two "-shorings" in 2015 was the "largest year over year decrease in the past ten years" and there will be "12 cents of U.S bound production for every dollar of domestic manufacturing output."

So, where does America need to turn to stimulate its economy and job creation? As it has for decades, it must look to entrepreneurs, startups and small businesses.

All of these sectors were especially hard hit by the Great Recession. In its State of the Entrepreneurship Address on February 5, 2013, the Ewing Marion Kauffman Foundation (Kauffman Foundation) reported, "After three decades of a relatively steady level of entrepreneurial activity, the number of new businesses dropped sharply in 2008 and 2009 and has yet to rebound."

On the small business front, in the New York Times, in February of that same year, Catherine Rampell wrote an article titled "Small Businesses Still Struggle and That's Impeding a Recovery." In January of 2013, drawing upon research from Citigroup economists, Bloomberg stated, "Payrolls at firms with fewer than 500 employees accounted for less than 50 percent of the total workforce for the first time in 2008 and have barely recovered since..."

That was then. How are things shaping up now in 2016? It is a muddled picture.

The Kauffman Foundation in its recently released report, The Kauffman Index of StartUp Activity observes, "The StartUp Activity Index (Index) rose for the first time in five years in 2015, experiencing the largest-year-over-year increase from the past two decades."

The Index notes that there are approximately 530,000 new business owners each month during the year. As opposed to earlier in the Great Recession, eight out of ten new entrepreneurs were employed rather than being unemployed when they started a business. This is close to historical norms. The number of startups rose to 130.6 per 100,000 people compared to 128.8 per 1000,000 in 2014.

The numbers within these numbers are telling. There has been a significant increase in the percentages of new entrepreneurs in the 2015 index compared to the 1997 index in a number of demographic categories such as:

  • Immigrant entrepreneurs: from 13.3 percent to 28.5 percent
  • Age 55 to 64: from 14.8 percent to 25.8 percent
  • College graduates: from 23.7 percent to 33.0 percent

By contrast, there has been a substantial decrease in the following demographic categories comparing the 1997 index to the 2015 index:

  • Female entrepreneurs: from 43.7 percent to 36.8 percent (close to a two decade low of 36.3 percent)
  • Age 10 to 34: from 34.3 percent to 24.7 percent

There is a contrast in the small business picture as well. The Wells Fargo/Gallup Small Business Index (WF/G SB Index) survey conducted with small business owners in early January showed they were more optimistic going into 2016 with a composite Index score of 67 (26 for present situation and 41 for future expectations) than they were in the surveys conducted in the prior three consecutive quarters of 2015.

This optimism was attributed to the owners feeling better about their cash flow. It should be noted that the WF/G SB Index in January 2015 at 71 (28 for current situation and 43 for future expectations) was even higher than the Index in January 2016.

In comparison to the WF/G SB Index, the National Federation of Independent Business (NFIB) Index of Small Business Optimism for March of 2016 came in at 92.6 which was a "two-year low." The NFIB noted that the number has been trending downward for the "last fifteen month falling from a reading of 100 in December 2014 to 92.6".

There we have it. Overall, not nearly as dim a perspective in 2016 for entrepreneurs, start-ups and small businesses as in 2013 but still not a positively bright one. Moreover, the GDP numbers for the past two quarters should sound a strong cautionary note.

There are three areas that must be addressed by the private and public sectors in order to enable these groups to make the critical contribution that they can to promote enhanced economic growth and job creation. They are: high growth companies; other startups, and small businesses in general.

In our opinion, the private sector will carry the bulk of the load in providing resources to the high growth entities and the public sector in collaboration with the private sector should take the lead in supporting other startups and small businesses.

High growth firms (the top 1 percent of entrepreneurial businesses), according to a 2010 Kauffman study, in any given year account for 40 percent of jobs created. These firms - especially the fast growing "gazelles" (three to five years old) - are on everybody's financial radar screen from angel investors to venture capitalists to crowd-funders.

Many of these firms are technology and internet-centered. They are the kinds of "cutting edge" businesses that Steve Case, AOL co-founder, describes as The Third Wave that will use the Internet to create new business models and to disrupt and reinvent entire sectors of the economy. Think Uber and Airbnb. The "smart money" will undoubtedly flow them.

Then, there's the rest of what we call the "main stream and main street" startup and small business entrepreneurs who will need to meet their business development and cash flow needs the old-fashioned way - through loans from family, friends and financial institutions.

For them, it's another story. Money has been hard to come by. That is especially true for loans from big banks. As the Wall Street Journal noted in an article on November 26, 2015, "...10 of the largest banks issuing small loans to business lent $44.7 billion in loans in 2014 down 38% from a peak of $72.5 billion in 2006. Smallbiztrends reports that the overall approval rate for small business loans at big banks was at a mere 49 percent for October of 2015.

It's not just big banks that don't want to buy in to startups and small businesses today. During her
State of Entrepreneurship Address
on February 12, 2016, SBA Administrator Maria Contreras Sweet made
  • the World Bank ranks the United States 49th out of 189 countries on the ease of starting a business
  • "...inexplicably, only a third of America's 6200 banks are active SBA lenders."
  • Conventional small business credit is now only at 83% of its pre-recession level - a58 billion shortfall.

These gaps explain why so many small business entrepreneurs turn to non-bank lenders for loans and/or run up credit card debts with extremely high interest rates to meet their financing needs. They also explain why the economic recovery remains sluggish. Finally, they explain why it is time for the SBA to get back into the direct lending business.

We first made this proposal in our 2010 book, Renewing the American Dream We reiterated it in our 2013 book, Working the Pivot Points: To Make America Work Again. We resurrect it now because there is nothing so powerful as an idea whose time has come.

The time for this idea has come. The recovery continues but has not become full-blown. Investments, resources and rewards are being distributed unequally.

If the SBA were to develop a plan and enter the direct lending business in a thoughtful way, it would put pressure on big and small financial institutions to increase their participation in this space.

This participation along with the SBA's involvement would benefit small businesses, job creation and local economies and accelerate the economic recovery. We would also expect that over time it would put the SBA out of the direct lending business.

That's the idea. We recognize, in a presidential election year, that the time might not have quite come for it yet. We would hope, however, that it would be given serious consideration in 2017.

Small businesses, entrepreneurs and start-ups are giants in terms of their contributions to the economic vibrancy and vitality of this country and its citizens. We need to provide them the support that they need so they can give our nation the support that it needs to break out of this sluggish economy.