The Small Business Economic Trap

An analysis of K-shaped Recovery in the United States from the perspective of small businesses.

An analysis of the ramifications borne by small businesses and self-employed wage earners in the United States indicates irreparable damage to their economic well-being.

As a result of the coronavirus recession, businesses started laying off workers. In April 2020, the unemployment rate reached an unprecedented 14.8%. The labor force participation rate plummeted to 60.2%. Between January 2020 and April 2020, there was a decrease of 22.1 million in nonfarm jobs. (Congressional Research Service, 2021, p. 5)

Although consumers were compensated with relief funds under the fiscal stimulus, the larger part of that money did not flow from households to small businesses. Due to physical barriers, E-commerce and remote services became the receptacle for consumer expenditure. Meanwhile, brick-and-mortar stores became a notion of the past.

The number of business owners declined from 15 million in February 2020 to 11.7 million in April 2020 (Fairlie, 2020, p. 3). This 22% dive may be attributed to business closures due to physical imposition as well as the general inability to pay for contracted assets - land, capital and labour.

An inquiry into the socio-cultural dimensions of economic hardship reveals that the COVID-19 recession had a graver impact on racial minorities. African-American business owners experienced the largest losses. From 1.1 million African-American business owners in February to 640,000 in April, the ethnic group saw a loss of 41% in the span of 2 months. Latinx owners followed, with a 32% loss in ownership by April 2020. Moreover, immigrants saw a 36% drop in business ownership.

Meanwhile, White business owners experienced a relatively lower loss of 17%. The data indicates the non-uniform economic ramifications of economic crises on different racial groups. Racism is deeply rooted in the American economy, and continues to have a significant impact on economic activity.

Aside from general business closures and rampant unemployment, there was a disproportionate impact on sectoral production. While tourism and hospitality nosedived, BigTech went forward by an estimated 5 years.

Large chain stores like J.C. Penney and Neiman Marcus filed for bankruptcy. Penney permanently closed 25% of its 850 stores after missing a debt payment of $17 million. Department stores and food chains have had to close hundreds of stores as well.

The cultural shift from ‘going out’ to the ‘stay-at-home’ culture fostered a shift in business activity. Restaurants declined by 22%; persistent ones started takeout and delivery services in place of conventional dining experiences. Even transportation services experienced an immediate 22% drop.

Evidently, all industries besides agriculture were susceptible to economic damage. In industries like retail and financial activities, the loss was primarily attributed to the initial shock in the market.

As a result of sudden closures, commercial real-estate plummeted. In April 2020, transactions in commercial real estate fell by 71%, the lowest since the Great Financial Crisis. Tenants ran out of business rapidly.

The American economy was already debt-ridden. The average consumer resorts to incurring loans to pay off student loans, rent and other household bills.

In the first quarter of 2020, total US consumer debt reached an unprecedented $14.3 trillion. Added to the approximately $3 trillion spent in aid, debt in 2020 averaged approximately $16 trillion dollars. Although Goldman Sachs reports claimed a healthy debt-to-disposable-income ratio that is below recent averages, they also concede that the estimated averages may “mask underlying weakness for more vulnerable households.” This misunderstanding may take place due to debt defaults occurring due to unemployment and increased expenditure.

Federal Aid was lent to small businesses. Under the Paycheck Protection Program (PPP), $669 billion were given to small business owners for relief and economic stimulus. However, it was found that the recipients of the funds were majorly in the top tier of the small business sector. For instance, it was found that Ruth’s Chris Steak House, a fast-food chain, received $20 million under the PPP in spite of having $70.8 million in cash on hand at the end of the first fiscal quarter. Other companies such as Shake Shack, AutoNation and the Los Angeles Lakers also received large sums from the program, but have since returned them. This indicates the inherent flaw in implementation of such relief programs.

Evidently, a very specific, cornered section of society was affected negatively by the coronavirus recession. Although the phenomenon was universal, the effects were not felt evenly. Hence, racially and sectorally disadvantaged persons recovered at a very slow rate post-April. Unskilled and unspecialised workers were let off - people with routine jobs slowly ran out of a source of income. They were forced to incur loans for household use. Thus, a perpetual debt trap was established, reducing the rate of recovery further. Even after the lockdown was lifted, a large number of people did not return to the job market.

Written by Urvi Agarwal

Illustrated by Urvi Agarwal

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