These days, a lot of people are anxiously watching operations like this. But they’re not watching for enjoyment; they’re watching for signs of health, the way old people sometimes compulsively check their blood pressure. Small businesses have become a bellwether for the condition of the American economy. Indeed, to hear politicians talk, small business is—pick your favorite cliché—the lifeblood, the backbone, the thunderously beating heart of the American economy.
Like most clichés, these have some truth. America could truly not survive without operations like Marlin Steel Wire Products. Among other things, they produce specialized parts like that stand, in small production runs that would be uneconomical on the scale of an airplane or automobile plant. Even mighty industrial machines cannot survive without tiny cogs.
Small firms also churn out jobs. Companies with fewer than 500 workers employ roughly half of all American workers, and according to the Census Bureau, more than 70 percent of net new jobs between 1993 and 2006 were created in firms that had fewer than 20 employees at the start of the survey period. But small businesses, which are well down the supply chain, also often find themselves under the greatest pressure from corporate cost-cutting—on the tail end of a particularly vicious game of Crack the Whip. That’s why small businesses are also disproportionately where jobs are lost, an effect that downturns greatly magnify.
To add to their woes in the current recession, bank financing seems to have dried up. A survey in April 2010 by the Atlanta branch of the Federal Reserve found that in the previous three months, 40 percent of small-firm applications for credit had been denied, and many of those who were offered credit either got less than they requested, or refused it because of unattractive terms. It’s a problem severe enough to have attracted the attention not only of the Obama administration, but also of the Federal Reserve itself, which convened a high-profile conference this July on “Addressing the Financing Needs of Small Businesses.”
This combination of factors has triggered the policy-wonk equivalent of the chicken-and-egg debate: which came first, terrible business, or terrible credit? And what can, or should, the government do to help?
Small businesses are clearly hurting: in a survey done in May by the National Federation of Independent Business, less than 10 percent of respondents thought conditions were healthy. The survey also showed that sales and profits had just about recovered to where they were at the very bottom of the 2001 recession.
Bankers say they’d like to lend small businesses more money, but creditworthy firms aren’t seeking loans, while too many would-be borrowers need the cash just to stay afloat. (The latter group recalls a bitter adage, popular during the Great Depression: “A banker is someone who lends you an umbrella, then asks for it back as soon as the rain starts.”) As Federal Reserve Governor Elizabeth Duke noted during the July conference, “Bankers are predisposed to lending, because without lending there can be no profit.” Sheer meanness isn’t a very likely explanation of the credit crunch.