As small businesses across the United States fight to survive the coronavirus recession, and all too many succumb to the extraordinary pressures they are facing, we can see the continuing impact as millions of workers continue to file for unemployment insurance benefits. These small businesses are the lifeblood of their communities, and they are critical to the U.S. economy, employing nearly one-half of those who work in the private sector and providing the dynamism — the continual creation of new businesses — that is vital to productivity and sustained economic growth.
The importance of small businesses is one of the few things on which politicians of all stripes agree. Yet, despite their rhetoric, in this moment of existential threat, the political system has produced far greater support for big businesses, and this will have painful long-term economic consequences. For those small businesses that survive this crisis, the advantages already held by their biggest competitors, suppliers, and purchasers will only get stronger unless policymakers tighten U.S. antitrust laws to prevent more market concentration.
There’s no question that the recession is hitting small businesses, from restaurants to day-care centers, from mom-and-pop retail stores to barbers and hair salons, harder than large companies. A recent survey by a group of economists showed that only 40 percent of small business owners expected to be open at the end of 2020 should the economic crisis last six months.
Especially hard-hit are minority- and women-owned businesses. While the number of active business owners in the United States fell by 22 percent from February to April 2020 (the largest drop on record), Black-owned businesses experienced a 41-percent drop, Latinx business owners a 32-percent decline, and women-owned businesses a decrease of 25 percent. Likewise, the JPMorgan Chase Institute found that cash balances of Black-owned firms in March were down by 26 percent from the previous year and by 22 percent for Asian American–owned firms, compared to a 12-percent decrease across all firms. Revenues of Asian American–owned firms declined by more than 60 percent.
Long before the coronavirus pandemic, small businesses across the country were feeling the pinch caused by the U.S. economy’s steady march toward greater economic concentration. Increased concentration led to a rise in market power — the ability of giant companies to set prices outside of market forces, not only for what they charge consumers but also for the prices they pay to smaller suppliers. Thus, small businesses, which face constant market pressures in the best of times (more than half a million on average close every year), are increasingly squeezed by their larger competitors and customers.
Research shows that by 2019, the dynamism driven by small-business creation had already been slowing down. Business churn and new firm formations have been on a persistent decline during the past few decades, and the pace of net job creation has been subdued. This decline has been documented across a broad range of sectors in the U.S. economy, even within the tech sector.
If anything, government today should be favoring assistance to small businesses over larger enterprises at this time. Alas, that is not the case.
A recent report issued by the Congressional Oversight Commission, established to monitor the numerous Federal Reserve and U.S. Treasury Department efforts to aid the economy during the pandemic, concluded that actions so far have had a “clear and powerful impact” on big businesses, but there is “less evidence” they have been helpful for small and midsize firms.
It seems that every time the government rolls out a program, it misses the mark for small businesses, in part because it generally relies on banks to act as intermediaries. Consider the Paycheck Protection Program, the signature small business relief program for the coronavirus recession. The program provides businesses with loans that can become grants, relying on mainstream financial institutions to deliver loans to small businesses. While this approach allows for scale (and hopefully speed), it also initially favored existing customers at large banks. The Treasury Department recently released an initial list of those who received loans, and it suggests that the well-connected were very well served by the program.
And the program did not seem designed for most Black and Latinx small business owners. When the first round of funding opened, independent contractors and sole proprietors had to wait a week before applying, in an effort to prioritize firms that might have been getting ready to lay people off. Since small businesses owned by people of color are more likely to have no employees, this represented yet another setback. In fact, 95 percent of Black-owned businesses have no employees, according to the Center for Responsible Lending, in comparison with 91 percent of Latinx-owned businesses and 78 percent of White-owned businesses.
A national online survey of 500 Black- and Latinx-owned small businesses conducted for Color of Change and UnidosUS during the second round of funding for the Paycheck Protection Program found that just 12 percent of these firms received the full assistance they requested, with two-thirds reporting that they did not receive any. And the Institute of Local Self-Reliance concluded that banking consolidation “appears to have contributed to a stark pattern of racial discrimination in the distribution of PPP loans” due to a long-standing pattern of discrimination in bank lending and because communities of color have fewer local banks.
The Main Street Lending Program, designed by the Federal Reserve “to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic,” is also failing to meet the needs of substantial numbers of small businesses. It is supposed to provide low-cost loans to firms with fewer than 15,000 workers, but it only became fully operational on July 6. Moreover, the terms will likely be too strict for many businesses, and besides, the minimum loan is $250,000, making it too big for very small establishments. There are also concerns that banks will focus their lending on existing clients.
Meanwhile, the Federal Reserve is doing everything possible to minimize operating constraints for the largest corporations. The Fed has even taken the unprecedented step of purchasing the debt of shareholder-held corporations such as Apple Inc., Verizon Communications Inc., The Coca-Cola Company, Walmart Inc., and McDonald’s Corporation.
This is reminiscent of the Great Recession more than a decade ago, when the Federal Reserve and Congress and other political leaders raced to shore up the same giant U.S. financial industry players that had caused the financial crash. Big business did not cause the current crisis, but it has again been put at the front of the line for relief.
What all this means — small businesses shuttering while large businesses are protected — is that these larger firms, both national and international, will disproportionately survive and prosper and gain greater market power. And the more market power in the economy, the more prevalent anticompetitive conduct is likely to be.
Yet, enforcement of federal antitrust laws, the primary weapon we have against increasing concentration, is as weak as it has been in decades. On April 30, some of the nation’s top antitrust experts told the House Judiciary Committee in a joint statement:
“The antitrust laws, as interpreted and enforced today, are inadequate to confront and deter growing market power in the U.S. economy and unnecessarily limit the ability of antitrust enforcers to address anticompetitive conduct … [W]e believe than any conclusion to the contrary reflects either an incomplete or incorrect understanding of economics and the economic literature from the last several decades.”
The experts called on Congress to revise current law to align it with modern economic theory and to fix harmful judicial rules.
Any pandemic is going to be bad for business, but one that occurs amid increasing economic concentration is especially bad for entrepreneurs, consumers, and the economy writ large. Federal programs intended to support small business need to be redesigned so that they actually promote small business. In the long run, we need to build a post-pandemic economy that promotes strong, stable, and broadly shared growth. To do so, we must strengthen antitrust policy and enforcement, and reduce market power in the economy.
Heather Boushey is president and CEO of the Washington Center for Equitable Growth and author of Unbound: How Inequality Constricts Our Economy and What We Can Do About It.