Things are already much worse this time around. In just two months, from February to April of this year, 22 percent of businesses closed (a record number), compared to 5 percent during the entirety of the Great Recession.
Given the number of businesses that have been lost, there will be a natural desire to replace as many of them as possible, as quickly as possible, to get the economy back on track. However, it would be a mistake for civic leaders to put all of their eggs in that basket.
The studies I looked at suggest that civic leaders also need to focus on sustained-growth businesses which exhibit incremental, but ongoing growth rather than episodic bursts of expansion. Sustained-growth businesses are responsible for the biggest cumulative job gains over time. Those businesses offer other benefits as well. Because their growth is sustained, they are able to offer employees stability, security, longevity, and opportunities for advancement, as well as sustained income growth. In other words, high levels of job quality.
The studies I looked at found that during the Great Recession, sustained-growth businesses fared much better than new businesses, which is another good reason to pay more attention to them this time around.
It’s not an either-or choice. Civic leaders will need to replace businesses that have been lost to meet short-term needs, and they will need to support sustained-growth businesses to meet their long-term needs. That will require a “bi-focal” rather than a binary approach.
I like the idea of a bi-focal approach. Thinking of the recent CPS microdata analysis by USC Santa Cruz’ Rob Fairlie that got a lot of media attention for quantifying the disproportionate impact that businesses owned by people of color have experienced as a group, it seems abundantly clear that entire communities need to structurally re-evaluate why they are not successfully nurturing and promoting aspiring and current business owners of color at scale. It seems to me that short-term and long-term objectives are well aligned in this case. Any reactions?
I couldn’t agree more. This moment seems pregnant with possibilities for change in that direction.
Analyses like the one you cite by Rob Fairlie that call out the disproportionate effects that the pandemic is having on communities of color, along with the protests in the street, are heightening awareness of systemic racism. Members of the Brookings network I belong to report that the conversations in their communities are shifting from “whether” to focus on racial disparities to “how” to address them most effectively.
That’s going to require a lot more than running isolated programs to boost minority entrepreneurship or to support minority-owned businesses as an add-on to business as usual for chambers and economic development organizations. Closing the racial wealth gap will require much more systemic, long-term, and large-scale approaches. However, in the short term, programs to expand minority entrepreneurship can unleash untapped economic potential, create more role models and mentors to inspire and guide others, and normalize entrepreneurship as a viable option in communities of color, which can increase the likelihood of more successful minority businesses down the road.
Both short-term and long-term actions are necessary, and as you point out, their objectives are well aligned.
To what extent would your reading of the literature change if the current recession goes much deeper or longer than expected?
In my study, I tried to get below the surface to look at the deeper dynamics of business growth, where there’s the greatest leverage for changing existing systems. I think of these deeper dynamics as the “physics” of business growth, which provide a foundation for a more scientific approach to economic recovery.
However, on the surface, there are certainly a lot of disruptive forces at work. The latest projection from the Congressional Budget Office estimates that the pandemic could cost the US economy around $8 trillion in real GDP over the next decade. That’s going to leave a lot less wealth to support local economies. In addition, the pandemic is radically altering consumer habits and preferences. Given that the virus has now gotten out of control, the economic damage is likely to be much more extensive and long-lasting, and the post-pandemic landscape is likely to look very different from what it looked like just a few months ago.
One of the disruptive forces I’m most worried about is the wave of consolidations, takeovers and buy-outs that are likely to happen over the next months, which will restructure the economy in ways that make it even harder for small businesses to survive and thrive. On top of that, large corporations are receiving concierge treatment when accessing recovery dollars, while young and small businesses are stranded in line. What are your thoughts on that?
Although the trend you’re describing was outside the scope of my study, I share your concern. From a job creation standpoint, a wave of consolidations would certainly be counterproductive. Mergers and acquisitions typically lead to reductions in employment, and often reductions in earnings, which is the opposite of what’s needed right now.
And giving large corporations easier access to recovery dollars is similarly counterproductive, since large corporations as a group have shed jobs rather than added jobs over the past decade.
On top of that, unlike past recessions, corporations are continuing to borrow at record levels, double the pace of last year through June of this year. Those levels of debt are clearly not sustainable.
If policymakers at the federal level don’t act, local economic recovery efforts are going to be facing stiff headwinds.
Let me pick up on that. We’ve been talking about what the post-pandemic landscape is going to look like for businesses. What do you think the post-pandemic landscape is going to look like for economic developers?
I think it’s going to be radically different. The good news is that the pandemic is likely to accelerate the shift away from an over-reliance on financial incentives to get businesses to relocate, so those resources can be put to better use. Momentum has been building in that direction since the Great Recession.
The pandemic also calls into question the use of stadiums and convention centers as effective tools to revitalize downtown areas. And it raises questions about what to do with surplus office space and shopping malls, due to increased working from home and shopping online.
In addition, supply chains that have been disrupted will need to be rebuilt, which creates opportunities for small businesses located in or near low-income communities to break into those supply chains or fill existing gaps in the supply base of regional anchor institutions.
And heightened awareness of racial disparities and the growing movement to address them will require economic developers to be much more intentional about developing and implementing effective strategies to grow good jobs in ways that expand opportunities for all.
At the same time, economic developers are likely to have fewer resources to work with. Funding for local economic development organizations fell by 40 percent in the first few years following the Great Recession. Those cuts are likely to be even deeper this time around, since local and state budgets have been hit even harder by higher costs and lower tax revenue during the pandemic.
As the smoke clears from the pandemic, civic leaders will need to carefully survey the new landscape to figure out where their scarce resources can make the biggest difference. They’re likely to find that those leverage points are very different from what they assumed just a few months ago.
If you would like to suggest a future guest to the interview/conversation series, please don’t hesitate to reach out here using the subject line “Forward Cities Reimagining Recovery Series”.