The Atlantic Monthly had recently an interesting article on the credit crunch small business are subject to and questioned these firms’ role in the fact that the economy is very slow to recover. (“The Bright Side“, October 2010)
The main theme of the article is that while small firms are the backbone of our existence (so to speak), making bad loans just so firms can continue to survive is a mistake. Making loans available to firms that have potential – that’s a whole different story. To explain this argument, the article tells the story of Marlin:
“Marlin’s specialty is custom work for demanding clients like Toyota, who need precision and quick turnaround. The business that Greenblatt bought 12 years ago used minimum-wage labor to manufacture bagel baskets from rough specifications written out on notepaper and stored in an untidy pile; that business was undercut by Chinese competitors who charged less for a finished basket than he paid for the steel. Greenblatt moved the company from Brooklyn to Baltimore and invested in equipment that was faster and more precise than the old labor-intensive methods of production.”
What Marlin understood is that the world has changed and that US –based firms cannot compete anymore on cost, but have to adjust by properly positioning themselves and aligning their business strategy and operations strategy. So given that changing the strategy and the operations take time, how should policy makers help. The article finishes with the following statement:
Small business will help lead the recovery: some firms now small will get big, and others, like Marlin, will help make the bigger firms better. And some firms will go out of business, paving the way for better-positioned competitors. We can’t do much to improve this process, other than use things like unemployment insurance to ease the suffering of those hurt by it. Unfortunately, as we found out during the long boom, extending iffy loans is rarely the best way to help those who are suffering. Credit magnifies our fortunes—it helps companies with strong cash flows like Marlin’s, but often all it does for those in trouble is provide some extra rope, and maybe help tie the noose.
The author is making several assumptions, which I think are highly debatable. While some argue that business cycles just exist and one cannot shorten them, others argue that the length of the recession depends on policies. By saying that policy makers can, at most ease the suffering, the author is implicitly assuming the former.
Another point that deserves some discussion is the relationship between these issues and unemployment. In the context of small businesses as the engine of the economy, one has to distinguish between those that have growth potential beyond their geographical region and those who do not. We all drive and see strip malls with empty stores: clearly, as more of these store reopen more people are going to be hired. But there is a limit to how many such places can hire. In my opinion, small businesses that manufacture and sell products are those that have real growth potential and can be the real engine by impacting the trade deficit on one hand while reducing unemployment on the other hand. Marlin is one such example.