Think Small Business To Help America's Middle And Working Classes Win Big

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In spite of a rebounding and more robust economy, many in the lower middle and working classes remain anxious and concerned about their futures. There has been low and slow wage growth and, as we discussed in our last blog, the changing nature of jobs, the middle class and the American Dream have pushed a large part of the workforce toward a gloomy perspective.

There have been various proposals to make the economy work better for America’s workers. The Trump administration suggests that a restrictive skills-based immigration bill (the RAISE act) that considerably reduces the number of immigrants will increase the chances for more and higher paying jobs. The Administration has also asserted that cutting corporate taxes will stimulate job creation and wage growth.

In a recent column, David Brooks observes that “a historically low labor productivity growth rate of 1.1 percent” may account for the low wages. Brooks usually nails it in his columns. This time his hammer hit nothing but air.

Brooks cites Shawn Sprague’s Beyond the Numbers publication for the Department of Labor as the source for “a good summary of data.” Footnote 10 in that publication is telling. It states in part:

Real hourly compensation growth tracked labor productivity growth closely before the 1970’s. However, since that decade, the growth in real hourly compensation has consistently lagged behind gains in productivity, with the gap between these two measures widening over time.

In other words, what we have today is a “compensation-productivity gap.” Sprague and two of his colleagues at the Department of Labor wrote a “visual essay” with that title in 2011. This gap attests to the fact, as Steven Pearlstein notes in a recent article for the Washington Post that thinking worker’s wages are an accurate measure of their productivity is a “faulty economic assumption.”

Here is the sad truth, as we noted in an earlier blog, the calculation and allocation of rewards, especially in major corporations has been used to drive CEO compensation and shareholder value up rather than raising the wages of hourly workers. We understand the need for continuing to increase labor productivity. But, we should not mistakenly believe that will automatically translate into higher wages for employees.

This brings us back to the proposed Trump corporate tax cuts and whether they will stimulate the economy. To date, there is little evidence to support that theory and there is a search currently underway by Republican lawmakers to find “real economists” who will use “valid models” to demonstrate that those cuts will result in substantial GDP growth.

We are certain economists of that persuasion will be found. We are just as certain, however, that there will be no money-back guarantees from those economists. We are also certain that just as labor productivity growth does not guarantee wage increases GDP growth does not guarantee higher wages.

As for the impact of the immigration bill supported by the Trump administration, a study by the Wharton School projected that “…RAISE will reduce GDP by 0.7 percent relative to current law, and reduce jobs by 1.3 million. By 2040, GDP will be about 2 percent lower and jobs will fall by 4.6 million.” That same study found virtually no increase in average hourly wages for workers in over those time periods.

So, we have been looking in many of the wrong places to improve conditions and prospects for the American worker. Where should we turn?

In our opinion, as we have said in prior blogs, we need to resuscitate the small business sector which is in a “start-up slump”. Start-ups account for a disproportionate share of job creation and innovation.

The Census Bureau recently reported that in 2015, the latest year surveyed, a total of 414,000 new businesses were formed. This compares to 558,000 in 2006, the year before the Great Recession started.

There is no simple or single explanation for why the pace of start-ups has declined so much. Ben Casselman, in his New York Times article, says that big businesses may be too blame because they are growing bigger, creating barriers to entry in the industries they serve, and limiting competition.

For existing small businesses, lending has recovered substantially since the depths of the recession. According to Inc, however, “…the Pepperdine-Dun &Bradstreet survey found that only a third of the companies with revenue under $5 million were successful in getting bank loans in the first four months of the year.”

It appears that Linda McMahon, the head of the Small Business Administration (SBA) is working diligently to ensure a range of assistance is provided to small businesses. On the other hand, President Trump’s proposed budget for SBA for the next fiscal year would cut appropriations by almost 5% from the current level.

There is no question that small businesses could use more support rather than less in order to make the meaningful contribution they can to job creation and wage increases. Toward that end we repeat the following recommendations that we have made in the past to pump up the volume of small business support:

  • Pass legislation similar to the Small Business Jobs and Tax Relief Act which would have given small businesses tax credits for hiring new employees
  • Conduct a systematic and rigorous examination of the areas that small businesses find problematic and implement a comprehensive program of reform to eliminate or correct them
  • Put SBA back in the direct lending business
  • Work with the private sector to develop a program modeled after American Express’ Small Business Saturday held during the holidays into a small business weekend held monthly with appropriate advertising and media support and a different lead corporate sponsor each month
  • Initiate a place-based neighborhood revitalization initiative target to support main stream and main street businesses in poor inner city, suburban and rural areas

Those are few idea starters. We present them because we firmly believe that it’s time to think small business to help America’s middle and working classes win big.

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