Coronavirus Chronicles: A Small Business Recession Could Turn into a Depression

Year to date, the Dow Index of the U.S.’s 30 largest companies is down 14 percent; the S&P 500, which tracks 500 large-cap companies, is down 8 percent; and the NASDAQ, an electronic system that trades many of the world’s fastest growing companies, is up more than 4 percent.  Clearly, for the stocks of some of America’s large companies, the coronavirus pandemic is your run-of-the-mill correction, never mind a bear market.

Not so for America’s small businesses. In a recent survey by the Society of Human Resource Management (SHRM) in late April, 52 percent said that they expect to be out of business within six months, whether or not they make changes to their operations during the pandemic; 20 percent believe they will be out of business within three months; and 12 percent expect to close their doors within just one month.

In California, Gov. Gavin Newsom tried to offer some solace to small businesses at an event at a small gift shop in Sacramento: “To see your [entrepreneurial] dream come to fruition and then potentially be at risk because of this pandemic is devastating. And so it’s a way of expressing not just empathy, but a deep admiration and appreciation for these entrepreneurs that put everything on the line.”

“Empathy . . . admiration . . . appreciation,” and other niceties are well and good, but to get California’s small businesses back on their feet calls for serious and substantive reform.  Among PRI’s recommendations:

  • Repeal AB 5 which forces firms to classify most independent contractors as employees, effectively destroying gig-economy jobs and one of California’s most innovative industries.
  • Permanently remove barriers to occupational licensing. Onerous and unreasonable occupational licensing requirements have barred many Californians – especially those poor and struggling – from breaking into well-paying jobs.  Sunsetting these requirements would allow many more people to pursue higher paying careers and a path to economic independence.
  • CEQA reform — independent contractors and builders have been forced out of state or out of business due to overregulation and lawsuits from the California Environmental Quality Act. After 50 years – CEQA is badly in need of an overhaul.
  • Remove red tape. California small businesses are mired in red tape – conflicting and overlapping regulations that only a lawyer can understand have cost small business owners billions of dollars. Newsom should borrow a page from Donald Trump who pledged early on in his administration to remove two regulations for every one enacted.  Trump has far exceeded this pledge, but Newsom could rise to the challenge.
  • Tax relief. California is one of the highest taxed-states in the country.  Many small businesses are sole proprietors putting them in the highest brackets.  Lowering taxes would help them rebuild and save their businesses.

The governor’s press release touts the following to help California’s small business: letting small businesses slide for a year on paying sales taxes (some of the highest in the nation) up to $50,000; guaranteeing loans for small businesses who don’t qualify for federal funds; providing $17.8 million to California’s Employment Development Department (aka – unemployment office) to offer faster services; and starting a jobs website.  It’s not clear how the latter two will help small business owners, other than the presumption that they too, will soon find themselves unemployed. Amusingly enough, the press release lede is the federal government’s loans to small businesses.

The late great economic expansion which began in mid-2009 failed to restore entrepreneurship to its pre-recession level according to the U.S. Census Bureau. This recession could very well turn into a depression for small business. As an entrepreneur and former restauranteur, Gavin Newsom knows first-hand the impact of government imposed taxes and regs on small business. To save California’s small businesses, he knows that he must do more than the current “relief” measures.

Rowena Itchon is senior vice president of the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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