For many years, Republicans, in particular, have espoused the virtues of "trickle-down economics." This theory holds that "increases in the wealth of the rich are good for the poor because some of such additional wealth will eventually trickle down to the middle class and to the poor." (Wikipedia)
Since the credit bubble began to burst, however, we've seen a malignant variation of this phenomenon. Instead of wealth, red ink has been trickling down from the orifices of badly-run financial companies, undermining the economic wellbeing of a wide range of individuals and firms.
When small businesses can't get loans, job growth and economic expansion stall.
After 41 years in business, Hull Printing shut down its printing presses for good in March, laying off 19 workers and closing one of the oldest family-run businesses in Barre, Vt. The catalyst: Hull Printing's bank slashed its line of credit, kicking off a death spiral that led to the company's collapse.
"All of the equipment's gone and been liquidated," said Jon Hull, 32, whose grandparents started the commercial printing business in 1967. "The bank got all of their money back, but it left a lot of unsecured creditors that will never be paid back, including many other small businesses in town."
Hull's story is a familiar one to millions of small business owners across the U.S. who rely on credit lines and loans to fund expansion or help them recover from setbacks. In a National Small Business Association (NSBA) survey released this week, 67% of business owners polled reported being affected by the credit crunch in August, up from 55% in February. Additionally, 32% reported a deterioration in the terms of available bank loans, up from 27% six months earlier.
"If there is a squeeze on banks, even if only large investment banks, the repercussions can easily flow over into commercial bank loans," says NSBA President Todd McCracken. "Based on what history suggests, if banks have to pull back, they'll pull from small business loans first."
A small business cutback will have ripple effects on the larger economy - and on the jobs pool. Small businesses employ about half of all non-government employees in the U.S., according to Small Business Administration estimates. This year, small companies have been crucial in keeping the job-loss numbers from turning even grimmer: While bigger businesses shed workers, companies with fewer than 50 employees have reported a net increase in positions every month this year, according to ADP, which compiles a monthly employment report. In August, when overall employment fell by 33,000 jobs, small companies added 20,000 net new hires, according to ADP's estimates.
A credit crunch can force companies to make hard choices. "Sometimes there may not be enough work for key staff, so they'll face the choice of losing good people or hanging on to them until they catch the next wave," McCracken said.
In D'Iberville, Miss., Fayard's Grocery owner Rusty Quave is waiting to find out if he'll receive a deferral on loan payments that will mean the difference between staying in business and going under for his general store.
