As is becoming more apparent day by day: This is not your typical economic recovery.
Each new day’s fresh headlines bring another statistic or study showing the latest negative economic trends: job creation lagging, new jobless claims at new records, dreary GDP growth numbers revised down, new and existing home sales collapsing. Pick your poison.
But most troubling of all: We seem to be in uncharted territory. When you look back at the history of recessions in the United States, most downturns were well into recovery by this point in the cycle. In fact, two years after the start of a typical recessionary period, history shows economic growth is usually very rapid, often twice that of “normal” growth periods.
This rapid growth is to be expected because businesses that emerge from recessions are leaner and more competitive, after cutting expenses and reordering priorities. Capital moves from less productive uses to more productive ones, and economic rebirth takes place.
After all, recessionary cycles, painful they may be on the micro level, are really normal parts of macro-economic business patterns. Think of a typical dieter – when a person’s weight gets too high, he/she will diet and lose weight to get back to fighting trim. And the business cycle is no different. It is natural that during good economic times businesses get a little fat. Eventually, the diet must come. Then afterward, the dieter is better off.
Well, businesses large and small have been dieting for a couple of years. But the recovery has not materialized as expected. History tells us that small business is supposed to be the engine of job growth after a recession. So people are wondering what’s going on?
Many critics point to recent uncertainty in the tax and regulatory environment for small businesses:
- State tax rates have gone up dramatically in recent years because these governments must balance budgets and have few options.
- The federal government, of course, can borrow and print money, which makes people worry about future inflation.
- In addition, income tax rates will rise automatically in 2011 without new legislation and increased rates on payroll, capital gains and dividend taxes are on the horizon.
- The biggest entitlement program, Social Security, needs funding soon because the IOUs in the lockbox can’t be cashed in – the feds are already broke.
- And the newest entitlement program, health care reform, promises to saddle businesses with increased regulation and costs.
All in all, the critics claim it’s a “perfect storm” of conditions depressing job growth and economic recovery, especially among small businesses. Given so much uncertainty, businesses are taking a wait-and-see approach about investing and hiring, preferring to remain on the sidelines.
But while these recent actions are certainly not helping the recovery, a new study lays quite a bit of blame on an older problem – the bursting of the housing bubble that started the downturn in late 2007. When people could no longer afford or didn’t want their homes due to falling prices, and then job losses a year later, it triggered a wave of failed investments across the financial sector.
Since then, the financial sector has been bailed out and is getting healthy again. But the housing sector is still a mess. And according to Scott Shane, of the American Enterprise Institute, the weak real estate market is the primary reason to blame for the poor recovery:
“The collapse in home prices is holding back small-business hiring. And unless we fix the residential real estate mess, we won’t see small business hiring anytime soon.”
Backed by an armful of statistics, Shane lays out five reasons why small businesses aren’t hiring - and it all comes back to our lingering real estate problems.
Entrepreneurs: What do you see out there? What do you think are the causes of the lackluster recovery? What would you suggest should be done to improve it?
About the author
John L. Duoba is the publisher/managing editor of Business Owner’s Toolkit at www.toolkit.com, and his idea of a perfect storm is one that washes his car at night but doesn’t make the grass grow.
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