How will the candidates help small business?
By Jason Grumet and Aaron Klein
All politicians express support for small business. These enterprises are the engines of our economy and represent the entrepreneurial grit that has made this country great. Unfortunately, these rhetorical commitments to Main Street have not always been accompanied by meaningful actions. As a result, many small businesses are finding it difficult to launch or grow, while others are failing altogether.
Since the misdeeds that led to the financial crisis of 2008, the federal government has adopted a myriad of regulations and requirements designed to reduce risk-taking by Wall Street. The quest for safer banks and greater financial stability is a good thing. However, we must be careful of what we wish for. The most stable financial system is one with no lending at all, and many small businesses today are struggling to find credit.
Small businesses need to borrow money to open their doors, bridge gaps between sales and expenses, and expand operations. Nearly half of small businesses that had problems accessing capital were unable to grow their enterprise, and another one-in-five businesses report being forced to reduce benefits to employees due to a lack of capital. If these problems persist, they will stifle entrepreneurship, reduce economic growth, and further undermine an already vulnerable middle class.
Restricting access to credit was a natural and understandable reaction to a crisis caused in large part by excess lending. However, in a post-crisis world of low interest rates, reduced investor appetite for risk, and increased regulatory standards, big businesses with established access to the capital markets can find low-cost credit, while many small businesses either cannot obtain loans at all or have to pay very high rates.
Banks had over $780 billion in loans outstanding to small businesses at the onset of the 2008 financial crisis, then lending fell sharply. To this day, banks are lending less to small businesses than before the crisis, despite five years of economic recovery.
There are many reasons why banks are more hesitant to lend to small businesses: a less certain economy, reduced collateral from borrowers who have less in savings and home equity, and higher regulatory requirements.
Increased bank regulation was a necessary and proper response to the crisis. BPC’s research into Dodd-Frank has found that among its most effective provisions are those designed to end “too big to fail.” Institutions can now go out of business without threatening financial stability or requiring a taxpayer bailout.
As President Obama noted when he signed Dodd-Frank, “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes.”
Given this progress, we need to be careful not to overshoot in our desire for financial stability. For the country to move forward, and for the economy to grow faster, we must find the right balance between the competitive spirit of capitalist markets and the wisdom of regulation.
Instead of arguing over whether the Dodd-Frank law should stay or go, candidates for president should propose how they would help small businesses access the credit they need to flourish.
In the first Democratic debate, candidates argued over reinstating the 1933 Glass-Steagall law to further regulate or break up some large financial institutions. It is to be expected that some Democratic candidates will seek the easy applause that accompany any criticism of big banks. Nevertheless, it is encouraging to see that the issue of financial regulation– always a complex one–is being raised on the campaign trail.
Reining in big government overreach is fundamental to the Republican argument and naturally some candidates continue to call for the repeal of Dodd-Frank. There are serious arguments to be made for improving the regulatory and legislative frameworks created in response to the crisis and hopefully these will become more detailed with time.
As presidential candidates debate and crisscross the country, asserting their affection for small businesses, they should be challenged to describe how they would balance financial stability, healthy lending, and economic growth. The election might not hinge on this, but the future of the economy—and of many small businesses—will.
This op-ed was originally published by CNBC on October 27, 2015.