December 1, 2020

Rebuilding the Small Business Economy in California :: Fox&Hounds

Counsel with the international law firm of Duane Morris LLP, a Milken Institute Fellow and former Director of the California Employment Development Department

(Latest in a series since March on the pandemic’s employment impacts, and rebuilding America’s job base. The previous ones are here.)

The small business economy in California continues to deteriorate rapidly. Small business revenue in California was down 7.2% from January 2020 to early July. In the latest August data, revenue is now down more than 15.9%. The number of small businesses open in the state declined 9.7% from January to early July, by early August the drop had reached 24.7%.

There are several strategies needed as part of the rebuilding process in the months. But they all rest on the same imperative: a reversal of the current politics of small business, which is proving destructive for small businesses and for the broader economy.

Let’s start with some recent history. A few weeks ago, around 150 small business owners in San Francisco rallied at City Hall, calling for the opportunity to reopen. Since mid-July, the City has re-imposed strict economic lockdowns. “Unbelievably, they’re watching as entire business sectors collapse,” announced the owner of a fitness center.

Other than an article in the San Francisco Chronicle business section, though, the rally attracted little attention and response from city government or the Chronicle’s editorial staff. This was not unusual in California in 2020: other rallies by small businesses throughout the state, calling for lifting lockdowns, have been met with indifference by county health officers, elected officials, and the state’s major editorial boards.

Similarly, the conclusion of the California state legislature session in late August brought a flurry of bills, but none that will significantly help rebuild the small business economy. In fact, the bills that were enacted mainly added new costs and regulations on small businesses. John Kabateck, the state director of the National Federation of Independent Business (NFIB), the largest of the small business associations in the state with approximately 15,000 small business members, put it this way: “Everyone in Sacramento says that small business is the backbone of the California economy; but then the state legislature acts in a way that is completely oblivious to the realities of small business.”

Kabateck has been a leader in small business advocacy in California for more than two decades. He notes that NFIB-sponsored legislation that would have provided liability protection for small businesses against COVID-19 lawsuits (claiming infection from a place of business), an important element for rebuilding, failed to pass. Also failing passage was a protection sought by small businesses against lawsuits for technical meal and rest break issues linked to employees working at home. At the same time the legislature imposed new requirements on small business for COVID-19 protocols that could result in additional fines and lawsuits (even though the federal and local governments already have imposed several layers of COVID-19 protocols). One small business bill that did succeed was SB1447, providing a tax credit of $1000 for each employee added: a positive action, but not significant in rebuilding.

“You and I and the Wilcoxes stand upon money as upon islands, it is so firm beneath our feet that we forget its very existence” Margaret observes in Howard’s End. California’s professional classes in government, universities, foundations, public interest groups and nonprofits stand upon their own islands of steady paychecks. It is the other class of small business owners, independent contractors and hourly workers who lack the islands of financial security.

This other class hasn’t had influence in state government or the local governments in urban centers for more than a decade. For any serious rebuilding, small business and its allies must find a way to change this. Even before the pandemic, business start up rates in California actually have declined since the early 2000s.

Despite the lack of support in the legislature, the NFIB and other small business groups are taking matters in their own hands, implementing their own set of strategies for rebuilding. They are beginning with the following four, as summarized by Kabateck.

Access to capital: In virtually all regions of the state, local governments, workforce boards and volunteer groups are establishing their own new loan and grant funds for small businesses, some drawing on local CARES Act funds, others on private funds. NFIB has been at the center of most of these, as well as active in ensuring that the state’s smallest businesses are able to access the Paycheck Protection and Emergency Disaster Loan funds.

Assistance to small businesses in negotiating with landlords and creditors: “NFIB has largely stayed out of the renter-owner policy debate, but is making sure member owners are getting the direction they need to make the most informed decisions”, Kabateck explains. “NFIB is advising small employers about where to turn for help in paying rent as well as working with creditors, to help them through this storm.”

Assistance to small businesses in compliance with the numerous COVID 19 return to work protocols: “With so many overlapping COVID-19 mandates from federal, state and local governments, our members are often uncertain on return-to-work protocols. We are helping them sort out their compliance obligations.”

Participation of small business on the state and regional recovery task forces: On the state level, the recovery task is headed by Tom Steyer and dominated by big business, labor and government representatives. Kabateck is part of a Small Business Working Group, trying to balance the perspectives.

All of these are sound strategies, as a start. Beyond them will be others, to be determined by California’s small businesses. But all of the capital programs, tax credits, or compliance assistance in the world will have minimal impact if the perspective of local and state elected officials does not dramatically shift. The small business economy is a resilient one, but it also is fragile. Even before the pandemic, the state legislature had little restraint in adding business mandates, and this has continued during the pandemic.

“Only Connect” is the best-known passage in Howard’s End, with its multiple meanings in terms of personal and social connections and disconnections. But the concept of connection/ disconnection is not foreign to the political. Addressing the growing disconnection of the small business community from the state’s professional classes, now in main control of state policy, will be the basis of rebuilding.

(First appeared in Forbes).

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