small business is the single largest economic power---maintaining size and financial capital is key.

Some sectors of the U.S. economy have been hit far worse than others as the coronavirus pandemic has upturned personal consumption habits and government has ordered a halt to normal economic activity. But the greatest suffering has been in sectors with low productivity and low wages, such as hospitality, leisure, personal services, and bricks-and-mortar retail. The left has tried to fit this fact into pre-existing narratives by pointing out that workers in these sectors are disproportionately nonwhite and female. The anti-government right, for its part, has explained the disparity as the result of an attack by tyrannical federal, state and local governments on independent small business owners.

But these conventional partisan framings should not blind us to an obvious fact: The sectors that have suffered the most are laggard sectors—laggard, that is, in moving from old-fashioned, labor-intensive and low-wage business models to innovative, capital-intensive, technology- and skilled-based ways of delivering goods and services. Upgrading these backward industries into high-wage, technology-intensive sectors must be a priority for bipartisan public policy in the aftermath of the COVID-19 pandemic.

December data from the Bureau of Labor Statistics provide shocking confirmation of the huge disparity in economic impact. In the leisure and hospitality super sector, unemployment was 16.7 percent and in “other services” 7.4 percent, compared to 4.3 percent in manufacturing, 6.4 percent in information sectors, and 6.1 percent in business and professional services. Not only is pandemic-induced unemployment vastly higher in leisure and hospitality, but wages, benefits, union representation and the number of hours worked per week are also lower.

Real hourly wages grew an unprecedented 5.5 percent in April, due to massive numbers of low-wage jobs workers losing their job, which boosted the remaining average. However, wages fell in real terms from July to December of last year, as the pandemic worsened and the effect of economic stimulus measures wore off. Apart from mass unemployment, all of those sectoral disparities preceded the COVID-19 pandemic and will reassert themselves in the future, unless the country does something about them.

The U.S. economy since 1990 has added 20 million low-quality private sector jobs, compared to only 12 million high-quality jobs, according to the Job Quality Index. The difference is reflected in hours worked, as well as wages. Americans trapped in low-quality jobs work on average only 30 hours a week, compared to 38 hours for those in high-quality jobs. The federal minimum wage of just $7.25 per hour, which has not increased since 2009 while inflation has grown 21 percent, contributes to the problem.

Long before the pandemic, it was clear that many firms in the laggard sectors of retail, leisure, hospitality and personal services were privatizing their profits while socializing their overhead costs—by paying such low wages that many of their workers could survive only with the help of food stamps, the earned income tax credit (EITC) and other aid charged to taxpayers. For example, 52 percent of fast food workers have at least one family member relying on a public assistance program. And as we point out in our book Big Is Beautiful: Debunking the Myth of Small Business, the largest share of these workers are employed by small businesses. Indeed, a 2007 study by the Urban Institute found that “Low-income workers are disproportionately likely to work in smaller firms.”

During the Great Depression, President Roosevelt declared: “It is my conviction that the South presents right now the Nation’s No. 1 economic problem.” During today’s Great Pandemic these laggard, low-wage sectors may be the nation’s number one economic problem. Just as the impoverished rural South was brought up to the standards of the industrialized North by government-sponsored electrification, minimum wage and farm programs, so the sectors that are dragging down U.S. average wages and productivity need to be transformed.

Rescuing good and bad firms alike during the initial stage of the pandemic makes sense. But in the years and decades ahead, American taxpayer support should be limited to businesses that pay and treat their employees well and seek to increase profits, wages and output at the same time by adopting innovative technologies, like self-service technology, and high-performance labor practices. Firms whose business models rely on low-wage labor (and no benefits), or shifting fixed costs to workers, or paying so little that their employees have to use welfare services, deserve to go extinct. This will make it easier for firms that want to do right by their workers to do so.

The low-road firms of the laggard sectors should be replaced either by bigger firms in the same sector, almost all of which pay higher wages and use more technology, or by small firms that have taken the high-road path to high wages and high productivity. When the pandemic is behind us, we should be encouraged, not appalled when laggard sectors replace small, undercapitalized low-road firms with fewer large firms and chains, including many with online business models that reap the benefits of increasing scale or networks effects. For most of us, small-producer romantics to the contrary, the American dream is to earn enough by working to support a family at a decent and rising standard of living—not to own your own tiny, undercapitalized business that cannot turn a profit without underpaying and mistreating its employees. If fewer, larger, and more modern firms in a previously laggard sector can afford higher pay and benefits, all the better.

Small businesses key

Beilfuss 20 — Lisa Beilfuss is a reporter at Barron's, covering the intersection of markets and the economy. She joined Barron's in 2019 after five years at The Wall Street Journal and a decade as a markets analyst. (“America’s Small Businesses Are in Crisis. Their Survival Is Key to Reviving the Economy.” Barron’s, May 23, 2020. https://www.barrons.com/articles/americas-small-businesses-are-sputtering-why-that-matters-for-the-economy-51590141602)

The owner of Diamond Dental Lab in Des Plaines, Ill., furloughed his staff of nine in late March after the state ordered dental practices to close for all but emergency visits and his customers stopped putting in orders for the crowns, bridges, and implants that his small business has made for the past 20 years. Illinois on dentists in early May, but Mike Bridge says most of his dentist clients are still closed as they try to get new safety protocols and personal protective equipment in line. His revenue was down 95% in April, and it isn’t any better this month. “We survived 9/11, [the financial crisis in] 2008, and hopefully we’ll survive this, but this is the hardest one,” Bridge says. “Business never entirely dried up before.” His application for a loan under the federal Paycheck Protection Program, , was approved on May 18, but there’s still not enough business to bring back employees. Versions of what’s happening at Bridge’s business have been playing out for the past two months, as lockdown measures have disrupted individual businesses and entire industries. While the virus is affecting companies large and small, it’s small businesses—often with smaller cash cushions and less access to credit—that are under greater assault. Small businesses are responsible for about half of U.S. employment, half of gross domestic product, and 40% of total business revenue. In short, they’re , and yet investors seem to have largely discounted the threat their struggles pose for the broader economy. While the small-cap —an imperfect proxy for the independent businesses that make up the small-business sector—is down 20% this year, the index of larger stocks is down just 8% after rallying on hopes that the economic impact of the pandemic might be contained and the recovery relatively quick. Yet the length and depth of the recession upon us will in large part depend on how small companies and the workers they employ fare during the shutdowns—and how well government aid programs help small firms stay afloat. So far, the hole is deep: Small businesses—those with fewer than 500 employees—and franchises together account for nearly two-thirds of the more than 20 million jobs lost since March, according to data from payroll provider ADP. The average monthly income loss for hourly employees stood at about $1,300 at the end of April, translating to over $60 billion in income lost across the U.S. economy each month, according to . Economists there predict an 8% decline in GDP this year. The coronavirus and efforts to contain it represent a shock to America’s small-business sector that has little parallel, says Alexander Bartik, an economics professor at the University of Illinois who led a team of economists that surveyed 5,800 small firms to study the virus’ impact. As of early April, 43% of businesses were temporarily closed, businesses had on average reduced payrolls by 40% relative to January, and 38% said they were unlikely or only somewhat likely to survive the crisis and reopen this year. Though grim, the findings make sense when you consider the financial fragility of the sector. Bartik says the median small business has more than $10,000 in monthly expenses and less than one month of cash on hand. In a “normal” recession, that might be sufficient to cover several months of revenue declines. “Now, you have certain industries where revenue is 50% or more below what it was.” he says. “Even during a bad recession, it’s really rare to have the kinds of declines we’re seeing.” That’s especially true for industries most directly affected by shutdowns and where social distancing is harder. Restaurant reservation-booker OpenTable’s CEO Steve Hafner will go out of business due to the coronavirus. Plenty already have. Mounting retail bankruptcies highlight how difficult it has been for even large players, like , to navigate the crisis. It would be worse, if not for substantial interventions by the Federal Reserve and the U.S. government that have helped limit the damage. Sweetened jobless benefits include an extra $600 per week for up to four months and let normally ineligible self-employed and contract workers claim them. For some workers, that amounts to more money than they had been making before being laid off. But that effect shouldn’t be overestimated. Even though many people who have lost their jobs are getting unemployment benefits with high income-replacement ratios, these payments have replaced only about half of lost income, according to the Brookings Institution. As April retail sales data showed, , and it’s not just because they’ve had fewer places to go; . If more temporary layoffs become permanent because some businesses don’t reopen, or because demand isn’t there when they do, then the bottom line is that the labor market and consumer spending will come back slowly, says Torsten Sløk, chief economist at Deutsche Bank Securities. Ben Footh’s two used-car dealerships are considered essential businesses, but that hasn’t helped sales. He has been moving cars at a loss just to generate revenue. His survival plan: scrape by long enough to buy failed rivals’ autos at auction. Photograph by Ackerman + Gruber To that point, some essential businesses that never had to close have seen sales slump. In St. Paul, Minn., Ben Footh has been conducting fire sales across his two used-car dealerships. He’s selling about 30 cars a month lately, compared with 80 previously, at about 70% of the normal price to get the deals done. He says his lenders predict a 50% default rate in his industry, and his strategy is to stay alive in order to seize the opportunity to buy failed rivals’ autos at auction if he has the chance. “I’m trying to get through this and run lean and mean,” he says, in begrudging acceptance that he is losing money on the cars he’s selling because that’s the only way he can sell anything. While he has been allowed to stay open, he also says that he’s being hurt by social-distancing guidelines that have resulted in appointment-only service with one customer at a time. The Paycheck Protection Program, meant to provide small businesses with forgivable federal loans to keep workers on their payroll, is potentially the most promising effort by Washington to support the broader U.S. economy. When Congress and the Trump administration in late March passed the first round of PPP loans as part of the , the $349 billion went quickly. Many not-so-small, publicly traded businesses secured loans, thanks to their banking relationships, while lots of truly small businesses struggled to jump administrative hurdles or get their banks’ attention. (Some of the public companies that got PPP loans have since returned the aid.) The second round of PPP loans, taking the total up to $660 billion, has reached more businesses and given some economists reason to turn slightly less pessimistic about the economic outlook. Sløk estimates that the PPP is currently supporting more than 50 million jobs. He says the program could help the economy rebound more quickly if enough businesses hire back employees. The key, however, is whether those companies see customer demand improve and manage to keep workers, as the coronavirus threat remains and the toll ripples through the economy. Nicole Adkins Rice’s live-events company in Ohio doesn’t have employees, relying instead on contractors. This makes her ineligible for the Paycheck Protection Program. There are signs that the program is having a positive impact. When Barron’s first talked to Sara Turack, a salon owner in Omaha, Neb., in early April, she had laid off her staff of seven and was worried that customers wouldn’t be in a hurry to come back once stay-home orders were lifted, given how close stylists and customers are situated. A few weeks later, she had her PPP loan request fulfilled. Now, Turack’s salon is back open for business. She used her loan to hire back her staff members and hired three more, and says that revenue is approaching previrus levels. Some customers are hesitant to return, but so far, 89% of her clients have booked appointments. On May 14, Turack had a bride-to-be in the salon ahead of her wedding, a sign that a degree of normalcy is returning to some parts of the country. Turack says that some of her nearby competitors have closed for good, and others have decided to remain shut until certain provisions, like allowing a maximum of 10 customers at a time and requiring masks, are lifted. That’s helping her business. “Some clients are better than no clients,” she says. Sløk says that what has surprised him the most in the past few weeks are signs of life in industries he hadn’t expected to recover quickly. There are salon owners like Turack seeing customers eager to come back, and restaurants in some areas of the U.S. are seating unfazed diners. In Tampa, Fla., and Scottsdale, Ariz., for example, restaurant seating is already at about 40% of previrus levels, even with capacity restrictions, OpenTable shows. In a handful of states—Nebraska, Mississippi, and the Dakotas—90% or more of small businesses have received PPP loans, according to Deutsche Bank, using data from the Small Business Administration. States including Idaho, Oklahoma, and Louisiana have had at least 80% of small businesses receive loans. Yet these approval rates aren’t being seen everywhere. In New York, where there are more than two million small businesses employing four million people and where the virus hit hardest,. New York City alone is responsible for a . Nationwide, nearly half of small businesses polled by the National Federation of Independent Business say they’re worried about getting their customers back, while 59% of respondents say they don’t think their local economy will return to precrisis levels until 2021 or later. And in some places where the economy has reopened, consumers appear more hesitant to venture back out. In Nashville, restaurants are seating only about a tenth of previous traffic, while in Dallas, it’s about a fifth. The point: Reopening is one thing, but getting customers to show up and spend is another. Take Keith Cohen, the owner of New York City bread supplier Orwasher’s Bakery. He received PPP funds, which he says have helped, but ultimately the sharp cutback in commercial activity may be too much to survive. “It’s not going well,” Cohen says, as at least 60% of his wholesale customers are closed. Even those still open are doing a fraction of their previrus business, leaving Cohen’s wholesale business down 70% and unpaid receivables mounting. While the PPP is helping many businesses hang on, it has left many behind. Bartik, the University of Illinois professor, notes that many small businesses aren’t eligible because they don’t spend enough on payroll expenses and instead spend on things like equipment. The program requires at least 75% of the funds be spent on payrolls, making it more of a roundabout way of channeling money to workers through banks than a direct small-business support program. That has left Nicole Adkins Rice, the owner of a live-events company in Swanton, Ohio, feeling like she has slipped through the cracks. She and her business partner don’t have employees and instead use about a dozen contractors for corporate events the company orchestrates. Business went dry in early March, when companies began canceling gatherings, and Rice is losing hope that her business will make it through. She says the reason she has hung on this long is because the Internal Revenue Service pushed back the tax-filing deadline. “We have a game plan that has to work perfectly,” Rice says. If business doesn’t recover enough to pay the tax bill in July, she’ll owe the IRS money that’s not there. “Initially, we had faith this would be OK. But as time goes by, we don’t know how long we have to stretch our dollars,” she says. “We don’t usually have a lot of money in the bank that we’re running on.” Others have been denied funds or received only a portion of the amount for which they qualified. In Wisconsin, Ashley Lang’s four shops were deemed nonessential. At first, she stayed open, letting in one customer at a time. Then the local police came to shut her down and she laid off her 10 employees. Lang didn’t get PPP funding because her stores sell CBD products, derived from cannabis, which makes her ineligible, even though larger retailers selling similar products remain open. “It irks me to the core,” Lang says. “The towns here, [parking] lots are full at big-box stores, and you drive by small businesses and they’re empty.” For the past couple months, she has made about 20% of normal revenue through deliveries. It’s impossible to know at this point how many small businesses have already failed, Sløk says, just as it’s impossible to know how many layoffs are temporary, as many businesses’ fates are unclear to the owners themselves. What is clear, however, is that the speed and robustness of a U.S. recovery is tethered to the ability of small businesses to weather the crisis. We will see in the coming weeks as the country reopens in getting back to normal, in turn determining how quickly business stabilizes and the labor market bounces back. We will also see in the weeks ahead whether reopenings cause coronavirus cases and deaths to again spike, and the degree to which that affects consumer behavior. For investors, there’s room for cautious optimism, or, it may be more accurate to say, there’s room for a bit less pessimism. “Forget valuations,” Sløk says. Instead, he says investors should think about the fundamental outlook for the U.S. consumer—which is going to both determine and be determined by the ability of small businesses to survive and again thrive.