Small Business Wades Through Economic Turmoil

Small Businesses on the Economic Crisis from Shannon Hoffman on Vimeo.

Interviews With Local Managers

The financial pipes are clogged, and last week the Bush Administration announced their confidence in the $700 billion bailout plan to get loans and investments flowing again. Small businesses are hoping this means that customers will be flowing through their doors as well.

When the real estate bubble burst last month, the country realized that economic crisis had been looming within the interest rates of the sub-prime housing mortgage agreements, and the burst has doused the confidence of just about every facet of the American economy – banks are afraid to loan, and consumers are afraid to spend and invest.

Among those taking a hit and struggling to stay above water are small businesses. Sixty-seven percent of small business owners say they’ve been impacted by the credit crunch, and so far this year there have been 28 thousand fewer small businesses than usual who received loans, according to an article on CBS Broadcasting Company’s website.

Small businesses owners are wondering for how long consumers will stay home and pinch pennies. Bloomsburg economics professor, Dr. M. Halim Dalgin said that the credit crunch presses on small businesses from all sides. “Firms which need credit to invest and expand cannot find credit, cut back on production, and lay-off workers, who in turn cut back on their consumption.”

“Moreover, falling house prices create weaker household balance sheets, reducing their expenditures and reducing aggregate demand. Hence, this will slow down the economic activity along the lines of the local economy,” he said.

During these hard times, owners are forced to re-think staff size, employee health care plans and pay, merchandise prices, and not to mention business expectations.

Bloom Businesses—Not Quite Booming

Shops in Bloomsburg are no exception to the economic downfall. “Business is down a little. I think the main thing is the inconsistency of the business,” said Steph Severn, manager of Steph’s Subs, who estimates that business has decreased by 15 to 20 percent since January. When customers come into her business these days, Severn said they definitely pay more attention to the prices.

Start-up businesses right now are hoping to defy economic gravity and open their doors successfully despite the crisis. There are two such businesses in Bloomsburg—Ready, Go, Burrito which opened this summer, and Good Fellas Pizza in September.

Unlike Steph’s Subs and other businesses that have been around for a few years, the managers of these places don’t have a history to compare to. “Being new, it’s like wearing a blindfold,” said Shawn McNally, manager or Ready, Go, Burrito. “I would expect a little more action.”

“It’s a lot harder to start out now when it’s down,” said Bob Conrad of Good Fellas. “Ten years ago, it wouldn’t have been a big deal. Gas is up, flour’s up, cheese is up, everything is up right now.”

Some managers in Bloomsburg feel that the college town atmosphere will pull them through the down economy, though. Adam Gladish of Campus Beer says that the only slow he has experienced was probably a result of the recent increase in college party busts this fall. Prices have also had to be raised to accommodate for rising costs. In addition, many locals have begun going for the cheaper beers than their usual Miller Light, but Gladish does not foresee a significant decrease in sales.

He is especially looking for business to remain steady because of the ever-growing student population at Bloomsburg. “It really makes you want to invest in this college.” As a former marketing major, Gladish knows all about appealing to the appropriate consumers.

McNally agrees that the Bloomsburg market can counter some of the problems of the economic crisis. “I think a college town is a different animal. I don’t think I could have picked a better town, but I could have picked a better time.”

Some managers are hoping to raise money from special events to help even out the hits from the crisis. Good Fellas is one of three local pizza shops who contribute to the once-a-month Midnight Pizza events on campus, the next one being scheduled for Friday, November 7th in the Kehr Union.

Ready Go Burrito attracted a crowd of forty people with a music event a few weeks ago, featuring local music talent, Mystery Fire. “It’s fun to be a part of an artistic college community,” he said. “When this sort of thing happens, you have to think a little creatively. What can we do to change it up?”

Finding a Way Out with a Bailout

A controversial bailout plan to rescue the economy was announced in September, but it went through revisions after being rejected by Congress. On October 3rd, the new bill was passed, but Dr. Dalgin said that the plan still was not welcome among economists or the public. “It was not really clear what the treasury would do with this money and whom it would save, as well as there was a lack of oversight.”

Last week, though, the country was given a clearer idea of where some of the money will be going. $250 billion will be available for buying up stakes in several US financial institutions, including Citi, JP Morgan, Bank of America, and Fargo. Two brokers, Goldman, Morgan Stanley, and two processing banks, Bank of New York and State Street, as well as some other smaller banks will also be receiving boosts. The plan to bolster the banking sector mimics the recent financial action of the British and European government. In a press conference last week, Treasury Secretary Henry Paulson said that if the plan succeeds, then the shares can be sold for more than the government paid, making a profit for the government and shareholders.

Many citizens have been startled by the huge number of tax dollars being contributed to this bailout, but according to Paulson it is a responsible bill protecting tax dollars to the maximum extent possible, and the investment will cost families far less than the alternative.

He affirmed that this bailout includes steps to increase confidence in the system and address the underlying weakness of the economy: illiquid mortgage assets (assets that are not easily converted to money) that lost value and are choking credit. “Money and capital should flow between houses and businesses to pay loans and investments,” said Paulson, who pointed out that lax lending processes over the past 10 years has resulted in five million homeowners who can’t afford their mortgages and are now delinquent or in foreclosure.

Business managers think that eventually customers will be confident enough in their economic security to visit their shops more often, but they’re not sure if it’s the bailout that will save them. “Things will change. You just got to tighten your belt a little bit,” said Severn.

Obama or McCain—Who’s Better for Business?

Both presidential candidates have openly supported the bailout plan, and they have offered up many opinions in the recent debates about how government can help relieve the pains of small businesses.

Visiting their campaign websites, it’s clear where the main difference lies between Barack Obama and John McCain’s economic plans. While the latter believes in the effectiveness of the trickle-down method, Obama pays little attention to the system of globalization and proposes a greater emphasis on feeding the economy from the bottom up.

The only real similarity between the two on small business policy is the push for alternative energies which will in turn make it cheaper to run a company. McCain plans to increase domestic production of oil and natural gas, and to build 45 more nuclear power plants by the year 2030. In addition, he wants government to contribute $2 billion annually to research the possibilities of coal usage. Obama plans to invest $150 billion over 10 years to catalyze private efforts to build a clean energy future, and he wants to make sure that 10 percent of electricity comes from renewable sources by 2012, and 25 percent by 2025.

There is a lot of focus from both campaigns on the affordability of employee health care plans. Obama promises to help small businesses compete in the global economy while still providing quality health insurance. He wants 50 percent of health tax credit on employee premiums to be paid by employers. McCain says that this “Pay by Play” method will discourage companies from hiring or increasing pay to their employees, and instead he promises $5,000 for health insurance to every family, supporting small businesses who seek to offer insurance but can’t.

McCain’s small business tax plan includes keeping the top tax rate at 15 percent, maintaining 15 percent rates on dividends and capital gains, and a phasing out of the Alternative Minimum Tax. He also plans to reduce the corporate tax rate to 25 percent. The current rate of 35 percent is one of the highest in the world. Obama also wants to lower the corporate tax on businesses, but his campaign site does not make it clear by how much. Both candidates want to make Research and Development tax credit permanent. Obama plans to reduce the burdens of the double taxation that several business owners are forced to pay, and to eliminate capital gains taxes for small businesses. To stimulate the economy, Obama promises to cut the taxes for the middle class, assuring that no family making less than $250,000 a year will see their taxes increase. His site points out that according to the Tax Policy Center, his plan provides three times as much tax relief for middle class families than the McCain plan.

On his site, McCain calls further globalization an “opportunity,” and his plan is to purify the system even more by reducing the influence of protectionism (the barriers such as steep tariffs which impede a complete Free Trade). He also plans to encourage more Free Trade agreements, which will allow more American firms access to sell abroad. In addition, McCain’s plan includes a first year deduction on equipment and technology costs.

Obama’s plan mentions nothing along the lines of a purification of Free Trade, but instead encourages the creation of a national network of public-private business incubators, which facilitate the work of entrepreneurs in creating start-up companies. The Obama plan is to invest $250 million a year to increase the number and size of incubators in disadvantaged communities throughout the country. Also mentioned in his plan is the goal to eliminate special interest loopholes in the corporate tax base.

The Heart of the Economy—Small Businesses—Are Hopeful

Conrad said that despite the financial state, things are actually looking better for him since opening. “It’s getting better everyday. That’s all I hope for, even if it’s a dollar more a day.”

Severn has had to increase her prices, as Campus Beer did, to accommodate rising costs of production. She said that small business is probably the least helped of all in these economic turmoils. To keep business from unnecessary expenditures, she works a lot more hours herself in the shop so as to spend less on payroll. “It’s just that you need to spend a lot of time in the business and if you’re not willing to do that then you just won’t survive.”

She remains hopeful though. “I do think things will change eventually. They says it’s going to get worse before it gets better, but we can all hang in there.”