To Help Small Business, Cease the Suffocation of Big Business
In late February, and just a few weeks before a political crack-up over the coronavirus that cruelly forced economic contraction on the American people in whiplash-inducing fashion, it was announced that the Glover Park (Washington, D.C.) Whole Foods would re-open in 2020. The location had closed in 2017 for a quick re-model, only for a landlord/tenant dispute to keep it shut down and idled altogether for nearly three years.
For readers that don’t know, Glover Park is a slightly run-down commercial and residential area just above Georgetown. Word of re-opening was welcome news to the small businesses that, in some instances, opened in the area specifically to be near a Whole Foods.
The international grocery chain is a big lure for shoppers. Even better, Whole Foods attracts a rather well-heeled clientele. Since it does, the arrival of the grocery store in neighborhoods invariably heralds or foretells economic revitalization.
The great Canadian economist Reuven Brenner has long written about the “vital few.” His crucial phrase is arguably easiest to understand through sports. Before the arrival of Larry Bird and Magic Johnson in the NBA, the League’s playoff games were televised in tape delayed fashion after 11:30 pm in markets across the U.S. Bird and Magic brought the NBA into prime time. When Tiger Woods plays golf, and better yet when Tiger Woods is winning professional golf tournaments, interest in the sport soars alongside prize money. Looked at through the prism of Hollywood, certain actors and actresses – think Robert Downey and Jennifer Lawrence – can pretty much guarantee substantial opening-weekend box office. When they’re “attached” to scripts, movies get made.
Business is no different. Consider malls. There’s a reason they all have anchor tenants that can invariably claim a national, and sometimes international, presence. What’s big and well known generates foot traffic for the small, almost invariably lesser-known brands that cluster around them. And while Apple Stores are rarely anchor tenants in the square foot sense, where they open ensures quite a lot of exposure for the businesses lucky enough to be near where they open.
All of what’s been written so far needs to be considered in consideration of a column by Milken Institute scholars Michael Klowden and Michael Piwowar. Writing in the Wall Street Journal yesterday, they made the claim that “America’s 30 million small businesses are the heart and soul of its economy. They are the engines of economic growth and the creators of the jobs that provide income and dignity for nearly half of the workforce.” No, that’s not true.
While it may well be true that small businesses provide tens of millions of jobs in aggregate, Klowden and Piwowar are putting the cart before the horse. Far from being the “engines of economic growth,” small businesses and the jobs they create are a consequence of big business.
To understand why what’s so basic is true, readers need only walk a shopping mall, a shopping district, or consider any sports league. It’s the big and prominent that lift up the lesser knowns. Always.
No doubt it’s fun and comforting in some kind of American frontier way to imagine Main Street and the small as the drivers of the world’s most dynamic economy, but that’s the extent of it. It’s fantasy thinking. It’s saccharine-sweet, rather empty comfort food.
Worrisome is that this rather naïve vision of the world is gaining traction inside the corridors of political power. On its own, that’s interesting. Think about it. The very political class that chose to fight the coronvarius with mass unemployment born of forced economic contraction, is now arrogating to itself the right to play capital allocator for the recovery. Politicians bring new meaning to self-unaware! Unknown is if the electorate will allow the authors of so much economic misery the right to slow our recovery through the politicized allocation of resources. Let’s hope not.
Needless to say, scholars of the feel-good variety like Klowden and Piwowar seem eager to hand to the political class the right to quarterback the recovery. They’ll claim they’re really calling for the Fed to play capital allocator, but that’s for them to draw a distinction that reveals no difference. The Fed is a politicized institution like any other, and like the Congress that it derives its power from, it is empowered to allocate precious resources sans the market discipline that is necessary if economic growth is the ultimate goal. No, let’s not be silly. For once.
Individuals and businesses borrow money for what it can be exchanged for. They borrow real resources. Trucks, tractors, computers, desks, chairs, office space, and most important of all, labor. No doubt in the world of scholars it’s kind of low rent to point out something so obvious, but neither the Fed nor government can create credit. They can only allocate credit extracted from the private economy.
Seemingly ignored by Klowden and Piwowar is that private, market-disciplined sources of capital are directing it to businesses of all sizes all the time. Goodness, the man for whom their Institute is named was arguably the greatest capitalist and capital allocator the world had ever known before those empowered by government tragically removed him from finance to all of our detriment.
The Milken scholars believe the Fed’s “lender-of-last-resort function” has “never been so crucial to preventing damage to the economy,” and in making this point they miss the point. They seem to be saying there’s a liquidity problem for businesses, but then there wasn’t just a few weeks ago. What that tells us is that businesses don’t need the Fed right now, what they need is freedom to begin producing again. Once returned, problems of liquidity will vanish for exactly the reason Klowden and Piwowar have excellent jobs: intrepid financiers aiming to be a fraction as good as their patron once was, will begin financing existing and future businesses in courageous fashion.
In particular, many of the big will attain finance first simply because what’s known can attract investment and loans more readily. That’s all to the good. Indeed, once the “vital few” are back on their feet, or as they’re getting back on their feet, smaller and mid-size entities that so often gain strength and lift-off from the big, will look more and more attractive.
The main thing is that the recovery that Klowden and Piwowar plainly want needn’t be authored by central bankers. In truth, it can’t be authored by them. If centralized control of capital doesn’t work in good times, it most certainly doesn’t in bad.
Freedom, for lack of a better word, works. Stop suffocating the big, and watch businesses of all sizes take flight.