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The Pandemic and Small Business:  Extinction or Transformation?

The Opportunity

As three out of four Americans find themselves in some form of lockdown, they fear for their lives, their livelihoods and the economy that they will emerge into. This article is about hope and the opportunity that the coronavirus crisis offers us, allowing us to build a better future and a better world. How we, not the government, can change things for the better. Cultural anthropologist Margaret Mead put it this way, “Never ever depend on governments or institutions to solve any major problems. All social change comes from the passion of individuals.”

The Crisis

COVID-19 is crashing through society worldwide as a health and economic tsunami. Nobody can accurately predict the long-term economic consequences, but we can see immediate effects that portend massive damage to small local businesses. And since small businesses with 20 or fewer employees account for the majority of jobs in the U.S. and the world, we are facing financial conditions that rival the Great Depression and perhaps worse.

Many small businesses are already at the breaking point and most Main Street companies cannot weather a prolonged delay in re-opening. Many are stretched financially and even if they could open their doors again, would not be able to service the debt that is the primary solution being offered them by the government.

Big business, in contrast, will likely weather the storm. Most of them will have the ability to finance their way through the crisis, especially if they are deemed essential by the President and Congress.  Not so with small businesses. Given present conditions, we may well be facing an extinction-level event.

That is, unless we take action at the local level to address the crisis ourselves. To do so, we will have to rediscover and redeploy strategies from the past, when communities worked together for their mutual benefit. The crisis may well give us the collective motivation to introduce some fundamental changes in the nature of our local economies.

Author Naomi Klein, in her book “Shock Doctrine,” describes how the economically powerful often take advantage of crises to impose unpopular solutions. Recent rollbacks of environmental regulations, as reported in this article, are a case in point. And as this article illustrates, governments often impose austerity measures after the acute phases of a crisis, a practice which only assembles the conditions for another crisis.

But citizens can also use a crisis to bring about positive changes that we might not entertain in normal times.

The question is, what can we do? We begin by examining how current conditions contribute to the problem.

Looking Backward

We posit that there are two conditions in most communities that could allow this crisis to fundamentally destroy local economies, both related to money. They represent the conditions that need to be changed.

The first concerns the lack of money in circulation to maintain a robust economy, something the government recognizes and is attempting to address, but likely will fall far short of what is needed. The need is to have money circulating among the bulk of the population, the folks that are the consumption engine that drives the economy. The federal government understands how to get large blocks of money to big enterprises, and has the mechanisms in place that funnel that money to them.

However, it does not understand or have the mechanisms in place to direct large amounts of money down to individual citizens, those who need it the most. Its current plans only call for one-time injections and not an open-ended solution like Andrew Yang’s UBI. How to unleash large amounts of money at the local level, and to keep it flowing, is the first problem we need to solve.

The second condition concerns the ownership model for most local small businesses, which makes them vulnerable to closure in this crisis. Let’s examine this condition first.

Small Business Ownership

For a very long time, the world of small business has been one that can best be described as quite Darwinian. Each small business owner has had to launch, grow and survive in a sink or swim environment where almost none have any significant outside support. Unlike big business, who typically have more than adequate access to money and other resources, small businesses usually struggle to obtain them.

Because small businesses are typically limited in their ownership to individuals, families or a small number of partners, they are constrained by the scope of resources available to those owners. And currently, when most of those businesses are sold, they are sold to other individuals who are similarly constrained.

And even though each business represents an “asset” to the community (by virtue of the jobs and economic activity it generates) they are not collectively owned by the community and thus do not have access to the larger scope of resources available in the community.

This leaves them far less resilient than big business, and vulnerable to outside forces.

Looking Forward

Local small business ownership

One of the first things communities can do is establish local mechanisms for expanding funding to small business and in particular capital to expand ownership beyond individuals. And while some of what is typically called “community investing” entails loans to small businesses, such lending doesn’t work well in times of crisis as debt servicing becomes much more difficult if sales volume goes down.

Instead, what those businesses need is cash infusion that does not have to be paid back. That means investing in and/or acquiring local small businesses, ideally by a substantial segment of the local population, not just a few individuals.

Broader community involvement calls for the establishment of community investment funds (CIFs). This handbook, Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice, provides guidance on at least 10 different models for CIFs that can address this problem and provides real-world examples of each model.

Some of those models provide loans, while others provide equity or funds to outright acquire small businesses. During this crisis, we feel that investments and/or acquisitions are more fitting to time and conditions. However, investments and acquisitions are best done under separate CIFs.

Given the high risk of closure for existing businesses under the current economic conditions, we feel that an acquisition fund should be a priority. We are pursuing this approach in Puerto Rico, where our non-profit, National Commonwealth Group, is in the process of organizing a CIF called PREBCO (Puerto Rico Public Benefit Corporation).

For a variety of reasons, we favor the type of CIF described on p. 66 of the Community Investment Funds guide. Such funds would be organized as a Section 3(b)(2) holding company, as defined in the U.S. Investment Company Act of 1940, with the goal of becoming publicly traded. This ensures that anyone in a community, not just the wealthy, can own equity in their local businesses. They will hold shares in the Fund that are liquid, i.e., salable, transferrable, as opposed to simple ownership of a business which is not publicly tradable.

The example for this model (prompted by the death of a local business owner causing the loss of 10 jobs and described on p. 28 of Community Investment Funds) provides the rationale for the need for such a CIF. The fund has been successful in acquiring several local businesses, and not only preserving but enhancing them post acquisition.

A scaled-up version of this model can facilitate a fundamental shift to a more resilient form of ownership, from small businesses owned by individuals to a new paradigm in which a significant portion are owned by the community via a public holding company. This extends what President George W. Bush called “the ownership society” to anyone in a community who wishes to invest in their local economy.

This CIF model corresponds to the type of company we have been advocating for, as described in this 2016 article How to Increase the Flow of Capital to Small Businesses While Enhancing Liquidity for Investors. We describe those kind of companies as Small Business Holding Companies or SBHCs and this video provides the rationale for such companies and how they would work.

One thing that will likely characterize most community CIFs is the difficulty of securing their first investments (seed funding). This problem is almost universal with new grass-roots enterprises, whether a small business startup, a local non-profit or a community investment fund.

In recognition that other communities might be interested in forming their own SBHC CIF, we are also forming a “fund of funds” that we call Commonwealth Capital LP. Its purpose is to provide seed funding to communities that need capital to launch their fund and would be willing to adopt our model. We will provide a complete template for setting up the fund, raising further funds, going public, acquiring local businesses and supporting them thereafter.

Our model also includes a comprehensive community economic development system we call the Sustainable Communities Framework. The SCF closely tracks to the proposed Green New Deal (GND) in addressing economic, social and environmental issues.

However, unlike the GND, the SCF would not be funded with a national currency but rather is based on the issuance of a local complementary currency, the key to solving the second issue addressed above – the lack of money in circulation. To understand how, let’s drill into the topic of money itself.

What is Money & How Can We Increase It?

Most economists agree that national and local economies are highly dependent on the amount of money in circulation, wherein the more money that is available (short of inflationary), the more robust those economies. And it is the bulk of the middle classes and below that spend the money that keeps the engine of commerce in motion. Where does that money come from?

Ask just about anyone where money comes from and most will say “the Mint” or “the U.S. Treasury” or even more generally, “the government.” Most economists operate on the assumption that the government does not create money but can only spend money it has received in the form of taxes or the sale of debt instruments like bonds. That is what underpins discussions about government “pay fors,” deficits and debt.

But the reality is that most national governments create only about 3% of all the money in circulation. They have privatized money creation, wherein the majority of money in circulation (the other 97%) is created by private commercial banks when they make loans (and to a lesser extent the central banks like the U.S. Federal Reserve), as we explore in depth in this article Money – A Time For Change and on our website here.

Yet the general public is likely more in touch with what should be the reality about money creation at the national level, as advocated by proponents of Modern Monetary Theory. What MMT is and how it differs from conventional wisdom is explained in this interview of Dr. Fadhel Kaboub, President of the Global Institute of Sustainable Prosperity (GISP) and in this podcast (25:35) with Nick Hanauer of Pitchfork Economics.

Dr. Kaboub explains that sovereign governments like the United States can directly authorize and issue money, as they are doing now with the $2.2 trillion dollar infusion into the economy in response to the COVID-19 pandemic and as they did when they funded the war effort during World War II. It is interesting to note that in the discussions about that $2.2 trillion dollar funding bill, nobody raised the question of how it was going to be paid for.

Similar bills could be passed to fund ongoing payments to all citizens in the form of monthly payments (Romney agrees with Yang), to pay for the Green New Deal, universal health care and more. Yet the majority of members of Congress still believe that we have to tax before we can spend, even though they authorize spending bills all the time. Achieving a fundamental shift in their beliefs may take some time.

Alternative Currencies

In recognition of the difficulty and likely delay in getting Congress to adopt the principles of MMT, Dr. Kaboub teamed with NCG to advance the idea that money need not only come from the government, but that we citizens can create our own money and fill that gap. Our premise is that locally issued money can reflect the fundamentals of MMT on a micro scale and is capable of producing profoundly positive changes in that region.

Research by our non-profit uncovered periods throughout history where the use of an alternative or complementary currency produced outsized positive results. This article, Complementary Currencies In Use provides a number of examples. We have adopted and incorporated those lessons to serve as the foundation for the Sustainable Communities Framework.

We elected to pilot the SCF program in Puerto Rico, as explored in this document, Rebuilding Puerto Rico. Those discoveries and our plans for Puerto Rico caught the attention of CEEDR, the leading business school research center at Middlesex University, London, who elected to team with us to develop this concept.

Our goal had been to demonstrate how this program can be used to lift up a very distressed economy like that found in Puerto Rico and subsequently share that with the rest of the world. COVID-19 has forced us to accelerate our plans and get the word out that communities are not helpless. They have it within their power to bring about fundamental changes in their local economies that will have greater vitality and resiliency in the long run.

We hope that you can make beneficial use of this information. Feel free to contact us about this article.