The Agenda

How small-business issues are shaping politics and policy.

Economists have been warning for months that if the $85 billion in indiscriminate budget cuts known as the sequester take effect, the consequences for the economy could be dire. But for small businesses, the prospects may be even worse.

“Government spending is at 8 percent of gross domestic product, and at a time like this, when the private sector is still climbing off the mat, the last thing you need is for the public sector to pull out,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and formerly the chief economic adviser to Vice President Joseph R. Biden. “So nonpartisan analysts predict that if the sequester takes hold, it will lower the growth rate of G.D.P. by half a percent. And that translates to an unemployment stuck at 8 percent and hundreds of thousands of fewer jobs.”

Small businesses, Mr. Bernstein added, will bear the brunt of it. “Smaller businesses tend to be more locally dependent,” he said. “They tend not to be multinationals. If you’re a multinational and the economy is not doing well here, you shop around the globe for economies that are doing a lot better.” Moreover, he said, “a lot of small businesses don’t have the access to credit markets, so it’s tougher for them to get through periods of a down economy.”

According to Stephen Fuller, a professor at George Mason University’s School of Public Policy, the budget cuts required by sequestration amount to $35 billion in payroll costs and about $50 billion in procurement expenses. All told, Mr. Fuller said, these cuts would result in 1.4 million lost private-sector jobs. Those lost jobs include positions at federal contractors, as well as at businesses that serve those contractors and, even less directly, at the businesses that depend on spending by government and contractor employees.

Small businesses, Mr. Fuller said, would lose just over half of those jobs.

“So many of these small businesses don’t realize how dependent they are to the federal government because they’re not the contractors — they are suppliers and vendors to the contractors,” said Mr. Fuller, who testified (pdf) at a House Small Business Committee hearing last September on the effect of sequester. “They’re the ones who water the plants and secure the buildings.” Small businesses will suffer from the reduced federal and private sector payroll because of the important role they play in the consumer economy, as retailers and restaurants. “However you allocate the consumer budget across the economy, there’s a large number of small businesses,” Mr. Fuller said.

Small businesses that deal directly with the federal government would fare even worse. According to the Small Business Administration, small businesses received $91 billion in prime federal contracts in 2011, or just under 22 percent of the total contracts available to small companies.* However, according to Mr. Fuller’s calculations, small companies would account for about 34 percent of the job losses at prime contractors under the sequester. (Since Mr. Fuller’s testimony, Congress reduced the amount of the sequester as part of the New Year’s fiscal cliff legislation. While the overall job losses would be lower as a result, Mr. Fuller said the share coming from small businesses would likely change only slightly.)

Small businesses “can’t survive on the loss of 10 or 20 or 30 percent of their revenues,” he said. “They can’t continue operating at half-speed or two-thirds speed. They don’t have a cushion that a large publicly traded company would have.” Large federal contractors can shift employees across business lines — most have both civilian and federal divisions — and geography. Small companies that specialize “can’t learn new tricks that quickly.”

Officials in the Obama administration, asked to comment on how small businesses could be affected by cuts to federal procurement, declined to be specific. “Should sequestration occur, small businesses, like other business, will be impacted as agencies are forced to allow certain contracts to lapse and de-scope, or terminate other contracts that would be no longer affordable,” said an Obama administration spokesman who asked that his name not be published. The spokesman would not say whether government agencies would attempt to stretch out payments to vendors in order to make the money last longer. For example, in September 2011, the administration announced its so-called QuickPay program, which attempted to cut the government’s payment time to small companies from 30 days to 15 days. The spokesman did not say whether the administration would continue this initiative.

However, Mr. Fuller said agencies would not likely cancel existing contracts, since the money for these has already been appropriated. Rather, he said, agencies would probably not extend some of those contracts or issue new ones. Because of the way the federal government spends money — purchasing is typically concentrated in the last three months of the fiscal year, which ends in October — the impact of the sequester would most likely be felt beginning in July.

The sequester would also scale back programs at the S.B.A. According to the administration, loan guarantees would be reduced by $902 million, from $22 billion to just over $21 billion. And the agency told (pdf) the Senate Appropriations Committee that cuts to its counseling programs would force the agency’s partners to turn away at least 33,000 business owners seeking assistance.

Not everybody was so pessimistic. Holly Wade, a senior policy analyst at the National Federation of Independent Business, said it was impossible to know whether the sequester, should it take effect, would harm the economy. “If the economy contracts overall, that will affect small businesses,” she allowed. But she downplayed the prospect of specific threats to small businesses. “Few small businesses have contracts with the federal government, and few small businesses get loans from the S.B.A.,” she said.

The N.F.I.B., she added, has not taken a position on whether the sequester should go into effect.

*However, as The Agenda has noted before, both of these figures — the total contract dollars awarded to small businesses and the total contract dollars for which small businesses are eligible — are slippery. The total awarded to small companies is almost certainly overstated and the total available to them is likely understated.

Article source: http://boss.blogs.nytimes.com/2013/02/21/many-expect-budget-cuts-to-hit-small-businesses-hard-but-not-the-n-f-i-b/?partner=rss&emc=rss