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Keep the cash home

How government agency spending can save small businesses

Dr. Dale G. Caldwell is a professor and the executive director of the Fairleigh Dickinson University Rothman Institute of Innovation and Entrepreneurship.

Dale G. Caldwell is a professor and the executive director of the Fairleigh Dickinson University Rothman Institute of Innovation and Entrepreneurship. – NJBIZ FILE PHOTO

The mandatory government shutdown of “non-essential” businesses because of the COVID-19 pandemic has crippled the state’s economy. Few people could have predicted the extent of the economic devastation caused by this necessary health-driven business freeze. The most visible demonstration of the impact of the mandatory closing are the unemployment numbers. Tragically, more than one million New Jersey workers filed claims for unemployment insurance in the first two months of the shutdown. That record number represents more than double the total unemployment claims in 2019. The stay-at-home order led to a major reduction in business revenue which resulted in the layoffs of hundreds of thousands of workers who filed jobless claims. Fortunately, the governor is starting to reopen businesses. However, that may not be enough without government agencies supporting small businesses.

The federal and state government have attempted to help businesses with stimulus grants and loans in an effort to reduce unemployment. Unfortunately, these programs are not providing sufficient cash to enable many businesses to keep their employees. This is clearly an incredibly challenging time for every sector of society in New Jersey. The only positive in a flood of bad news is that the crisis has made it clear to everyone who is paying attention that the New Jersey and national economy is driven by small businesses. In 1933, during the Great Depression, the unemployment rate reached an incredible 24.9 percent. In April of 2020, the United States economy lost a record 20.2 million jobs bringing the unemployment rate to 14.7 percent, the highest rate since the Great Depression. In contrast, the Dow Jones Industrial Average has been recovering steadily, rising from 18,213.65 on March 23 to a close of 24,331.32 on May 8.

The question that many people are asking how the stock market could be thriving during a time of record unemployment. The answer is simple. According to the U.S. Census Bureau, large businesses employ approximately 68 million people (1.84 million in New Jersey) while small businesses hire 61 million people (1.83 million in New Jersey). When the government shuts down the economy, most big businesses have sufficient cash on hand to survive. However, small businesses have to lay off workers almost immediately when their revenue dries up because they have limited cash available. The Dow is increasing because investors are confident that big businesses will be successful after the crisis is over. Unemployment is increasing at the same time because small businesses are not sure if they can survive the pandemic.

The only way that New Jersey and the United States can restart the economy is to provide the level of stimulus that small businesses need to stay open and hire employees. Ironically, federal, state and local governments lack the resources to support small businesses because the closed small businesses are not able to generate profits to pay the taxes needed to fund government activities. Public sector leaders therefore have a cyclical problem that is only getting worse the longer the crisis continues. The only way that government can significantly increase the revenues of small business job creators is to push public agencies to support New Jersey small businesses.

Municipal, county and state agencies and public school districts spend billions of dollars with out-of-state vendors every year. Unfortunately, there is no public record of the percentage of this discretionary spending that is used to pay New Jersey businesses. This situation presents a tremendous opportunity for government to provide an economic stimulus to small New Jersey businesses without promising to give businesses money that it does not have. I believe that a Public Spending Program under which every government entity that receives state funding would be required to report, online, how much money they spend with New Jersey certified veteran-owned, woman-owned and minority-owned businesses. Such a program would provide a powerful stimulus at a time when New Jersey businesses need it the most.

These three categories of ownership account for a significant number of small businesses yet they receive a disproportionately small amount of the loans and grants available. The Small Business Administration indicates that among small businesses, 39 percent are women-owned, 29.3 percent are minority-owned and 9.1 percent are veteran-owned. However, according to the Center for Responsible Lending, more than 90 percent of these businesses have been shut out of the current stimulus program. If the revenues of the Newark, Jersey City and Camden public schools are combined their total spending would be an incredible $2.1 billion. If just 5 percent of that money is used to hire vendors – companies providing supplies, trainers, curriculum developers, food service providers, transportation companies, etc. – that would be $105,250,000 that could be spent by just three school districts with New Jersey veteran, woman and minority certified businesses. This money would provide a much-needed stimulus to the economy that would increase exponentially if every school district and municipality in the state hired New Jersey certified businesses whenever possible.

Unfortunately, the state does not have enough money to continue to offer small business stimulus programs indefinitely. A public spending program would enable the Murphy administration to use public spending transparency to influence public entities to provide a necessary economic stimulus to small businesses at no additional expense to taxpayers. The PSP is one of those rare win-win programs that can be initiated with an executive order by the governor that influences the purchase of goods and services from New Jersey certified businesses. Hopefully, that will influence all of us to “Buy Local-Buy Jersey” and turn around this dismal economy.

Dale Caldwell is a professor and the executive director of the Fairleigh Dickinson University Rothman Institute of Innovation and Entrepreneurship, which has organized the New Jersey Family Business Awards for 27 years. He teaches Family Business Management and is the host of the TV show Family Business World.

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