By : Fredner Prevalus
An old adage says don’t lose sight of the forest for the trees. There’s an incredible amount of wisdom and insight in this expression. The principle is certainly applicable to the current COVID climate as it relates to small businesses. A prudent business owner/entrepreneur will have awareness of not only the daily particularities of their business and directly related affairs, but will have awareness of broader events that can have an impact on the operation of their business. In our brief discussion, we’ll provide the small business owner with some basic theoretical tools to help them understand the economic significance of the current COVID pandemic, the economic stimulus and the impact that these phenomena can have on their small business. This will be followed with some guidance on how to mitigate the effects of the pandemic and better prepare for future political and economic disruptions.
THE BIG PICTURE
To help us understand the economic and overall impact of COVID 19, a very brief and highly simplified review of short-run macro-economic theory may be helpful. The
steady state of a national economy with respect to the price level and GDP is determined by the interplay between short-run aggregate supply-SRAS-and aggregate demand-AD. Factors effecting aggregate demand includes consumption, investment, government spending and net exports. Aggregate supply represents the collective productive capacity of a nation as reflected by factors of production including capital, labor and technology. Exogenous shocks are acute events that shift either the aggregate supply or the aggregate demand curves or both. The difference between the new equilibrium position and the original steady state position is what is described as inflation/deflation or a recession/expansion depending on the nature of the impact.
APPLICATION TO COVID
Applying this theoretical framework to the current COVID pandemic, we witnessed widespread government induced businesses closures because of the lockdown. This is described as a negative short run aggregate supply shock(SRAS0=>SRAS1) which leads to a dramatic reduction in output-recession- and upward pressure on the price level-inflation. To mitigate the harmful effects, the government and the federal reserve applied expansionary fiscal and monetary policy measures through direct spending and interest rate reductions respectively. This represents a positive shift in aggregate demand(AD0=>AD1) helping to minimize the effects of the recession, but this also places further upward pressure on inflation.
THE EMPIRICAL EVIDENCE
Empirical data has largely confirmed the accuracy of the traditional macro-economic predictive models. Data from the U.S. BEA-Bureau of Economic Analysis-reveals that during the first two quarters of 2020, there was a dramatic reduction in real GDP/output. This corresponds with the widespread business closures and exogenous aggregate supply shock described in the theoretical model. In the third quarter of that year, there
was a dramatic restoration of output and more stabilized real GDP growth during successive quarters. This corresponds to the effects of the economic stimulus bill-CARES Act-passed at the end of the first quarter and represents the positive short-run aggregate demand shock described. Furthermore, the model predicted that the combined effects would lead to dramatic rates of inflation which is exactly what occurred starting in May 2020 based on data from the U.S BLS-Bureau of Labor Statistics.
SMALL BUSINESSES/ENTREPRENEURS: THE HARDEST HIT
Data from a BLS report shows that during the onset of the pandemic, 43% of businesses had temporarily closed. There was regional variation with the highest closure rates occurring in the Mid-Atlantic, New England and Pacific regions at 54%,47%,46% respectively. There was also industry variation where the highest closure rates occurred in personal services, arts & entertainment, tourism/lodging and restaurant/bar at 86%,,70%,60%, 58% respectively. In addition, there was significant variation among communities of color relative to the general population. An independent university study found that the reduction in business activity between February and April 2020 in African American owned businesses fell by 41%. This was twice the rate of the general population.
WEATHERING THE ECONOMIC STORM
The national and international events that have transpired during the past couple of years relating to the pandemic can seem dismal, daunting, and overwhelming. However, there are some strategies and resources that a small business owner can use to help their business survive. The first strategy is to take advantage of available government programs. The government has passed several economic stimulus packages since the inception of the pandemic to provide relief to small business owners which includes the PPP- Paycheck Protection Plan administered by the SBA-Small Business Administration-and other programs. Next, consider pivoting which is a way of adopting creative strategies to adapt to new challenges and demands facing your business. For instance, some companies involved in textile modified their product offerings to include face masks. A pivot can also include changes in the methods of service delivery such as expanding online operations which can also minimize costs. A small business owner should also renegotiate their contracts with their landlords, suppliers, IT providers, benefits providers, and others to secure more favorable terms or shop around for more cost-effective providers. In short, the business/economic cycle is a reality of life. Experts predict that one can expect at least one recession every five years on average. With greater concerns about the effects of climate change, social/political unrest and military conflicts, economic shocks will likely be more frequent and severe in the future. Although sometimes known pejoratively as “the dismal science” due to some of its bleak predictions, or seemingly esoteric methods, economics can still be a useful tool in the savvy businessperson/entrepreneur’s toolkit. The pandemic has taught us that seemingly irrelevant and unrelated global phenomena can have a significant impact on small businesses through their effects on the economy. Having a general understanding of the nature of these economic effects can help a small business owner better predict and most importantly better prepare for inevitable future events.
Picture Sources
https://i0.wp.com/sninews.org/wp-content/uploads/2020/04/Economic-Storm.jpg?fit=1008%2C711&ssl=1
https://www.bea.gov/system/files/gdp1q22_adv_chart-01.png
https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
Sources
https://www.federalreserve.gov/releases/h15/
https://www.bea.gov/data/gdp/gross-domestic-product
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7461311/
https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm