The Law of Unintended Consequences Strikes Again

The federal government responded to the coronavirus pandemic with fiscal stimulus (loans to businesses, cash grants to citizens, delaying tax payments, etc.) and monetary stimulus (cutting interest rates, buying bonds, etc.).  While it appears the government’s unprecedented actions have stopped a full-blown depression, at least for now, I fear the lasting effects of its actions.

Prior to the pandemic, entrepreneurship was already in decline in the US as measured by the creation of start up companies and the size of companies most Americans work for.  

The pandemic will further exacerbate this trend.  Would you quit a job and start a business today?  Even if you are willing to do so, would a bank lend you money?  In good times, banks like to lend to people that don’t need money.  In bad times, this statement is even more true.  Banks are bracing for huge defaults later this year.  They are not going to lend to startup businesses.  That means the capital necessary to start a business becomes more expensive.  More expensive capital means lower returns.  That makes starting a business less attractive.  

The fiscal stimulus provided by Uncle Sam is being done with borrowed money.  At some point, that money needs to be paid back.  That means higher taxes or dramatic spending cuts.  I don’t see our politicians of either ilk having it in them to cut spending.  That leads us to higher taxes.  Who is better equipped to pay higher taxes and has the pricing power to pass on higher prices, large companies or small companies?  Advantage: large companies.  

Interest rates are at record low levels.  That favors companies (and people) who have good credit.  That does not help companies or people who have poor credit.  Current SBA 7-A loan rates, a popular government loan program for small businesses, range from 6 to 8%.

Alphabet, the parent of Google, just sold $10 billion in bonds yielding 0.8% (yes, 0.8%) for seven year maturities and 2.25% for thirty year maturities.

Guess who has the advantage again?  

Dynamism is what separated the US economy from the rest of the world over the last 75 years.  Creative destruction allowed startups to thrive and become large companies.  With less startups, we will have less creative destruction.  The government needs to create programs that encourage startups and reward risk taking.  If that does not happen, the US economy will stagnate.  

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