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Theory to Practice

Small businesses, economic development, and the black swan of a COVID-19 pandemic.

Theory to Practice is an occasional blog series which explores the intersection of economic development research and current issues of debate within the practitioner community. In this post Jamie McCall, CSBDF’s Vice President of Policy and Research, explores how economic “black swan” events like the COVID-19 pandemic might impact the small business community. For more information about CSBDF’s research and policy analysis program, click here.

At this point, it seems likely the COVID-19 virus will have an impact on the United States (and North Carolina) economy. The extent and duration of that impact is still unclear. However, recent actions by the Federal Reserve point toward growing concerns about an economic downturn. On the evening of March 15, the Federal Reserve’s Open Market Committee made the extraordinary emergency decision to cut interest rates to near 0. The federal funds rate, which is used as a basis for many forms of consumer lending, now sits between 0.00% and 0.25%. This follows an emergency rate cut just two weeks ago on March 3, and it represents one of the largest drops since the central bank’s response to the financial crises of 2007-2009.[1]

Uncertain Times for Small Businesses

So what does all of this mean for small business owners? If there is any positive note here, it is that the cost of credit is about to go even lower. Financial institutions generally peg their lending terms to these rates, and a cut of this magnitude means the cost of credit products will be lower across the board. But why did the Federal Reserve’s Open Market Committee make this decision? This type of action by the country’s central bank is meant to reinforce investor confidence in markets.[2]

But research shows the ability of central banks to influence economic outcomes through these actions has been weakening over time.[3] And obviously changes in monetary policy have no direct effect on the public health crises and public fears about the COVID-19 virus. The pandemic the United States now faces will bring a variety of challenges, and all of them are in some way connected to our economy.

For the economy, the COVID-19 virus represents a “black swan” event. A black swan event refers to a rare, large-scale, and unexpected incident that carries potentially large social and/or economic impacts.[4] The event(s) can be positive or negative, it just must be something improbable with outsized consequences. The September 11 attacks are a classic example of a negative black swan event. It’s too early to say if scholars will categorize COVID-19 as a black swan event, but it is at least within the realm of possibility.

Learning From Past Mistakes

If history is any clue, most of the negative economic impact of COVID-19 will not be from its effects on productivity or healthcare costs. Data from past pandemics like the 2003 SARS outbreak show about 80% of the negative economic impact was from aversion behavior.[5] Simply put, aversion behavior is fear. Countries with SARS outbreaks saw a 1% to 5% decline in economic growth when individuals did not engage in their normal social and work activities.[6]

It goes without saying that such effects have a disproportionately large influence on small businesses. Small businesses tend to be oriented toward Main Street service-related sectors like restaurants and retail stores. Based on history, these are exactly the types of firms that see the largest negative economic impact from aversion behavior.

Many North Carolina Small Firms at Risk

The chart below summarizes a few industry sectors that have a high small business concentration which are particularly vulnerable to aversion behavior [7]. The data only include establishments with 0 to 19 employees. For example, 86% of retail trade firms in North Carolina are small businesses with less than 20 employees. In 2017, during the midst of an economic expansion, those businesses employed 168,073 people and generated annual payroll revenues of $4.3B. These types of firms are highly likely to see extended negative impacts from COVID-19.

A Holistic Policy Approach

Events like COVID 19 often cause governments to be more amenable to moving outside of their normally incremental methods to crafting public policy.[8] Historically, large scale black swan events – whether they be natural (Hurricane Katrina[9]) or man-made (the 2008 financial crises[10]) – create punctuation in the normal equilibrium of policy. The issue is not whether we will have a large policy response with COVID-19. The question is whether the response will be effective for entrepreneurs. Public sector responses to these events are myriad and multi-faceted, but historically they tend to overlook assistance to small firms.[11]

Thus far, the COVID-19 response is no exception to that general rule. Current policy proposals include suspending payroll taxes and creating a national sick leave policy. Regardless of the merit of these proposals, they tend to benefit larger businesses. On the small business front, the SBA has been authorized to provide small business loans for firms that suffer economic injury related to COVID-19. While we think this is a good start, more needs to be done. There is a need for a more holistic approach to assist current and aspiring small business owners:

  • Long-Term Financing Assistance: Short-term disaster lending facilities are likely insufficient for small business needs. Emergency credit assistance is a start, but research shows lending to small firms will quickly dry up in a downturn.[12] There will be a need to ensure credit flows to small firms over the next few years, as data shows entrepreneurs will likely face systemic credit rationing.[13],[14]

  • Increased Provision of Technical Assistance: Affordable financing is of little use if entrepreneurs do not how to deploy funds in a sustainable manner. Particularly during times of economic distress, training is essential.[15] Technical assistance programs in critical areas are offered by a variety of support organizations – including Chambers of Commerce, SBDTCs, and community nonprofits like CSBDF.

  • Strengthening Social Networks: Businesses who succeed during economic downturns tend to have robust social capital networks. Social capital enables small firms to rely on each other and their suppliers in ways that promote sustainability. Promoting entrepreneurial social capital networks must be done at the community level. CSBDF’s research concurs with the scholarly consensus that while the process of building social capital networks is not easy, it is extremely effective.[16]

The Need to Act Now

Beyond a health concern, COVID-19 is a macroeconomic event which will likely present severe problems for entrepreneurs and small business owners. Though its still too soon to know for sure, those problems will likely be related to an economic downturn. We know what happens in the wake of an economic downturn when small businesses do not receive support. In the 2007-2009 recession small firms were hit hard due to both poor sales and high economic uncertainty.[17] In an economic contraction, certain types of small firms – for example those in rural places – are often hardest hit.[18]

Empirically, we know that small businesses are the engine of state economies and the foundation of sustainable growth.[19] We encourage state and federal policymakers to consider the vital importance of maintaining the country’s vibrant small business ecosystem during this turbulent time.


[1] Federal Reserve System, “Effective Federal Funds Rate,” FRED, Federal Reserve Bank of St. Louis (FRED, Federal Reserve Bank of St. Louis, 2020),

[2] Dosoung Choi and Frank C. Jen, “The Relation between Stock Returns and Short-Term Interest Rates,” Review of Quantitative Finance and Accounting 1, no. 1 (January 1, 1991): 75,

[3] Caroline Jardet, “Why Did the Term Structure of Interest Rates Lose Its Predictive Power?,” Economic Modelling 21, no. 3 (May 1, 2004): 509–24,

[4] Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, 2nd ed. (New York: Random House Trade Paperbacks, 2010).

[5] Paul K. J. Han et al., “Communication of Scientific Uncertainty about a Novel Pandemic Health Threat: Ambiguity Aversion and Its Mechanisms,” Journal of Health Communication 23, no. 5 (May 4, 2018): 435–44,

[6] Sulzhan Bali, Kearsley A Stewart, and Muhammad Ali Pate, “Long Shadow of Fear in an Epidemic: Fearonomic Effects of Ebola on the Private Sector in Nigeria,” BMJ Global Health 1, no. 3 (November 9, 2016),

[7] US Census Bureau, “County Business Patterns Dataset,” 2017,

[8] Frank Baumgartner and Bryan Jones, Agendas and Instability in American Politics, 2nd ed. (Chicago, IL: University of Chicago Press, 2009),

[9] Chris Koski and Samuel Workman, “Drawing Practical Lessons from Punctuated Equilibrium Theory,” Policy & Politics 46, no. 2 (April 30, 2018): 293–308,

[10] Nancy Bermeo and Jonas Pontusson, eds., Coping with Crisis: Government Reactions to the Great Recession (New York City, NY: Russell Sage Foundation, 2012).

[11] Michelle M. Harner, “Mitigating Financial Risk for Small Business Entrepreneurs,” Ohio State Entrepreneurial Business Law Journal 6 (2011): 469.

[12] Burcu Duygan-Bump, Alexey Levkov, and Judit Montoriol-Garriga, “Financing Constraints and Unemployment: Evidence from the Great Recession,” Journal of Monetary Economics 75 (October 1, 2015): 89–105,

[13] Stijn Claessens, M. Ayhan Kose, and Marco E. Terrones, “What Happens during Recessions, Crunches and Busts?,” Economic Policy 24, no. 60 (October 1, 2009): 653–700,

[14] Judit Montoriol-Garriga and J Christina Wang, “The Great Recession and Bank Lending to Small Businesses,” Working Papers (Boston, MA: Federal Reserve Bank of Boston, 2016),

[15] Avraham Shama, “Marketing Strategies during Recession: A Comparison of Small and Large Firms,” Journal of Small Business Management 31, no. 3 (1993): 62–70.

[16] Sameer Prasad, Jasmine Tata, and Xuguang Guo, “Sustaining Small Businesses in the United States in Times of Recession: Role of Supply Networks and Social Capital,” Journal of Advances in Management Research 9, no. 1 (January 1, 2012): 8–28,

[17] Aysegul Sahin et al., “Why Small Businesses Were Hit Harder by the Recent Recession,” Current Issues in Economics and Finance 17, no. 4 (2011): 1–7,

[18] Martina Battisti, David Deakins, and Martin Perry, “The Sustainability of Small Businesses in Recessionary Times : Evidence from the Strategies of Urban and Rural Small Businesses in New Zealand,” International Journal of Entrepreneurial Behavior & Research 19, no. 1 (January 1, 2013): 72–96,

[19] D. Keith Robbins et al., “An Empirical Assessment of the Contribution of Small Business Employment to U.S. State Economic Performance,” Small Business Economics 15, no. 4 (December 1, 2000): 293–302,

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