Theory to Practice:
COVID-19’s economic cost is emerging, and it’s worse than we thought. We need to think outside the box to save small businesses.
March 29, 2020 / Jamie McCall / CDFI, Economic Development, Economy, Jobs & Employment, Public Policy, Small Business, Theory to Practice
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, outlines the importance of evidence-based policy solutions to address the COVID-19 crises. For more information about CSBDF’s research and policy analysis program, click here.
COVID-19 is a public health crisis, but it also continues to wreak havoc on North Carolina’s economy. And although we don’t fully know the extent of the economic damage – and we won’t for some time – we know it will be high. The economic blow could be the worst the country has seen since World War II. Recent economic analysis suggests the macroeconomic impact of these types of events can depress economic growth for up to 40 years.
The first data indicators on the economic consequences of COVID-19 are sobering. Already surveys of the region’s business community from the Federal Reserve show a huge drop in general business outlook and sales across the Carolinas. Last Thursday the Department of Labor reported 3.3 million weekly unemployment claims across the 50 states. The next highest weekly filing number, for comparison, was 695,000 in 1982. North Carolina reported over 100,000 weekly claims just a few days ago. Many of those claims are due to the shuttering of small businesses in the retail, entertainment, and food service industries. With unemployment claims this high, the the chance of a global recession (at a minimum) is likely.
Over the past few weeks, we’ve been looking at what works and what doesn’t work in small business disaster assistance. Admittedly, there is little research consensus on the effectiveness of traditional policies that are used in disaster recovery. In general, we’ve found only a few consistent themes:[i]
Existing disaster policy frameworks do appear to help small businesses, in the short-term.
Businesses that receive disaster financing are more likely to experience short-term revenue increases than those who do not receive assistance.[ii]
When they receive funds, very small businesses (those with less than 50 employees) are more likely to survive in the immediate aftermath after a disaster.[iii]
Businesses that receive affordable financing are more likely to expand post-disaster when other stimulus efforts include strategies like cash grants.[iv]
But not all firms can access to these programs, and their long-term effectiveness is unclear.
There appears to be a weak correlation between long-term businesses survival rates and the amount of disaster assistance the owner receives.[v]
Under-served constituencies are more likely to be denied disaster financing and their businesses are more likely to fail in the recovery period.[vi]
Women-owned businesses are often more likely to receive government disaster financing,but also disproportionately more likely to receive lower amounts.[vii]
Admittedly, existing research tends to examine the effectiveness of small business policies in the context of disasters that are localized (e.g. hurricanes, earthquakes, etc.). Each disaster impacts local economies in different ways. It’s unclear whether such findings hold in the event of a global pandemic. Nevertheless, we think the data provides guidance on what types of policies are more likely to be effective.
One example of innovative thinking: partnerships between local governments and community institutions.
As an unprecedented economic disaster, the COVID-19 pandemic requires innovative and out of the box thinking. COVID-19 represents an opportunity to help small businesses in ways that will help them survive and recover long-term. Professor Tyler Mulligan at the UNC School of Government presents the kind of evidence-based solution that North Carolina’s local governments should consider. Quick provision of financial capital to smaller firms is critical during times like the present pandemic. Professor Mulligan has had laid out a detailed pathway for localities to legally pursue this option through partnerships with external 3rd party organizations. Local governments can set up these partnerships through the School of Government’s Development Finance Initiative, which is one of the state’s thought leaders in this area of work.
But why work with a partner organization? Why not have cities and counties do it themselves? For most local governments, the process of setting up and administering a disaster assistance financing program is difficult. To be effective and in compliance with state law, local government lending programs require a great deal of staff and financial resources. Particularly during disasters, these resources are least likely to be available to localities. North Carolina is fortunate to be home to multiple community financial institutions (including CSBDF) that can partner with local governments to quickly deploy affordable capital in the short and long-term.
The data strongly support the use of partnerships between governments and community-level institutions for disaster assistance.[viii] These partnerships are important because they help promote organizational social capital, which is key to both immediate and long-term disaster recovery.[ix] In past disasters, including hurricanes Matthew and Florence, community-based institutions were efficient distributors of affordable capital to impacted small businesses throughout North Carolina.[x]
And yes – setting up these kinds of partnerships is not easy. Meaningful organizational collaborations rarely are. But we talked with Professor Mulligan over email and he confirmed that these disaster-assistance frameworks can be ongoing and activated on a “as needed” basis. Once the framework is set up, institutional collaborations between local governments and community lenders can be more quickly utilized in future disasters. Municipalities would still need to lawfully appropriate funds for each deployment of capital, but the same administrative structure can be utilized later – minimizing the time to program execution.
Its not hyperbole to say the fate of the state’s small business community hangs in the balance.
Existing government disaster assistance paradigms are insufficient to address the COVID-19 pandemic. Failure to use evidence-based solutions to assist small businesses in this pandemic will only slow the process of economic recovery. It is time for governments and community institutions to think beyond the “usual” response to disasters, because the scope of COVID-19 requires us to do so.
[i] Elizabeth Ann Dietch and Christy M. Corey, “Predicting Long‐term Business Recovery Four Years after Hurricane Katrina,” Management Research Review 34, no. 3 (January 1, 2011): 311–24, https://doi.org/10.1108/01409171111116321; Robert B. Olshansky and Laurie A. Johnson, “The Evolution of the Federal Role in Supporting Community Recovery After U.S. Disasters,” Journal of the American Planning Association 80, no. 4 (October 2, 2014): 293–304, https://doi.org/10.1080/01944363.2014.967710.
[ii] Tomoko Hiramatsu and Maria I. Marshall, “The Long-Term Impact of Disaster Loans: The Case of Small Businesses after Hurricane Katrina,” Sustainability 10, no. 7 (July 2018): 2364, https://doi.org/10.3390/su10072364.
[iii] Meri Davlasheridze and Pinar C. Geylani, “Small Business Vulnerability to Floods and the Effects of Disaster Loans,” Small Business Economics 49, no. 4 (December 1, 2017): 865–88, https://doi.org/10.1007/s11187-017-9859-5.
[iv] Justin Gallagher, Daniel Hartley, and Shawn Rohlin, “Weathering an Unexpected Financial Shock: The Role of Cash Grants on Household Finance and Business Survival Following a Natural Disaster” (Chicago, IL: Federal Reserve Bank of Chicago, 2019), https://www.chicagofed.org/publications/working-papers/2019/2019-10.
[v] George W. Haynes, Sharon M. Danes, and Kathryn Stafford, “Influence of Federal Disaster Assistance on Family Business Survival and Success,” Journal of Contingencies and Crisis Management 19, no. 2 (2011): 86–98, https://doi.org/10.1111/j.1468-5973.2011.00637.x.
[vi] Taylor A Begley et al., “Disaster Lending: ‘Fair’ Prices, but ‘Unfair’ Access,” Working Paper Series (Ann Arbor, MI: Poverty Solutions Institute at the University of Michigan, December 2018); Maria I. Marshall et al., “Predicting Small Business Demise after a Natural Disaster: An Analysis of Pre-Existing Conditions,” Natural Hazards 79, no. 1 (October 1, 2015): 331–54, https://doi.org/10.1007/s11069-015-1845-0.
[vii] Anna Josephson and Maria I. Marshall, “The Demand for Post-Katrina Disaster Aid: SBA Disaster Loans and Small Businesses in Mississippi,” Journal of Contingencies and Crisis Management 24, no. 4 (2016): 264–74, https://doi.org/10.1111/1468-5973.12122; Gary R. Webb, Kathleen J. Tierney, and James M. Dahlhamer, “Predicting Long-Term Business Recovery from Disaster: A Comparison of the Loma Prieta Earthquake and Hurricane Andrew,” Global Environmental Change Part B: Environmental Hazards 4, no. 2 (January 1, 2002): 45–58, https://doi.org/10.3763/ehaz.2002.0405.
[viii] National Research Council, Building Community Disaster Resilience Through Private-Public Collaboration (Washington, DC: National Academies Press, 2011).
[ix] Virgil Henry Storr and Stefanie Haeffele-Balch, “Post-Disaster Community Recovery in Heterogeneous, Loosely Connected Communities,” Review of Social Economy 70, no. 3 (September 1, 2012): 295–314, https://doi.org/10.1080/00346764.2012.662786.
[x] Alexander Meeks, “Accounting for Disaster: Small Business Recovery in North Carolina after Hurricanes Matthew and Florence” (New Haven, CT, Yale University, 2014), https://dspace.mit.edu/handle/1721.1/123974.