In news that may come as a surprise to policymakers though probably not the rest of us, it turns out that small businesses with limited resources were hit hard during the COVID-19 pandemic. Those who suffered the most included business owners who had to struggle with natural disasters including floods and wildfires on top of social distancing and lockdown orders. But the worst sufferers included small- and medium-sized businesses (SMBs) owned by minorities, women, and veterans who just didn’t have the resources to handle slowdowns and (especially) forced closures. While not all business woes over the past two years were the result of political decisions, it’s fair to say that pandemic policy proved more damaging than hurricanes to the most vulnerable entrepreneurs.
“A study carried out by researchers at the National Institute of Standards and Technology (NIST) and the National Oceanic and Atmospheric Administration (NOAA) revealed that businesses run by minorities, women and veterans, which they call historically underrepresented group operated (HUGO) businesses, were dealt a much worse hand by the pandemic than other businesses,” NIST announced last week. “What’s more, the team saw that HUGO businesses reported harsher downturns from COVID-19 alone than even non-HUGO businesses that were struck by natural disasters on top of COVID-19.”
The findings are published in a paper in the International Journal of Disaster Risk Reduction and, while they’re eye-opening, there’s also a common-sense quality to what the researchers have to say. Basically, people who are already strapped are going to be hit harder by tough times and restrictive policies.
“Pre-pandemic, there were 30.7 million small businesses in the U.S., which accounted for 99.9% of all U.S. business; of these, approximately 18.3% were minority-owned and about 19.9% were owned by women for reference year 2018,” the researchers write. “From the start of the COVID-19 pandemic, the number of active SMBs plummeted, with minority and female-owned businesses disproportionately impacted.”
Why would businesses owned by minorities, women, and veterans be slammed so much harder than other small firms during the pandemic? It turns out that they tend to be smaller, newer, and have fewer resources than other businesses, which limits access to capital as well as resilience in the face of downturns. Compared to white-owned businesses, black-owned operations are more likely to be owner-operated, home-based, and have no employees. They also tend to rely on funding from personal and family savings. Veteran-owned businesses have similar challenges borrowing money, and also run up against “difficulty with the transition from military to civilian life via loss of connection with the military community and loss of sense of purpose/camaraderie.”
Other sources agree about the hurdles faced by minority entrepreneurs. “Across the nation minority-owned businesses face the obstacles of access to capital, access to markets and access to social networks, all of which are essential for any business to increase in size and scale,” reported a 2010 paper from the U.S. Department of Commerce’s Minority Business Development Agency.
Difficulty in raising capital makes it difficult to grow a business, but it also means that there’s less to put aside for such hiccups as natural disasters and economic crunches caused by pandemics. That leaves suffering entrepreneurs looking for help in order to recover. “However, historically, there are limited paths for SMB operators to finance disaster recovery after the fact, especially for HUGO SMBs,” the NIST and NOAA researchers noted. That left many minority-owned small businesses with limited recourse.
“Based on the self-reported responses, we found that businesses belonging to the HUGO group are more likely to experience things like business closure, decreased revenue or decreases in the number of customers,” commented Payam Aminpour, a NIST postdoctoral research fellow and study co-author.
Interestingly, arbitrary designations during the pandemic of some businesses as “essential” and therefore immune to lockdown orders had a particularly nasty impact on communities about which many politicians claim to be particularly concerned. “It is less likely for sampled HUGO SMBs to be designated as a business providing essential services during the pandemic, which may amplify impacts of local guidance during COVID-19, such as government mandated closures,” researchers found.
It was hard enough on businesses when virus-averse customers chose to limit trips to stores, restaurants, and hairdressers. But forced closures substantially worsened the harm. “Local implementation and enforcement of lockdown restrictions and voluntary behavioral responses as reactions to the perceived local COVID-19 spread both played a role, but enforcement of mandatory restrictions may have had a larger impact on sales losses,” found economists Robert Fairlie and Frank Fossen in a California-focused paper published last year by the National Bureau of Economic Research.
Politicians who claimed to be helping especially vulnerable communities with restrictive policies were, therefore, inflicting disproportionate damage on them instead. This isn’t the first time we’ve seen interventions in the economy have an especially harsh impact on specific populations. Falsely defended as protections for consumers, occupational licensing laws raise barriers to entry to people who want to enter trades and start businesses. Logically enough, those barriers are most challenging for people who have less capital to pay for fees and mandatory classes, and less ability to navigate regulatory mazes.
“The higher the rate of licensure of low-income occupations, the lower the rate of low-income entrepreneurship,” reported economist Stephen Slivinski in a 2015 Goldwater Institute study that was subsequently cited by the White House. Slivinski found especially negative impacts on immigrants trying to get established in the United States, but anybody with limited resources would be hampered by hurdles set in their way.
The takeaway from this study about the effect of COVID-19 on small businesses is the same one we should gain from any disruption of society, especially when it’s deliberate. That is, those most affected are certainly going to be the people with the fewest resources and the least ability to defend themselves. Politicians who claim to care about vulnerable populations should keep in mind that those are the people most likely to be harmed by the dictates and restrictions they impose.
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