Small Business

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Poverty and microcredit

Ever since I read about Muhammad Yunus winning the Nobel Peace Prize for his Grameen Bank in his native Bangladeshi, I wondered why no one in the United States had thought of doing something similar for small businesses especially as credit got tighter.  Buried in the business section of yesterday’s New York Times was the story of the Grameen Bank in the Jackson Heights section of Queens.  There was microcredit offered in parts of the United States, I just didn’t know about it.  This, according to the Times story by Shaila Dewan, is how it works.

On a recent Thursday, dozens of Latina immigrants clustered in a small, noisy second-floor office in the Jackson Heights neighborhood of Queens, waiting for one of a half-dozen loan officers to call their names and hand over a check. Children loitered in the stairwell or sprawled, calflike, over their mothers’ laps.

The loans were recorded the old-fashioned way, with ink, in green passbooks that enumerated the borrowers’ commitments to “exercise responsible financial behavior,” “seek preventative health care” and meet each week in a “comfortable and safe place.” Aside from these words, little secured the loans in question, which ranged from $1,500 to $8,000.

In the United States, microcredit has generally been defined as loans of less than $50,000 to people — mostly entrepreneurs — who cannot, for various reasons, borrow from a bank. Most nonprofit microlenders include services like financial literacy training and business plan consultations, which contribute to the expense of providing such loans but also, those groups say, to the success of their borrowers.

Grameen America dispenses with the advice and makes smaller, less formal loans at a lower cost. It hews closely to the model developed in Bangladesh: borrowers form groups of five, approve one another’s loans and make weekly payments at 15 percent annual interest, a rate comparable to those charged by other nonprofit lenders. That is far less than the rates of payday lenders, which can charge 400 percent or more.

If everyone in the group repays on time, each member is entitled to a larger loan in the next cycle. Members are supposed to be below the federal poverty line when they join and use the money for entrepreneurial purposes. Grameen does not ask if they are legal residents.

What are the women doing with the loans?

In Jackson Heights, borrowers said they used the money to buy costume jewelry, Herbalife nutritional supplements or Mary Kay cosmetics for resale in home-based businesses or door to door, many supplementing income from another job like housecleaning. Some make cakes or empanadas; others tailor clothing or sell flowers. One woman buys designer clothes at closeouts and resells them from a tiny shop on the second floor of a commercial complex; another sends clothes home to the Dominican Republic, where her sister sells them on the street.

S. M. Nural Kabir fills out papers for borrowers, many of whom lack access to credit

S. M. Nural Kabir fills out papers for borrowers, many of whom lack access to credit

The question is:   Will selling Mary Kay bring a lot of families out of poverty?  Two women with storefront business were profiled in the story.

…Guadalupe Perez, 51, took a loan when business fell off during the recession. She and her husband were having trouble paying rent on the party decoration store they had started with their life savings. “It opened up a way for me to keep my business,” she said through an interpreter, standing near a display of ribbons and wine glasses that she had embellished with glittery designs. “I wanted to hear what the rules were for Grameen because I was afraid of going to a bank. It was a loan that I could pay little by little; I felt it was a good choice for me.”

Ms. Perez has used subsequent loans to expand the size of her store and now plans to invest in enough tablecloths to decorate two parties at the same time. But the loans have not increased her enthusiasm for entrepreneurship. Asked whether, had she the chance to do it over, she would go into business for herself, her answer was short and simple: no.

Ms. Perez said she and her husband worked every day and earned $500 to $600 a week, or about $29,000 a year — a “very low” income by federal standards for New York. They are not able to save.

…

Elizabeth de Jesus, 45, is a hairdresser who, with Grameen’s help, achieved her dream of opening her own salon in Corona, Queens. But she is unable to estimate her annual income. “I don’t know because I don’t keep it,” she said. “I spend it all on the payments, on the rent, on food. I spend it every week.”

The life of a small business owner is always difficult and I was surprised that there wasn’t more financial planning and management training provided by Grameen to those receiving loans.  There is, however,  one very bright light in the story:  establishing credit.

Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs.

Nayrobi Gonzalez de Quiroz, 26, recently received her first Grameen loan but decided not to follow through with her plan to buy handbags for resale. After using about $200 to pay off a debt, she said, she decided it was safer to leave the money in the bank and make the payments from her earnings as a manicurist.

“Here, you have to have good credit,” she said. “I have a young son and I have to think about his future.”

The results appear to be mixed.

Good data on the benefits of microcredit are scarce, and the few randomized studies have not demonstrated that it substantially improves prosperity in developing countries. In the United States, data collected by the Field program of the Aspen Institute show that microloans yield significant increases in income and create jobs. Joyce Klein, the program’s director, said the surveys had limitations but more rigorous studies that included randomized control groups would be prohibitively expensive.

Grameen says that its loan recipients have increased their incomes by an average of $2,500 during each six-month loan cycle, and that one in five hires an additional worker. But Katherine Rosenberg, a senior vice president at Grameen, acknowledged that pinning down income data is the group’s biggest challenge, because borrowers tend to think in terms of whether they have enough to cover their next bill, not how much they make over all. Ms. Rosenberg said many clients may not earn more but instead work less, dropping one of several low-wage jobs or taking advantage of the flexibility of self-employment to spend more time with their children.

Peer pressure produces a good repayment rate on microloans and I know they are not a magic bullet and way out of poverty, but it appears they have other benefits for those women who want to start businesses and/or build credit.   There is no easy way to break the cycle of poverty.

Photograph:  Ruth Fremson/The New York Times

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The myth of small businesses and healthcare

One of the favorite talking points of the Republicans who oppose the Affordable Care Act (ACA) is that it will kill job growth and hurt small businesses.  Quite honestly, I think that their government shutdown which they admit is largely about defunding/delaying/repealing the ACA is doing a fine job of doing both.  Forget what they think “Obamacare” will do.  But in the current issue of the New Yorker, James Surowiecki takes on the myth, at that, according to him, is what it is, that the ACA will do horrible, terrible, no good things to the economy.

The G.O.P.’s case hinges on the employer mandate, which requires companies with fifty or more full-time employees to provide health insurance. It also regulates the kind of insurance that companies can offer: insurance has to cover at least sixty per cent of costs, and premiums can’t be more than 9.5 per cent of employees’ income. Companies that don’t offer insurance will pay a penalty. Republicans argue that this will hurt companies’ profits, forcing them to stop hiring and to cut workers’ hours, in order to stay below the fifty-employee threshold.

How much of this is true?

The story is guaranteed to feed the fears of small-business owners. But the overwhelming majority of American businesses—ninety-six per cent—have fewer than fifty employees. The employer mandate doesn’t touch them. And more than ninety per cent of the companies above that threshold already offer health insurance. Only three per cent are in the zone (between forty and seventy-five employees) where the threshold will be an issue. Even if these firms get more cautious about hiring—and there’s little evidence that they will—the impact on the economy would be small.

Meanwhile, the likely benefits of Obamacare for small businesses are enormous. To begin with, it’ll make it easier for people to start their own companies—which has always been a risky proposition in the U.S., because you couldn’t be sure of finding affordable health insurance. As John Arensmeyer, who heads the advocacy group Small Business Majority, and is himself a former small-business owner, told me, “In the U.S., we pride ourselves on our entrepreneurial spirit, but we’ve had this bizarre disincentive in the system that’s kept people from starting new businesses.” Purely for the sake of health insurance, people stay in jobs they aren’t suited to—a phenomenon that economists call “job lock.” “With the new law, job lock goes away,” Arensmeyer said. “Anyone who wants to start a business can do so independent of the health-care costs.” Studies show that people who are freed from job lock (for instance, when they start qualifying for Medicare) are more likely to undertake something entrepreneurial, and one recent study projects that Obamacare could enable 1.5 million people to become self-employed.

English: This is a diagram depicting the perce...

English: This is a diagram depicting the percentage in US who have no health insurance by age. (Photo credit: Wikipedia)

Remember that large employers get tax incentives to provide health insurance.  The ACA will actually do the same for small businesses.

Obamacare changes all this. It provides tax credits to smaller businesses that want to insure their employees. And it requires “community rating” for small businesses, just as it does for individuals, sharply restricting insurers’ ability to charge a company more because it has employees with higher health costs. And small-business exchanges will in effect allow companies to pool their risks to get better rates. “You’re really taking the benefits that big companies enjoy, and letting small businesses tap into that,” Arensmeyer said. This may lower costs, and it will insure that small businesses can hire the best person for a job rather than worry about health issues.

Surowiecki ends his short piece with this kicker.

The U.S. likes to think of itself as friendly to small businesses. But, as a 2009 study by the economists John Schmitt and Nathan Lane documented, our small-business sector is among the smallest in the developed world, and has one of the lowest rates of self-employment. One reason is that we’ve never had anything like national health insurance. In a saner world, changing this would be a reform that the “party of small business” would celebrate.

So it seems that implementation of the ACA with small business health insurance exchanges will actually help lead to more job growth.

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Putting the minimum wage in persective

Dan Wasserman of the Boston Globe explains why we need an increase in the minimum wage.

Wasserman 6-5

This needs to be a national increase.  Yes, I know.  When businesses have to pay more, they won’t hire.  But there is another side to their objection.  If they pay people more, then there will be more spending and more business and they can hire.  Plus there will be more payroll taxes paid on the larger salaries.  And more state and local taxes.  Conservatives would be happy because some folks wouldn’t need food stamps as a lot of working people do now.  Seems like a winner.

I know that some economists argue that increases always lead to higher unemployment, but a large number of small businesses already pay wages higher than the legal minimum.

Put simply, small businesses are our economy. Given that it’s still recovering, the economy needs all the help it can get to make it over the proverbial hump and flourish. Small businesses will play a key part in that journey.

Given their importance, politicians should stand up and take notice when small business owners say they strongly support a policy that has and will continue to elicit political fights of the knockdown drag-out variety, such as increasing the minimum wage. The minimum wage is a business issue that impacts a wide swath of small firms, and according to scientific opinion polling Small Business Majority released this week, two-thirds of them support increasing it and adjusting it annually to keep up with the cost of inflation.

Some have claimed that raising the minimum wage would put small firms out of business because they won’t be able to afford to pay their workers more. Our polling found a whopping 85 percent of small businesses across the country already pay their workers more than the minimum wage, though.

“You need to pay workers enough to survive. It’s in your best interest as a company because if you don’t there is nothing tying them to you.” That’s Clifton Broumand, the president of Man and Machine, a specialty computer product business in Landover, Md., who pays his workers more than the minimum wage and supports increasing it. “I want my employees to have the chance to grow and improve here. I want them to want to stay so we don’t have a lot of turnover. And I pay over minimum wage because it’s the right thing to do.”

The President proposed an increase to $9 in his State of the Union Address:  Let’s just do it.

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The President, Big Business and the Republicans

You may have noticed that the President has met more than once with various business groups and corporate leaders about fiscal and economic issues.  In today’s New York Times, Jackie Calmes has an interesting analysis.

Corporate chiefs in recent months have pleaded publicly with Republicans to raise their taxes for the sake of deficit reduction, and to raise the nation’s debt limit without a fight lest another confrontation like that in 2011 wallop the economy. But the lobbying has been to no avail. This is not their parents’ Republican Party.

In a shift over a half-century, the party base has been transplanted from the industrial Northeast and urban centers to become rooted in the South and West, in towns and rural areas. In turn, Republicans are electing more populist, antitax and antigovernment conservatives who are less supportive — and even suspicious — of appeals from big business.

The article quotes Senator Cruz

“One of the biggest lies in politics is the lie that Republicans are the party of big business,” Ted Cruz, a new senator from Texas and a Tea Party favorite, told The Wall Street Journal during his 2012 campaign. “Big business does great with big government. Big business is very happy to climb in bed with big government. Republicans are and should be the party of small business and of entrepreneurs.”

Senator Cruz

This brings me to the question, once more, as to who is actually represented by people like Senator Cruz.  OK, I get the small town and rural but what I don’t get is what exactly does he and his wing of the party want to do for those they represent.  My husband would tell me that they don’t want to do anything except blow up government.  Maybe so, but how politically popular would it be to do away with money for roads and railroads that move the farm products that are produced?  (Heard of infrastructure, Senator?)  Or the rural subsidies that provide phone and internet services?  Or the various farm subsidies?  I admit, that I’m not clear on where they are on the corporate farm versus the family farm issue.

But big business isn’t interested in blowing up the government.

Big business is so fearful of economic peril if Congress does not allow the government to keep borrowing — to pay creditors, contractors, program beneficiaries and many others — that it is nearly united in skepticism of, or outright opposition to, House Republicans’ demand that Mr. Obama first agree to equal spending cuts in benefit programs like Medicare and Medicaid.

That explains the administration’s outreach to corporate chiefs, like Monday’s conference call. Mr. Obama wants business’s support to buttress his vow that he will never again negotiate over so essential an action like he did in 2011, when the nation flirted with default and the economy suffered. Vexing Republicans, many business leaders are siding with him.

“I’m agreeing with the president — you should not be using the debt limit as a bargaining chip when it comes to how you run the country,” said David M. Cote, chief executive of Honeywell, and a Republican. “You don’t put the full faith and credit of the United States at risk.”

And the party reaction?

Some of the Republicans’ distancing from big business is a matter of political tactics — to alter their image as the party of wealth and corporate power. A writer for the conservative Weekly Standard said of the fiscal fight last month, “While big business cozies up to Obama once again, Republicans have an opportunity to enhance their reputation as the party of Main Street.”

But if we default on our debt by no raising the debt ceiling, what will happen to all those small Main Street businesses?  People with no social security, unemployment, and in the case of thousands of furloughed government workers at all levels will have no money to spend and those very businesses will be at risk.

Let’s face it.  No one “likes” government until they want or need government to do something for them then we all love government.  All those Republican’s in Congress, many from the South, who voted against Sandy relief will be crying in August and September when a storm hits the Gulf.

President Barack Obama talks with Michael G. M...

President Barack Obama talks with Michael G. Morris, right, of American Electric Power Company, and David Cote in the Cross Hall of the White House, before a dinner with CEOs, Feb. 24, 2010. (Photo credit: Wikipedia)

Photograph of Senator Cruz Joshua Roberts/Reuters
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