How Obama Lost Small Business

Financial reform might irk Wall Street, but the president’s real problem is with small businesses—the engine of any serious recovery. Joel Kotkin on what he could have done differently.

The stock market, with some fits and starts, has surged since he’s taken office. Wall Street grandees and the big banks have enjoyed record profits. He’s pushed through a namby-pamby reform bill—which even it’s authors acknowledge is “not perfect”—that is more a threat to Main Street than the mega-banks. And yet why is Barack Obama losing the business community, even among those who bankrolled his campaign?

Obama’s big problems with business did not start, and are not deepest, among the corporate elite. Instead, the driver here has been what you might call a bottom-up opposition. The business move against Obama started not in the corporate suites, but among smaller businesses. In the media, this opposition has been linked to Tea Parties, led by people who in any case would have opposed any Democratic administration. But the phenomenon is much broader than that.

The one group that has fared badly in the last two years has been the private-sector middle class, particularly the roughly 25 million small firms spread across the country. Their discontent—not that of the loud-mouthed professional right or the spoiled sports on Wall Street—is what should be keeping Obama and the Democrats awake at night.

Small business should be leading us out of the recession. In the last two deep recessions during the early 1980s and the early 1990s, small firms, particularly the mom and pop shops, helped drive the recovery, adding jobs and starting companies. In contrast, this time the formation rate for new firms has been dropping for months—one reason why unemployment remains so high and new hiring remains insipid at best.

Here’s one heat-check. A poll of small businesses by Citibank, released in May, found that over three quarters of respondents described current business conditions as “fair or poor.” More than two in five said their own business conditions had deteriorated over the past year. Only 17 percent said they expect to be hiring over the next year.

It’s not hard to see the reasons for pessimism. Entrepreneurs see bailed-out Wall Street firms and big banks recovering, while getting credit remains very difficult for the little guy. In addition, many small businesses are terrified of new mandates, in energy or health, which makes them reluctant to hire new people. Small banks—not considered “too big to fail”—fear that they will prove far less capable of meeting new regulatory guidelines than their leviathan competitors.

The small business owners I’ve spoken to—like most of the public—generally don’t seem convinced about the effectiveness of the stimulus, even if the administration claims it helped us avert an economic “catastrophe.” Barely one fourth of voters, according to a recent Rasmussen poll, think it helped the economy.

Obama’s troubles with the bigger firms are more recent. Initially, President Obama wowed the big rich, leading The New York Times to dub him “the hedge fund candidate.” By the time he won the election, he enjoyed wide support from the Business Roundtable, the Silicon Valley venture community and other titans.

Initially, big business was happy with Obama’s stimulus plan, and more or less was ready to acquiesce to both his health-care reforms and cap and trade. After all, most large companies generally provide some health coverage to their employees. For Wall Street, cap and trade represents just one more wonderful way to arbitrage their way to more profits.

Of course, some corporate titans will remain loyal to the White House. Take the lucky folks from Spanish- based Abengoa Solar, who are now getting $1.45 billion in federal loan guarantees for an Arizona solar plant that will create under 100 permanent jobs while providing expensive, subsidized energy to perhaps 70,00 homes. If this is stimulus, it’s less jarring than a decaf from Starbucks. Also let’s dismiss those on Wall Street who whine about the administration’s occasionally tough anti-business rhetoric. Wolves should have thicker skins. The Obama administration and Congress have delivered softball financial reform dressed up as major progressive change. They should be grateful, not petulant.

But there’s clearly something more serious than hurt feelings at play here. The pain felt by small businesses is hitting the big boys, too. After three straight bad years, small businesses buy a lot less stock, business services, and equipment. Big companies can hoard their money and sport big profits, but ultimately they have to sell to consumers and small firms. Maybe that’s something that the media moguls—who after all have to sell to the hoi polloi—have been picking up on, too.

This has led some Obama allies, like GE’s Jeffrey Immelt, to grouse that Obama does not like business, and vice versa. “Government and entrepreneurs are not in sync,” he explained to reporters in Europe. So, too, has Ivan Seidenberg, the head of the once Obama-friendly Business Roundtable, who denounced the administration recently for creating “an increasingly hostile environment for investment and job creation here in this country.”

Among businesses of all sizes, there is now a pervasive sense that the administration does not understand basic economics. This is not to say they believe Obama’s a closet socialist, as some more unhinged conservatives claim. That would be an insult to socialism. Obama’s real problem is that he’s a product, basically, of the fantastical faculty lounge.

For the most part, university professors do not much value economic growth, since they consider themselves, like government workers, a protected class. Many, particularly in planning and environmental study departments, also embrace the views of the president’s academic science adviser, John Holdren, who suggests Western countries undergo “de-development,” which is the opposite of economic growth.

Of course, such ideas, if taken seriously, have economic consequences. You want to see the future? Come to California, where the regulatory stranglehold is killing our economy. Subsidizing favored interests also is not a winning strategy. There’s simply not enough money to maintain a federal version of Chicago-style baksheesh. The parlous state of Obama’s home state of Illinois—which manages to make even California or New York appear models of prudent management—demonstrates the futility of the subsidize-the-base game.

The worst part is that none of this was necessary. A stimulus plan that helped workers and communities by recreating a WPA for the unemployed youths might have gained wide support on Main Street. Credits for hiring, reductions in payroll taxes or a regulatory holiday for small firms also might have bolstered business confidence. Business people, particularly at the grassroots level, would also like to see a return for the detested TARP in a freer flow of credit for their firms. They are not so much hostile to Obama as puzzled by his inability to address their needs.

But for now, the stimulus is widely seen as a wasted opportunity and proof of Washington’s enduring incompetence. As a result, roughly 80 percent of Americans, according to Pew, say they don’t trust the federal government to do the right thing, which does not bode well for a second round of pump-priming.

This leaves business turning back to the Republicans. Not because most see them as competent or even intelligent; GOP rankings are also at a low ebb. Business owners across the spectrum are forced to embrace the “party of no” because Obama and the Democrats have given them so little to say “yes” to.