The economic downturn caused by the COVID-19 pandemic has taken a painful toll on small businesses nationwide. State policymakers and economic development organizations find themselves on the front line in helping them weather challenging times, but existing incentive and finance programs may not be appropriate to address what these businesses face today.
Ellen Harpel is the founder of Smart Incentives, a consulting firm that helps state and local governments make sound decisions throughout the economic development incentives process. With a Ph.D. in regional economics from George Mason University’s Schar School of Policy and Government, Harpel brings decades of experience to her work. She also serves as a senior research fellow with the Center for Regional Economic Competitiveness (CREC), based in Arlington, Virginia.
Smart Incentives works with communities to design and manage incentive programs that are effective and responsible. The firm is at the forefront of efforts to develop better processes for monitoring compliance and evaluating the effectiveness of incentive programs. Harpel is under contract with The Pew Charitable Trusts to support its research on state fiscal health. This interview has been edited for clarity and length.
Q. What does the unique nature of this recession mean for states trying to support small businesses?
A. The last recession hit the construction and manufacturing sectors hardest, with men disproportionately affected by job loss. This recession is different. The impact has been borne primarily by service businesses, especially restaurants and retail, personal services, tourism, and health care establishments. Women workers and women business owners tend to be overrepresented in these sectors.
There are also a lot of small businesses and microenterprises within these categories. Both typically have less revenue and fewer employees. They are also less likely to have established banking relationships through which they have financed growth. As a result, many had difficulty participating in the early rounds of assistance offered by the federal government, such as the Paycheck Protection and Economic Injury Disaster Loans programs. Their experience magnifies a long-standing, well-documented problem: Many small businesses, especially those with African American, Hispanic, or female owners, do not have equal access to financial resources.
So small businesses have been disproportionately affected, and the programs intended to help them were not designed well to meet their needs. This means that states trying to support these businesses need to fill this gap, and they need to approach assistance differently than they have in the past.
Q. What should states be thinking about as they develop strategies to support small businesses during this time?
A. There are four main questions that state policymakers and economic development officials should consider:
- What objective are you trying to achieve?
- Which small business challenge are you trying to address?
- Is financial assistance the most pressing unmet need?
- Are initiatives being implemented in an equitable manner?
The first is the hardest to answer. Without clear direction, how will states know how to allocate scarce resources? How will they know if their actions were successful? Everyone wants to help small businesses, but states need to be clear about the desired outcome. Program design changes should align with specific policy objectives. At Smart Incentives and CREC, we are hearing a desire among state officials to keep businesses in business, to grow and preserve jobs, and to address glaring economic and health inequities within our communities. The challenge will be wanting to achieve all of these objectives while recognizing the need for near-term trade-offs. For example, helping businesses survive may mean short-term job cuts, while preserving the maximum number of jobs may require directing resources toward the healthiest small businesses, rather than those struggling the most.
Q. What comes after defining the objective?
The second question is which small business challenge are you trying to address? Businesses have many needs right now. Do they need fast access to small amounts of cash to stay open, keep their employees, or adapt operations? Or, do they need longer-term financing to adapt and sustain operations in a new, ongoing operating environment? After considering the answers, policymakers should explore the state’s economic development toolbox to determine the best way to provide that assistance in an efficient and timely manner.
Thirdly, is financial assistance the most pressing unmet need? Businesses have other concerns that states and economic development partners may be well positioned to address. These include guidance around safe operating procedures, technical assistance on establishing an online presence or implementing new distribution procedures, subsidizing new expenses to comply with evolving health regulations, or networking and business development assistance via state small business and entrepreneur support organizations.
Fourth, are initiatives being implemented in an equitable manner? Have you considered how outreach efforts, program eligibility rules, application procedures, and reporting requirements may inadvertently exclude significant segments of the small business community?
Q. Can states use existing programs, or should they design new ones to support small businesses?
A. If the current programs are aligned well with the state’s small business support objectives, then it makes sense to adapt them. Generally, states do this in two ways: by streamlining procedures and expanding outreach.
Smart Incentives’ research on incentives for small businesses and entrepreneurial firms shows that procedural details, rather than program design or intent, are often the biggest roadblocks to small business participation. States should examine eligibility rules, application procedures, review or underwriting processes, and reporting requirements through this lens.
They also can do better outreach to ensure that businesses are aware of the programs. Creating a program without first engaging community partners and making sure businesses know how to access it can lead to problems. This is especially true for the smallest businesses that might not have established banking relationships or professional advisers guiding them through the process.
However, states may find that their current financing and incentive offerings are not a good fit for small businesses or service industries. For example, many economic development programs have minimum job creation or investment standards that end up excluding most small businesses.
These programs may have been designed to achieve a different objective: to expand a state’s economy by bringing new money to a community. This means they are set up to help grow export-oriented sectors or tech/innovation firms but not many of the businesses hurt by the current downturn, such as restaurants or child care centers that provide services within a community.
Q. How will states know if their efforts are successful?
A. States should consider how outcomes will be measured, what the associated reporting requirements from program participants will be, and how data will be collected and analyzed. Keep this process as simple as possible, emphasizing only one or two core outcome metrics based on data easily obtained and reported.
The critical element is reporting on outcomes related to the initial objective. It may be easier to report on inputs, such as how much money was spent, and outputs, for example how many businesses were assisted. Of course, it is important to collect this information and report it to stakeholders. But program metrics should also include one or two outcome measures that indicate how effective the efforts were in achieving the specified objective, whether it is business survival, job preservation, or another policy goal.
Finally, prepare now for scrutiny later. More states are conducting regular economic development and incentive program evaluations to determine whether policies are having the intended effect at a reasonable cost. The whole reason states engage in economic development is because they believe these activities benefit their communities and residents. Prepare to tell that story. Having a defined process with clear objectives, procedures, and reporting mechanisms can help policymakers do that.