As Downturn Spreads, Business Failures Could Be Key To Depth Of Trouble

Cutting jobs is one thing. Going out of business is another. As it becomes clear that millions of jobs will be lost by companies which are weak but will probably make it through the recession, the concern is shifting to companies which will not make it at all.

Since, by many estimates, businesses with under 100 employees represent more than 50% of the jobs in the US, watching a huge number of them burn out has become cause for increasing alarm, an alarm which does not appear to be addressed by any government bailout program.

According to the FT, The US will see 62,000 companies go bust next year, compared with 42,000 this year and 28,000 last year, says a report by Euler Hermes, part of German insurer Allianz. If the median number of people at those companies is 50, another three million people could be out of work.

As long as the government focuses it efforts on saving huge companies like GM (GM), Ford (F), Citigroup (C), and AIG (AIG), a segment of the employment market which may even be more important will remain unaddressed. Saving twenty big companies might salvage one or two million jobs. But, if more modest enterprises go under in great numbers, what has been saved will be more than offset by what is lost.

Helping tens of thousands of small operations is particularly difficult which makes it not unlike trying to improve the troubles of millions of mortgage holders. The government has tried to fix the housing crisis from the top down. Giving large banks a lot of capital should stimulate lending. It doesn’t. The financial firms simply squirrel the money away for a rainy day.

Without an effective assistance program for small companies, helping big ones is only half a measure.

Douglas A. McIntyre