Discussion Board

Slump? I ain’t in no slump… I just ain’t hitting.

Yogi Berra

I was invited to speak at the recent CBIA conference – April 20th.  I had prepared this material beforehand.  However, I was not able to use it because of the weird talk show format – for which I was wholly unprepared.  The format is one where the “guests” are sitting on stage - like in a talk show - in chairs, facing the audience, with the “moderator” asking questions from the far side. 

Interestingly, the conference keynote address was by the President of Electric Boat – Jeffrey Geiger. Mr. Geiger bragged about the thousands of jobs EB was going to create in Connecticut.  And he bragged just as loudly about the “jobs pipeline” EB was creating to develop the workforce that they are going to need.  Little did we know at the time that we – as in the people of the state of Connecticut – are paying quite handsomely for that training and job creation and so on that Geiger was taking credit for: subsidizing quite a bit of it, actually.   This additional information on the generous subsidies we are giving EB emerged after the CBIA Conference.  Read about it in the Junkie.  To me this is like someone paying me to go drink beer at the 744 West Restaurant; getting paid for something I was going to do anyway.  The 744 West Restaurant – by the way - is a favored Economics Department watering hole – located nearby on the edge of campus. 

I continue the “small-ball” theme set forth in my last post; point being to examine the ground left untrammeled by the now infamous Fiscal Stability and Economic Growth Commission- who promised us they would “go big or go home.” 

And my commentary starts out – yet again – with a Steven Lanza piece published in The Connecticut Economy way back in 2010: “Shining a Light on Connecticut Shadow Jobs”. Lanza was celebrating what he called Connecticut’s “shadow jobs.”  He pointed to the impressive performance of the self-employed-consultants, entrepreneurs, independent contractors that the employment tally sublimates into the larger count. 

 I have alluded to this Lanza paper before – to frame a discussion on Connecticut’s weak entrepreneurial strength.  I now use it to call attention to a particular piece or legislation coursing its way through Congress that has the power to reverse the rather severe blow to Connecticut’s community banking industry fraught by Frank-Dodd.  The Bill is S. 2155, titled: Economic Growth, Regulatory Relief, and Consumer Protection Act.

  1. 2155 would modify provisions of Dodd-Frank and other laws governing regulation of the financial industry. The bill would change the regulatory framework for community banks (institutions with assets under $10 billion) and for large banks with assets over $50 billion. The bill also would make changes to consumer mortgage and credit-reporting regulations and to the authorities of the agencies that regulate the financial industry.

It follows that – if S. 2155 were to pass it would rollback some of the pressure on the brutally hamstrung small community lending industry indirectly (and directly).  In turn, because community lending establishments have the advantage of the Hayekian “particular sense of time and place” when it comes to their communities – these banks are likely to assist and sustain the storied Connecticut entrepreneurial prowess Lanza celebrated in his 2010 article.  And my ASK is that you contact your legislators – ask them to support this bill – or, in the alternative, its intent; tell them you know the tale of the tape and that this Bill is more likely to create jobs in Connecticut than more millions placed at the feet of Electric Boat.

The tale of the tape

Figure 1 and Figure 2 below offer the same employment information over the period: 1996-2016.  Figures 1 shows total employment performance and proprietorship in levels.  Figure 2, shows the series indexed to 100 in 1996; indexing highlights their relative performance.  The data is BEA data on the self-employed, which includes sole proprietorships and partnerships. 

Figure 1

The growth in proprietorships is explosive especially compared to what we fared in total employment. 

Figure 2

Understanding proprietorship performance requires a two-handed story.  On the one hand, the meteoric rise in proprietor’s employment could be a reflection of the fact that many residents of CT got laid-off in the late 1990s and in the great recession. And facing difficulties in finding employment we did what we had to do: bake cookies, mow lawns, a little consulting here, or all of the above.  This type of proprietorship predictably occurs with a slowdown. On the other hand, one can infer that proprietorships that start-up when the economy is hopping – are doing so because they are actually peddling something novel or innovative. 

But the two-handed story is not pertinent to this tale of the tape.  What is more concerning is the following: Figure 3. In it we see our performance relative to the US and to Massachusetts.  It shows how – over the better part of the last two decades our performance far outstripped others.  The problem is that after or about 2014 we returned to national averages whereas Massachusetts proprietorship employment increases dramatically.  We lost our mojo; something happened.

It is the thesis here – that part of Connecticut’s inability to “convert” those mom and pop startups onto sustainable businesses lies with our jaundiced community lending banks left in shambles by Dodd-Frank.  By the way – this well-known 2015 paper by Lux and Greene contains evidence for the thesis at large; and here are two others – one by Peirce, Robinson & Stratman (2014) recounting national survey of small banks results supporting the thesis and a more recent one by Miller, Hoffer and Wille (2016).

 

Figure 3

 

I took my thesis to Michael Rauh for some real-world vetting. Michael Rauh is the President of Chelsea Groton Bank; he knows banking.  I asked Michael whether there was anything to the argument that we are leaving a lot of entrepreneurs, startups, and small-businesses on the table in Connecticut, because they cannot get financing.  I got an earful.  Here are the points Mr. Rauh made – I transcribe his answers unedited from his email response to me:

  1. Community banks are the lifeblood of small businesses. While community banks only account for 18% of the assets in our Nation’s banking system, they provide almost 50% of the small business loans.
  2. Community banks have been disappearing at an alarming rate since the mid 1980’s. In 1985 there were more than 18,000 banks in the US. Today there are approximately 5,700. The overwhelming majority of those lost during this time period were small community banks. This is not good for small business lending.
  3. During this same time period, 22 major pieces of bank specific legislation have been passed at the Federal level. Additional layers have been added at the State level, and many more that affect all small businesses (healthcare, minimum wages, etc.) The sum total of this legislation has added hundreds of policies and thousands of pages of procedures and forms required for day-to-day operations, which disproportionately affects smaller banks.
  4. This phenomenon has been a leading cause of demise cited by small banks who have sold or are contemplating sale. It is not necessarily the case where a particular piece of legislation is the cause in and of itself. Rather it is the sum total of all the legislation that stifles a bank’s ability to keep up. It’s like cholesterol that builds up in your system over time that eventually causes a heart attack.

So that is a big fat yes to my question on whether the regulation-handicapped community lending banks are associated with the startup slump in Connecticut.  And I add that Rauh referred to S-2155 as “a little bit of sanity.”

There you have it: you are a phone call away from helping to turn around our economy. Call or email your congress-folks, tell them that their support for S-2155 will allow CT to do what it knows: entrepreneurship, small-business.  This phone call of yours has the power to do more for CT than all the stuff in the Go Big or Go Home Commission. 

arod

arodriguez@newhaven.edu

Data Sources

All Data is BEA Data [SA4 Personal Income and Employment by Major Component].  BEA data is the self-employed, which includes sole proprietorships and partnerships. Self-employed jobs include both full- and part-time positions (e.g., one worker with a covered wage/salary job and self-employment on the side would be counted as two jobs). Self-employed jobs from BEA data (1) may be reported geographically by place of residence or place of work (since they are based on the self-employed workers’ tax returns which may show a business or home address); and (2) represent the sum of all self-employed jobs existing at any time during the year, instead of an annual average.

This essay is part of the ongoing Economics Department research program on CT employment and entrepreneurship:

Fiscal Stability and Economic Growth and Small Ball (March 2018)

The Likelihood of an Employment Downturn in Connecticut (December 2017)

Searching for Eli (July 2017)

Connecticut’s Feeble Entrepreneurial Bench Strength (March 2016)

Where Have All the Yutes Gone? (June 2013)

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