President Donald Trump has joined the defense of a revered component of the American economy -- small business. As his fellow Republicans in Congress have done for years, Trump says regulations written in the name of preventing bank meltdowns and bailouts are crushing companies that have fewer than 500 employees. To start, he’s ordered a sweeping review of the Dodd-Frank Act of 2010, which tightened restrictions on banks. To hear Trump tell it, it’s close to impossible to start or expand a small business in the U.S. these days. The data suggest that’s less true today than it was a few years ago.
1. What did Trump say?
Addressing owners of small businesses on Jan. 30 at the White House, Trump said, "you people know better than anybody it’s almost impossible now to start a small business" and "virtually impossible to expand your existing business," because banks "don’t loan you money" due to regulations like those in the Dodd-Frank law. Trump pledged to do "a big number" on Dodd-Frank, which has been under attack by congressional Republicans.
2. Did Dodd-Frank harm small businesses?
They weren’t the law’s prime target. Rather, its restrictions were aimed at banks, especially large ones, whose risk-taking helped cause the financial crisis of 2007-2008. But complaints about the impact on smaller banks led to a broader indictment of Dodd-Frank as anti-small business.
3. Why’s that?
As the U.S. Chamber of Commerce puts it, Dodd-Frank forces many small local banks "to meet steep capital requirements and regulations once they pass certain arbitrary thresholds" -- the best-known of which are $10 billion and $50 billion in assets. To stay below those thresholds, the banks reduce their lending, "and the smaller businesses that create jobs and drive growth become starved for capital." In a 2014 report, Goldman Sachs researchers concluded that "low-income consumers and small businesses -- which generally have fewer or less effective alternatives to bank credit -- have paid the largest price for increased bank regulation."
4. So small businesses struggle to get credit?
Lenders definitely became more stingy about credit following the 2008 crisis. The squeeze was felt widely -- by businesses large and small, of course, but also by first-time homebuyers seeking mortgages, and, for a while at least, by applicants for credit cards. But it would be tough to pin that all on Dodd-Frank, which wasn’t signed into law, by President Barack Obama, until July 2010. Many of its provisions didn’t take effect until long after that.
5. How about now?
The latest survey of small businesses by the U.S. Federal Reserve found that 50 percent of small businesses that sought credit in 2015 got all they asked for (up from 33 percent in a similar survey for 2014) and 18 percent were turned down in full (down from 46 percent in 2014). Twenty percent of respondents in 2014, and 16 percent in 2015, said they were too discouraged to seek credit.
6. Is the U.S. losing small businesses?
According to the U.S. Census Bureau, the number of U.S. small businesses declined for four straight years from 2007 through 2010. Since then, their ranks have grown each year. In 2013, the last year for which data is available, the number of small businesses expanded by 44,454, to top 5.5 million. (These numbers exclude the roughly 23 million so-called nonemployer firms, which mainly consist of self-employed individuals.)
7. Isn’t the U.S. the best place to do business?
By some measures, yes; by others, not so much. In the World Bank’s annual "Doing Business" rankings, the U.S. was No. 8 in the world out of 190 economies in 2016, down from No. 3 in 2008. The U.S. scored strongly in getting credit (#2) and enforcing insolvency (#5) but not so well in dealing with construction permits (#39) and protecting minority shareholders (#41). In the "starting a business" category -- which considers the time and cost of gaining all required licenses, permits, and employee verifications -- the U.S. tied with Puerto Rico for 51st, just behind Ivory Coast. Trump said small businesses will be helped by his order that two federal regulations be rescinded for every new one implemented. Even if he succeeds in that, licensing and permits remain subject to state and local rules, too.
The Reference Shelf
- Undoing Dodd-Frank is easier said than done.
- The 2014 report by Goldman Sachs on bank regulation and small businesses.
- Trump is right about Dodd-Frank’s large impact on smaller banks, says a Bloomberg View editorial.
- A look at the growth of occupational licensing and its downsides.
- Republicans may need to go it alone in dismantling Dodd-Frank.
- Trump wants to kill two regulations for every new one enacted.
- Bloomberg View columnist Megan McArdle says Trump’s war on regulations seems doomed already.
- The home page of the Census Bureau’s Statistics of U.S. Businesses.
— With assistance by Paula Dwyer