Race and Government Aid

Entrepreneurs and business owners are generally optimistic people, who tend to be more hopeful than the general public. They have to be in order to launch, scale up, and sustain their ventures in the face of uncertainty and challenges. Society is greatly better off for their entrepreneurial optimism.

Unfortunately, as a direct result of government fiscal stimulus policy in response to the COVID-19 pandemic, there is now lower entrepreneurial optimism among Black business owners and entrepreneurs compared to their non-Black peers. This is a big problem – healthy Black-owned businesses are key to narrowing the racial wealth gap, which could cost the United States more than $1 trillion to $1.5 trillion per year by 2028. 

Let’s explore this issue and what can be done about it.

For starters, Black business owners and entrepreneurs usually start their ventures in the face of significant obstacles that are not shared by their non-Black peers. Blacks often face lending discrimination. A Black business owner or entrepreneur is much more prone to be denied credit compared to someone who is non-Black and has the same creditworthiness. Moreover, the Black entrepreneur or business owner is more likely to be charged higher interest rates on bank loans compared to other borrowers. Yet Black entrepreneurs and business owners, remarkably, have largely maintained their entrepreneurial confidence in the face of racial or race-based discrimination and structural barriers that exclude them from full participation in American capitalism.

But there are limits to Blacks’ entrepreneurial optimism, especially when the structural barriers they face are compounded by the government’s actions in the midst of a global pandemic. After all, as the ancient Solomonic proverb noted, “hope deferred makes the heart sick.” A waning of confidence among Black business owners and entrepreneurs has serious repercussions for the nation, in addition to its potentially devastating local economic effects on communities of color.

Data that was collected in mid-2020 by the Center for Economic and Social Research (in the midst of the COVID-19 pandemic) shows that Blacks were about ten percentage points less likely than all other racial or ethnic groups to believe that their business would still be in existence in two years. Unfortunately, the federal government’s actions in response to the COVID-19 pandemic did little to help.

By mid-2020, the federal government had authorized four major COVID-19 stimulus packages. Collectively, these measures accounted for roughly $3.5 trillion in COVID-19 relief spending and provided direct and indirect aid to individuals and businesses. For example, the “Paycheck Protection Program and Health Care Enhancement Act” appropriated $320 billion in forgivable low-interest loans to small businesses for payroll costs and other expenses.

However, the evidence suggests that stimulus funding was more available to non-Black than to Black business owners and entrepreneurs.

Compared to all other racial or ethnic groups, Black business owners and entrepreneurs were about 30 times less likely to have received government aid for people or businesses affected by the pandemic, even accounting for financial factors such as the expected total receipts for the month the data were collected, and the cash reserves at hand. Such a disparity in funding creates a negative feedback loop of lower entrepreneurial optimism, driving a self-fulfilling prophecy wherein Black businesses and ventures are less viable and have poorer growth.

So, what should be done?

First, the federal government should take concrete steps to ensure that future stimulus funds are distributed more equitably, especially among minority business owners and entrepreneurs. Local and state agencies should be the key vector for the disbursement of relief funds. Matching federal grants should be made to state and local governments in support of ongoing activities that are reshaping entrepreneurship ecosystems to make them more supportive of Black and other minority businesses and ventures. The evidence suggests this can work. The City of Pittsburgh has used its economic development agency, the Urban Redevelopment Authority (URA), to provide critical funding for minority business owners and entrepreneurs. The URA’s Center for Innovation and Entrepreneurship offers the gap financing minority owned businesses and ventures need to grow and expand. Similarly, the City of Cincinnati’s Department of Community & Economic Development runs the MicroCity loan program that is targeted at small businesses with five or fewer employees; these loans encourage business growth and expansion by providing critical debt financing.

Second, Federal agencies like the Small Business Administration and the Minority Business Development Agency should work with local governments to improve the information flow to Black business owners and entrepreneurs. Pittsburgh area minority business owners that were in contact with the URA were well placed to receive information on how to obtain stimulus funds from the PPP. The City of Cincinnati’s Department of Economic Inclusion and the Ohio Development Services Agency partnered to disseminate information on aid available through the state’s Small Business Relief Grant program, which was designed to help businesses cope with negative impacts of COVID-19 using funding from the federal CARES Act.

Third, we need better data. A May 8th report by the SBA Inspector General found that, counter to the instructions in the CARES Act, the SBA failed to enforce the collection of demographic data for PPP borrowers in underserved markets. It is therefore hardly surprising that Black business owners and entrepreneurs were underrepresented among PPP borrowers. There is also anecdotal evidence that PPP loan applications were more likely to succeed if the borrower had a pre-existing relationship with the lending institution. This may help explain why the burden of COVID-19 business failures by the end of summer 2020 had been disproportionately felt by Black and Brown business owners and entrepreneurs (41% and 32% drops, respectively) who may not have pre-existing relationships with White-led financial institutions. In contrast, the decline in White business owners and entrepreneurs was only about 17%.

All future stimulus packages should enforce the mandatory collection and publication of demographic data for borrowers, and encourage partnership with institutions that already have relationships with Black and other minority business owners and entrepreneurs. These should include Black-owned banks and financial institutions, especially in areas or locations that are underserved by traditional or mainstream lenders.

The pandemic has been a human disaster on many levels, much of which was initially beyond our control. But when it comes to how government fiscal stimulus policy treats racial groups, we can and must do better.

Related Posts

Pin It on Pinterest

Share This