Two Americas

The weekend Wall Street Journal’s page one contains an interesting article on the so-called recovery in which it paints a picture of two Americas, but the dichotomy it notes has less to do with erstwhile Democratic presidential candidate John Edwards’ poverty/wealth divide and more to do with Wall Street versus small businesses. This notion is populist in its own way, but more accurately identifies a real and emerging fault line in American politics, much more so than Mr. Edwards’ lame attempt to parrot William Jennings Bryan.

This fault line was first exposed anew last year during the congressional debates over the first bailout package, when the populist wings of both parties rebelled against their parties’ leadership to defeat the initial bill. I had noted at that time how strange it was to see those at the far left and far right of the political spectrum make common cause against the center, but for one moment last fall, this was the case. As it happens with most alliances of convenience, however, the cooperation almost immediately dissipated, and a second attempt to get a bailout bill succeeded.

Lefties and conservatives loathed the bailouts for essentially the same reason – each side felt that too many resources were being deployed to help the elite and too few to help others. Of course, they disagree on who the “others” are, with left-wingers wishing more could be done for the disenfranchised and poor and conservatives sticking up for small businesses, middle class entrepreneurs, and local chambers of commerce.

As the recovery takes shape, the political conflicts of last fall are likely to sharpen. First and foremost, as the Journal points out, the Two Americas perspective highlights how relatively easy it is for corporate America to get access to credit, while small businesses are struggling to do so. Even marginal large companies have ready partners in the banking industry who are willing to provide junk bonds (this Bloomberg article was well circulated last week). Small businesses don’t have this luxury and are increasingly imperiled by a vicious cycle, described in the Journal article by John Graham, a finance professor at Duke University’s Fuqua School of Business:

“If you’re not making money, you need to borrow money … you need to be creditworthy in order to borrow, and if you’re not making money, you’re creditworthiness isn’t very strong.”

To make matters worse, those institutions that cater to small businesses – small and mid-sized regional banks – are themselves in a ton of trouble. Experts estimate that anywhere from 300 to 500 such banks will fail in the next twelve months. Their ill health and dwindling numbers will further exacerbate the credit problems of small companies.

In any event, the plight of small companies promises to be a huge issue during the 2010 election cycle.