Impact Voices | April 19, 2023

How the Fed can help small business owners, raise real wages and rebuild communities

Damien Dwin
Guest Author

Damien Dwin

Bankers, investors, and wealthy asset owners are watching for the Federal Reserve’s decision early next month on whether and by how much to raise interest rates. 

Workers should be watching, too, especially those with low-to-moderate incomes, who continue to face disproportionate impacts from rising inflation.

After the March meeting, Fed Chair Jerome Powell indicated a target policy rate of 5%. But The Fed must raise interest rates back to 6% or beyond to properly combat the biggest threat to our economy — inflation — and its collateral damage: a neglected, financially unsettled workforce. 

With inflation still higher than we’ve seen in decades, rate hikes are a bitter but necessary medicine to ensure our monetary policy and capital markets normalize.

This is a pivotal point when both the government and private entities, especially capital providers, must be courageous and consider the long-term health of our broader economy, not solely the sectors where wealth is already concentrated. 

In this moment, we should be prioritizing the very people we are failing — employees of small businesses, bus drivers, first responders, schoolteachers, home health aides, and countless other professions representing the vast majority of Americans. They are the lifeblood of our economy, and they are too vital to neglect.

Real wages

Business owners know how important a strong workforce is for the health of the economy, and we should be doing everything we can as investors and entrepreneurs to encourage strong action from the Fed and implement other initiatives to combat inflation.

Many of my industry peers are laser-focused on the potential fallout within the banking sector if rates rise further. 

What they are missing is a greater concern that has been playing out over the past three years. First came the economic distress from the pandemic. Then, the harsh effects of record inflation, causing real wages to drop 6.4 percent for private sector workers since 2020.

With fear spreading about the safety of cash – a retiree’s life savings, a young woman’s college fund — depositors are seeking a secure place to store their savings, and money is flooding into the four largest banks. 

During a time when capitalism is already sending too much money to high-income places and high-income people, this surge of capital flowing to larger “systemically important banks” undermines the vital resource that is regional banks and further exacerbates the oligopoly.

More than half of American workers are living paycheck to paycheck, lack $500 of liquid savings, and don’t have access to the right benefits – such as emergency savings accounts and low- to no-interest loans — to help assuage these issues. And nearly half of American workers (46.4%) are employed by small businesses.

Working people need capital that flows into their communities. We need to get inflation in check, but that’s the first step. We also need a mix of policy and employee benefits that address financial insecurity.

With signs pointing to a less aggressive path forward for the Fed, the onus is now on the business community to show leadership and support working people.

Low-to-moderate market

There is a clear path forward: Invest in and develop businesses headquartered outside of high-income places. By investing in low-to-moderate-income places and people, we can reduce the harms posed by inflation and rebalance a system that too often sees economic opportunity flow to people and places that already have it. The impact could help reset a flailing economy and improve the lives of working people who are once again being disproportionately impacted by a Wall Street issue.

Those who provide capital to small businesses should have a vested interest in the wellbeing of the employees who comprise those businesses. According to the Economic Policy Institute, over the past 44 years, worker productivity has increased 65% while private sector compensation has increased just 17.3% (adjusted for inflation). In other words, productivity has grown more than three and a half times as much as pay.

This is not only unfair but unsustainable. It is a risk management imperative to understand the financial stressors impacting the labor force and make a concerted effort to mitigate them. We have the data and must act on it.

Those who invest in and lend to start-ups and other small businesses must focus our energy on helping low-to-moderate-income people and places.

History will judge this generation of financiers according to our investment decisions, the analytics we overlooked, and our handling of regulatory frameworks that were originally created to drive beneficial outcomes for working people. If we don’t support the people who comprise the backbone of the economy, the economy will break for everyone.

Damien Dwin is the founder and chief executive officer of Lafayette Square.