Yesterday’s LA Times discovered something many of us have known for some time now: small business is getting hit hard by the recession and unable to play a leading role in economic recovery.

The article makes some good points, but ignores others entirely – such as the ways in which current economic policy is oriented around propping up big dinosaur corporations at the expense of new innovation – and gives way too much credit to teabagger interpretations of the recession.

In every recession over the last three decades, it has been America’s small businesses – those Lilliputian companies with fewer than 100 employees – that stepped forward, began hiring and pulled the country out of the mire.

Not this time….A host of factors – some well-recognized and others seemingly unnoticed in the national debate over economic policy – are converging to restrain small-business owners from hiring. Among them:

* Near-stagnant demand for goods and services as a result of consumers’ reluctance to return to their free-spending ways.

* A disturbing falloff in the creation of new small businesses.

* The devastation of the real estate market.

* Uncertainty about the economic outlook at home and abroad.

….The fact that many small firms are seeing little increase in demand for their services and products is decisive for Scott George, owner of Mid-America Dental & Hearing Center, which employs 55 people in the southwestern Missouri town of Mount Vernon.

“I’m not having any trouble getting money,” said George, who recently got a $250,000 loan to renovate one of his buildings. But he’s not hiring more workers because of little or no growth in sales.

This is true also in California. Here in Monterey, many storefronts on Alvarado and Lighthouse – the major commercial districts in the city – remain vacant, two years after the recession began in full force. Friends report the job market is extremely tough, with even the tourist industry reluctant to add new employees this year.

What we’re seeing here is a classic deflationary/Depressionary situation. In contrast to the article, it’s not that people won’t become “free spending” again, it’s that they have no room to do so given the need to purge debt. I’ve been explaining this concept in repeated posts here at Calitics – it is a balance sheet recession where the private sector will behave exactly as the article predicts – no spending and no hiring until the debt is purged. Only government can step in to solve the crisis through stimulative spending.

Except that’s not happening. The key question, as Kevin Drum asks, is “why not” and “what’s going to get consumers spending again?”

Matt Yglesias attempts an answer:

I don’t think this is brain surgery. If currently unemployed people had more cash in their pocket because – for example – the government hired them to do a job, then they’d probably spend more. If the federal government offered financial support for mass transit operations, then bus fares would be lower and consumers could spend more. If we did general state and local fiscal relief then taxes would be lower and consumers could spend more. If the Fed acted to raise short- and medium-term inflation expectations, then consumers would be inclined to spend more and businesses would be more inclined to undertake risky expansion projects. Ten percent unemployment is a fixable problem. I think it’s an open question as to whether these tools would become ineffective at 6 percent or 7 percent or 8 percent, but we could definitely make major progress.

This is about right, though I’d add that there are some other elements that would be helpful, like speeding up health care reform to kick in ASAP for most people rather than in 2014. Government should also not be laying anyone off, and should be increasing the amount of money it spends more broadly, to circulate more money throughout the economy.

Here in California, we instead have Arnold Schwarzenegger doing his best to destroy small business through widespread austerity, with his latest insane act merely topping things off.

The reality is simple: austerity and small business don’t mix. Plenty of people would like to expand their small businesses, but don’t have the customers they need because government is withdrawing stimulus at a time when stimulus needs to be increased. Plenty of people would like to start a small business of their own, but worry about how to afford the cost of living if they walked away from their present jobs.

Unfortunately, the LA Times article didn’t explore those issues. Instead the author, Don Lee, gave voice to an Arizona teabagger’s ridiculous claim that taxes are too high and that’s why small business is struggling:

Joy Staveley of Flagstaff, Ariz., said it was clear to her why people are more scared to take a risk on a new business: There are more regulations, taxes and government-mandated costs – and fears of more to come – with President George W. Bush’s tax cuts expiring soon, new healthcare rules and pending legislation on energy.

“I’ve seen poor economies in the past, and I can deal with it,” said Staveley, who with her husband has been running Canyoneers, a Grand Canyon river-rafting business, for 30 years. “But what I can’t get through is a runaway government.”

Such sentiments are not uncommon among many small-business operators, the bulk of them conservatives who believe Washington does not understand or respond to their needs.

Although taxes are at their lowest levels in 60 years, people like this woman in Flagstaff still are trained to believe any bad economy is the fault of a government that is too big. She’s convinced that this downturn is like those of the early 1980s and early 1990s where government was gutted and customers returned anyway – not because government was scaled back, but because debt was mobilized to provide the veneer of growth.

That’s not happening now in a balance sheet recession. Small business owners across the country need government stimulus to keep them going. Without it, they will have to close their doors as countless other small businesses already have done since the recession began.

The only businesses that are thriving are the large corporations, who have parlayed their wealth, their campaign contributions, and a pliable White House into unprecedented levels of political power. Whether it’s big banks, big telecoms, or other large businesses, they have succeeded in crafting a national economic policy that favors themselves but denies small businesses the policies, stimulus, and paying customers they need to survive and prosper.

Small businesses need to get mobilized behind progressive economic policies that reduce their costs, such as single-payer health care, and that will bring in more customers, such as direct government job creation.

Until they do, they’ll see the dinosaur corporations prosper, while their customers stay at home slowly repairing their own balance sheets and weakening small businesses. It’s a situation that can only be reversed through government intervention. Instead, we appear doomed to try another round of Hooverism before enough people finally learn the lesson that austerity doesn’t pay.