"California doesn’t recover until small business recovers," declared Kevin Klowden, Managing Economist and Director of the California Center at the Milken Institute. Klowden took part in a panel discussing California small business at the Milken Institute’s annual State of the State conference this week.

Klowden stated that California is a small business mecca. Over fifty-percent of California employees work for small businesses defined as businesses with 500 employees or less.

Per capita, California is still the second most popular state to start a business (behind Wisconsin) according to Milken research. However, small business survival is severely challenged by diminished credit and available capital for small businesses.

Two main sources for small business credit were credit cards and home equity. Both sources have dried up during the recession. Bank of America executive, Kathleen Sowa, said the recession has cut down on small business productivity and produced a lack of cash flow, which prevents businesses from acquiring credit. Therefore, the percentage of business bankruptcies is growing.

Klowden revealed in the last couple of years small businesses have suffered 6,400 bankruptcies and 15,000 small businesses have closed down.

Eric McAfee of McAfee Capital, a veteran of the California Manufacturers Association, criticized CalStrs and CalPers pension funds for not focusing investments on California businesses. He argued these agencies look for returns in exotic locals meaning that the janitor in California paying into his pension may lose his job when California companies close down.

McAfee said we should focus on the cash flowing out of the state and keep it here. In addition to the big state agency investors like CalPers and CalStrs , McAfee said investments should be made in home-grown clean energy efforts instead of sending billions for foreign energy. He pointed out that no wind turbines were manufactured in California.

State Controller John Chiang warned that the state would not be in a position to help small businesses. He said in a year temporary tax hikes expire, the stimulus money will be gone and state government has to return dollars to local government that it borrowed to balance past budgets.

Those revenue holes must be filled another way. Tax increases will only keep the recession humming along. Tax increases will mean less job creation in California. Small businesses and entrepreneurship must be encouraged to create jobs and produce the revenue to fund government. That means government must tighten its belt and take some of the burdens off businesses so they can grow and expand.

One source of funding for small businesses may be micro lending, said banker Kathleen Sowa.

Kevin Klowden’s statement says it all and is worth repeating: "California doesn’t recover until small business recovers." Policy makers need to take this wisdom to heart and proceed accordingly.