America has always had a thing for small business.
Maybe it’s a legacy from Colonial days (think Adam Smith and his “nation of shopkeepers,”) but politicians and pundits have long held up the small business – the Mom and Pop, the Startup, the Young Entrepreneur – as the cornerstone of the economic life of the republic. And not without some justification. After all, firms with fewer than 500 employees (one of the Federal government’s thresholds for “small business”) employ more than 80 percent of all workers in the country. That’s not just a cornerstone; that’s an edifice.
Over the last few weeks, though, I’ve run across a number of reports and studies that call into question the primacy of small business.
Just this morning, I received the the latest “State of Women-Owned Businesses” report from the American Express Open Forum. I was struck by a pair of statistics for Hawaii: there are 39,900 women-owned firms in the state, but those companies only employ 39,400 people. That’s less than one employee per firm, not counting the owners. You can’t get much smaller than that. Moreover, on a national basis, women-owned firms account for 26 percent of all enterprises, but they only earn 4 percent of the revenues. All of which highlights – in a kind of backhanded way – the importance of small businesses to women.
But buried in the same report are some fascinating numbers that seem to belie the broader significance of small business. First, despite their numbers, small firms are a disproportionately minor part of the overall economy. For example, the report shows that 75 percent of all firms (88 percent of women-owned firms) had annual revenues of less than $100,000, while just 9 percent (4 percent for women-owned) generated more than $500,000 in annual revenues. Nevertheless, that 9 percent accounted for 96 percent of all non-farm revenue in the country (78 percent for women-owned firms.) In other words, small business – at least as it’s understood by the average person – is just a blip compared to the numerically small membership of corporate America.
The relative importance of large firms is also reflected in their role as job creators. Who Creates Jobs?, a controversial report for the Census Bureau by John Haltiwanger, Ron Jarmin and Javier Miranda, goes to great length to show that most new employment isn’t created by the much ballyhooed small business sector, but by larger, older companies. That’s partly because, although newer, smaller firms create do more jobs (3.5 million in 2005), they also destroy them faster by going out of business more frequently. In fact, nearly a quarter of all workers are employed by firms with more than 10,000 employees. The real issue, according to this report, isn’t so much the size of the firm, but its age. It turns out that firms over 15 years old employ more than 65 percent of all workers.
A similar report for the American Enterprise Institute, reaches some of the same conclusions. In particular, it asserts we’ve let our native affinity for small business cloud our judgement, especially when it comes to tax policies that disadvantage large businesses. Through the Small Business Administration, for example, we channeled more than $28 billion last year to small businesses in the form of contract preferences and loan guarantees. That’s just cream on top of a decidedly lower tax burden and reduced regulatory constraints. The justification for all this aid, at least in part, is ostensibly because of small businesses’ role in creating jobs, a premise largely belied by the data. In fact, the authors of this report, Alan D. Viard and Amy Roden, go so far as to say there’s no economic or statistical basis for giving small businesses preferential treatment.
There are other reasons to help small businesses, of course. The most obvious is that it serves the public good to preserve a diverse marketplace, one that includes small, local firms as well as large, national or multinational corporations. That’s a perfectly valid reason to give small businesses a little help. But it’s not the same thing as hiding behind the illusion that small businesses are the backbone of the economy. To put this in context, here’s one more set of statistics from the Census Bureau: The 27.6 million firms with fewer than 500 employees generated $8.8 billion in gross receipts in 2007. In contrast, the 975 companies with more than 10,000 employees generated $10.7 billion.
Now that’s a cornerstone.