America's Small-Business Fetish: When It Comes to Job Creation, Size Doesn't Matter

By de Rugy, Veronique | Reason, June 2012 | Go to article overview

America's Small-Business Fetish: When It Comes to Job Creation, Size Doesn't Matter


de Rugy, Veronique, Reason


ON FEBRUARY 12, House Majority Leader Eric Cantor (R-Va.) sent a message to his 62,550 followers on Twitter: "Small business is the job growth engine in this country and we need to pursue policies that reflect that reality to create jobs." Cantor was wrong on both counts. Despite overwhelming conventional wisdom to the contrary, small businesses are not the engine of growth. And the small businesses that do create jobs rarely stay small for long, which makes crafting policies that favor those fast-growing firms both difficult and unnecessary.

The cult of the small business is so prevalent that you are treated like a heretic in Washington if you don't pledge to do something nice for the little guys. Targeted tax credits, special regulatory exemptions, preferential access to government contracts--nothing is too good for America's DIY manufacturers and social networking startups. Support for the Small Business Administration (SBA), a federal agency tasked with handing out goodies to the modestly sized, remains strong, despite dozens of compelling studies demonstrating that its efforts amount to little more than poorly targeted corporate welfare.

In his 2011 budget, President Barack Obama requested $1.4 billion to fund SBA programs. Most of the agency's money is spent on special credit programs for small businesses that have difficulty getting loans from regular banks. In fiscal year 2011, the SBA guaranteed $30 billion in such loans, which theoretically don't cost taxpayers anything. In practice, however, whenever the economy goes south, the SBA Can't cope with the number of small businesses that default on the loans. In 2011 the SBA ended up spending $6.2 billion, a $4.8 billion increase over its requested amount, mainly because so many small businesses couldn't make their payments.

The idea that small is glorious or that small businesses are the engine of growth is based on bad economics, and the result is bad policy.

The government's definition of a small business has become absurdly broad. The category officially includes the "mom and pop" firms with fewer than 10 employees that most people think of when they hear the term. But companies with hundreds or even thousands of employees (depending on the industry) are also eligible for benefits and other preferences; they win the coveted designation by virtue of the fact that they are small relative to other firms in their industry. Based on the federal government's bizarre classifications, 99.7 percent of firms in America qualify as small.

The percentage of people who work at these small companies has remained constant during the last decade, holding steady at about 50 percent of the private sector work force. This fact alone should cast doubt on the claim that small businesses account for the bulk of new jobs. If that figure was accurate, it would mean that half of American workers are employed by 0.3 percent of firms. Shouldn't we instead be cheering the tremendous job creation record of those powerhouse companies?

The ubiquitous statistic that small businesses create 70 percent of all net new jobs is also misleading. The source of this figure is none other than the Small Business Administration itself. In a 2005 study published by the American Enterprise Institute, I noted that to arrive at this figure, the SBA divides net small business jobs--a figure that includes every single current employee of a small business--by the net job creation from all businesses combined. This is not an accurate way to determine the share of new jobs created by small businesses.

The results can be comical: One table published by the SBA in 2005 showed that small businesses created more than 100 percent of new jobs, a truly heroic (if fantastical) result. We should stop using this junk statistic.

Our national obsession with small businesses misses the point. It's not micro-firms that drive our new, entrepreneurial economy. …

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