The Founding Fathers tended to idealize 'The Yeoman Farmer,' and the small-scale mechanics and tradesmen who supported their efforts. As the country grew - and scale commensurate with the size of the nation's - and then the world's - economy became a necessity, large enterprises were tolerated but rarely celebrated. At least in public.
That inclination has survived to this day, as Walmart discovered while it expanded at the expense of locally owned stores and as the 'Too Big to Fail' banking backlash has demonstrated. It is important to note that this opposition never halted enterprise growth, but it has affected public policy.
This inclination was given a boost in the early 1980s by David Birch whose research, it was claimed, established that small companies were the primary source of job growth. There was only one problem: that is not what his data showed.
Rather, it was that NEW companies generated jobs. Politicians are generally keen to recognized for aiding small businesses. They believe it shows they remain true to the country's roots and are fighting for the (many) little guys against the (fewer) big guys. Anyone who has counted votes gets the math. So being able to claim that support for smaller enterprises also generates jobs is a two-fer. The issue, of course, is that new businesses are inherently risky: for a variety of reasons they fail at a greater rate than do large businesses. But if economic policy is to be effective, it must address the reality rather than the popular myth. JL
Bruce Bartlett comments in the Economix blog:
Census Bureau data show that 78 percent of businesses have no employees. Among those with employees, three-fifths have one to four employees, and 98 percent have fewer than 100. However, half of all workers are employed by large companies (those with more than 500 employees), and a third work for very large companies (those with more than 5,000 employees).
The Small Business Administration recently refined its definition of a “small business” for the purposes of qualifying for federal aid and contract set-asides. Depending on the industry, a small business may be defined by the number of employees, receipts, assets or other factors. The new definitions are industry-specific.
About 8,350 companies are believed to be newly eligible for the small-business designation, according to a Bloomberg Government article published in The Washington Post. Among those affected, 958 engineering and technical services contractors that were previously considered large businesses will now be considered small. In 2011, $220 million in federal contracts for engineering and technical services were reserved for small businesses.
Historically, Congress’s main interest in the small-business sector has been its job-creating potential. This has been the case since 1981, when the economist David Birch published an article asserting that small businesses created the vast bulk of jobs in the economy. Since then it has been an article of faith among policy makers that private-sector job creation strategies should concentrate on small businesses.
Actually, what Mr. Birch really showed is that young companies are more likely to be job creators than mature companies. He also showed that such companies are highly volatile in terms of net job creation; many of the jobs that are lost are lost among recent start-ups.
More recent research by the economists John Haltiwanger, Ron Jarmin and Javier Miranda confirms that this is still the case.
Insofar as job creation is concerned, another important factor is establishment size. A new study from the Bureau of Labor Statistics finds that over the last 10 years new companies have tended to be smaller and stay smaller than those in the past.
In the 1990s, new start-ups averaged 7.6 employees, falling to 6.8 in 2001 and just 4.7 in 2011. Among all businesses, establishment size fell from an average of 17.5 in 2000 to 16.6 in 2003 and 15.7 in 2011.
The B.L.S. has also found that the number of new establishments has fallen sharply since 2006. The number of those less than one year old fell to 505,473 in 2010 from 667,341 that year. The number of jobs created by such companies has fallen to less than 2.5 million in 2010 from 4.7 million in 1999.
If the pace of new businesses and job creation by such businesses were at 1990s levels, we would have created some two million additional jobs this year.
Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by “emerging growth” companies.
Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.
The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period.
The linkage between a small business’s tax burden and job creation, however, is tenuous at best. This stands to reason, since business start-ups, the prime engines of small-business job creation, seldom have any profits to tax; most start-ups lose money for the first several years.
And since labor costs are already deductible as a normal business expense, there is no reason to think that lowering a business’s overall tax burden, especially if it is just for one year, will have any effect whatsoever on the number of workers it employs.
Moreover, the proposed small-business tax cut would skew its benefits overwhelming toward highly profitable businesses that just happen to have a small number of employees. As Steven T. Dennis noted in Roll Call, Oprah Winfrey, a billionaire, would get a big tax cut, because her production company employs about 400 people, and so would the New York Giants, which has about 210 employees and made $1.3 billion last year.
The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.
There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.
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