Magazine | June 11, 2018, Issue

Upside of the Upsized

Workers process purchased orders at a packaging area inside the Amazon distribution center in El Prat de Llobregat, near Barcelona, Spain, March 15, 2018. (Albert Gea/Reuters)
Big Is Beautiful: Debunking the Myth of Small Business, by Robert D. Atkinson and Michael Lind (MIT, 368 pp., $29.95)

The only figure possibly more sacrosanct in the U.S. economy than the American farmer is the American small-business owner.

Small businesses, it is often repeated, are the engines of the American economy, creating most of the jobs and providing the impetus for the country’s engine of economic growth. Our economy depends on the fecundity of small business not just for the new jobs it creates but for much of our innovation and entrepreneurial spirit as well, to continue the sentiment.

Both Republicans and Democrats come close to fetishizing small business these days: Each proclaims its importance in its platform, and the parties compete against each other to demonstrate their fealty to this group by offering them an amazing variety of economic incentives. For instance, the recently passed tax bill provides a flat 20 percent tax cut to most small businesses, which is on top of myriad existing tax breaks — such as the ability for small businesses to fully and immediately deduct all capital investment, a break worth billions of dollars a year.

We also have an entire administrative bureaucracy, with an annual budget of over $700 million, called the Small Business Administration, that makes loans to small businesses, provides a wealth of advice to this group, and essentially looks out for its interests. It has, for instance, helped engineer the exclusion of small businesses from an amazing array of rules and regulations governing worker safety and environmental protection.

Robert D. Atkinson and Michael Lind take great exception to the narrative of small-business exceptionalism, as well to the regulatory breaks and tax provisions that go to small business, while demonstrating that the “small business as economic engine” argument is largely a crock.

Big businesses, they aver, have proven to be better at achieving all that both the Left and the Right deem important to the U.S. economy: Big businesses pay higher wages, provide better benefits, have higher worker productivity and more innovation, do more research and development, export more, and achieve more in terms of environmental protection, worker safety, training, tenure, and diversity. In short, if the Left and the Right were to examine business solely by outcomes, both would more forcefully advocate that the government do more for big business, the authors reason.

A majority of U.S. workers are employed by “large” businesses with 500 or more workers, and Atkinson and Lind suggest that these workers are, on average, much better off than those toiling in smaller concerns. Besides better pay, benefits, and safety, jobs created by large companies tend to have much longer tenure. This simple fact obscures the contribution of big business to job creation: While small firms with fewer than 20 employees accounted for 35 percent of all new jobs created from 1993 to 2010, they also accounted for 34 percent of all job losses. In net, they created only 26 percent of all new jobs — with the rest created by big businesses.

How small business came to be lionized completely out of proportion to its contributions to the economy is complicated: Atkinson and Lind note that in the 1950s, General Motors was seen by most Americans as the ideal company, one that treated its employees well and brought substantial benefits to the U.S. economy. Today, few big companies — not even tech companies — are held in such regard.

A major source of our confusion, the authors suggest, is that we conflate small businesses with new businesses; new businesses do create a chunk of the nation’s new jobs, as well as provide an important impetus for the economy, but new businesses are not necessarily small businesses. Facebook, for example, is just 14 years old — relatively new as these things go — and has created hundreds of thousands of jobs, for people employed by Facebook itself or by a company that’s part of the Facebook ecosystem. Google, Microsoft, Apple, and Amazon were not all that small five years after their inception, either.

Of course, small businesses are not the only ones that receive public-sector largesse: Our state governments are inclined to provide large, established businesses with tax breaks and subsidies.

Having an environment in which entrepreneurs are constantly creating new businesses is an unalloyed good thing for the U.S. economy, and the fact that new-business formation has been historically low the past few years is a worrisome trend. But most new businesses will ultimately fail in the first five years of existence, and the vast majority of those that manage to survive will remain small for most of their existence. Those few firms that attain liftoff velocity and become big businesses are the driving engine of the economy, in essence. If we are to have a department of the U.S. government dedicated to helping small business, it should focus on helping more companies reach this transition stage.

This is, of course, easier said than done. Perhaps it would be best for our government to refrain from such overt assistance of small businesses and instead create jobs and boost our economy in ways that require less direct government intervention.

Ike Brannon is a nonresident fellow at the Cato Institute.

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