Saturday, January 7, 2012

Small businesses are a political fetish

If there's one bit of rhetorical that's clueless from the left and condescending from the right, it's the worship of small businesses.

Small businesses are wholesome, mom and pop shops, right? They have closer ties to the community, treat workers better, pollute less and create more jobs than big companies.

Well, no, all of those claims are false.

It's popular for politicians to claim that small businesses create most new jobs in this country, so let's start there. You hear this from both donkey and elephant breeds. The crucial detail they are missing is that small businesses lose most of the jobs too, as they go under a lot. This is a classic case of counting the hits and not the misses, and that's why the policies intended to help small businesses fail at creating jobs.

From Doug Henwood of the Left Business Observer:

...It’s still often claimed that that’s where all the real job action is. The claim is ultimately traceable to 1980s work by the consultant David Birch, who once famously said that 88% of the new U.S. jobs created in the first half of the 1980s were in firms employing fewer than 20 workers. That factoid was repeated by pundits and politicians, and has since made its way around the world. But it’s not true.

Mr. Birch came up with this nugget by playing with some computer tapes from the credit rating and business information firm Dun & Bradstreet. But a closer examination conducted some years later showed the D&B tapes to be full of errors, at odds not only with official unemployment insurance registration info, but even with the phone book. Firms were classed as being born and dying when they merely changed hands. And Mr. Birch’s methodology was pretty idiosyncratic, to put it kindly.

For example, firms that started in the very small category — fewer than 20 workers — were categorized for all time as staying there, even if they’d grown beyond the small category. Or, more wackily, if a firm with 600 employees had a bad year and canned 200 of them, this would show up as a gain of 400 jobs for the small business sector. Not that Mr. Birch ever fully disclosed his techniques, like most serious researchers would; he did, however, tell the Wall Street Journal in 1988 that his figures were “silly,” and that “I can change that number at will by changing the starting point or the interval. Anybody can make it come out any way they want.” Despite that confession, Mr. Birch is still taken seriously by the U.S. press.
American small businesses are defined as having less than 500 employees, a far cry from the small stores everyone pictures. Large businesses pay their employees more and environmental regulators have an easier time keeping tabs on them. They also employ local people and contribute to charities in the immediate area.

I don't mean to vilify small business, because they are still important for the economy. Large, successful businesses have to start somewhere. For what it's worth, every member of my family is a small business owner. Both my parents, my brother and even his wife all own their own small businesses. My father owns a small franchised store and the other three have farm and agricultural businesses.

I used to think as small businesses as having the blessing of being too small to hire lobbyists to game the system in their favor. That was until I learned they pool their resources together and form lobbying groups like the National Federation of Independent Business.

In the end, all businesses are important for the economy, large or small. It's popular to single out small businesses as being special, but that's just empty rhetoric.

As a footnote, the "buy local" activists usually throw in that local businesses tend to be small businesses, but that's not always the case. Coming from Maine, I've never heard localists say they're against buying from LL Bean, despite it being a huge corporation. Their flawed model makes no allowances for the size of a business. That's why I don't bother including this point in my normal treatments of their economic views.

1 comment:

  1. The 'middle class' is a similar political fetish.