The case against small-business fetishism

The case against small-business fetishism:

Just about the only thing Republicans and Democrats can agree on nowadays is that small businesses are the key to economic growth and hauling the economy out of recession. Trouble is, as Charles Kenny argues in Bloomberg BusinessWeek, there doesn’t seem to be a lot of evidence to prop up this view.

While small businesses obviously play an important role in the U.S. economy, the vast majority of them — think restaurants, beauticians, independent retailers, plumbers — will remain small forever, according to a recent survey by two University of Chicago economists. The bulk of them have no plans to grow further. Occasionally there’s a future Apple or Hewlett-Packard among the vast and varied potpourri of small businesses (both firms started out as garage-sized operations), but that’s a relative rarity. Fairly few small businesses are applying for patents, and only a very small slice of them are creating new jobs. “Eighty percent of U.S. small companies that remained in business from 2000 to 2003,” Kenny points out, “didn’t add a single employee.”

A few weeks ago, I posted a chart showing that the United States actually has a tinier proportion of small businesses than most other developed countries. But that’s not necessarily so terrible. After all, do we really want to be more like, say, Greece, which depends far more heavily on small businesses? One recent cross-country analysis by Dartmouth’s Rafael La Porta and Harvard’s Andrei Shleifer found that a country’s wealth tends to be inversely related to how many people are self-employed or work in small businesses. Across the globe, large companies tend to be far more productive. Plenty of praise gets lavished on micro loans and small enterprise, but often the best thing for a poor country’s development is the expansion of larger, established firms.

So why does all this matter? Because, Kenny argues, it means we might be pursuing misguided economic policies here in the United States. He quotes Case Western Reserve economist Scott Shane: “Because the average existing firm is more productive than the average new firm, we would be better off economically if we got rid of policies that encouraged a lot of people to start businesses instead of taking jobs working for others.”

That’s not meant to be a shot at small businesses, which are important in and of themselves. It’s less clear, however, that they’re the key to stronger job growth. There’s a case for nurturing tiny startups that have a shot at becoming the next Apple. But what about specially directed tax breaks for small businesses — the sort of thing that frequently gets touted as effective stimulus? It might be time to start rethinking that.