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Dec. 30 2009 - 2:58 pm | 139 views | 0 recommendations | 16 comments

Are Small Businesses Good For The Economy?

U.S. Chamber of Commerce headquarters

Image by NCinDC via Flickr

I recently noted that, on balance, successful large corporations are better for the American people than similarly successful small businesses. The profits gained by large, publicly-traded corporations, I argued, are distributed democratically to thousands upon thousands of shareholders across the country. The profits generated by successful small businesses, conversely, go only to said businesses’ owners. In any event, one would think that the semantic distinction between publicly-traded and privately-owned would be enough to indicate which form of company is on the side of the angels.

This post occasioned an impassioned response from commenter ‘paullewis.’ Lewis’ cri de coeur was eloquent and, at times, moving. I will quote at length from it here:

I’m one of the small businessmen that you claim is “enriching myself” at the expense of my employees, vendors and community.

Yeah, we’re not a public company, so members of my community can’t invest in our stock and get “a piece of the action.” Perhaps we should issue stock. I could use a lot of help because for the past two calendar years a “piece of the action” of our business would involve an investment, not a dividend.

We don’t live in a mansion. We haven’t taken a vacation in three years. Our cars are both over six years old. I don’t dress in Armani suits.

We comply with the same local, state and Federal regulations that the big guys do, but it costs me a larger percentage of my budget to secure legal counsel, accountants and consultants to help us wade through the sea of regulation.

Our employee compensation package is very competitive. Many of our employees have been with us for over ten years. We’ve made loans to them so that they can purchase cars, homes, and help their kids go to college.

We contribute products, services and money to many local charities. We’re approached by charities on a near-weekly basis. Why? When the representatives of these charities approach large (publicly traded) companies, they’re refused, being told that the decision to give to charity is made by the home office. When charities approach me, they know that I have the power to say yes or no (and have said yes often in the past).

What you’ve not mentioned is that the profits we may have earned in more prosperous years were earned by taking an enormous risk. Starting a business involved investing capital. Without that capital, employees can’t be paid. If I lose that capital whether by making poor business decisions or due to economic disaster, the employees will no longer have a job.

Lewis’ worthy comment raises an extremely important point: that is terribly difficult to successfully operate a small business – let alone attire oneself in designer duds. Yet, in so doing, Lewis has inadvertently conceded yet another nefarious impact of the existence of small businesses: what a drag they are on the economy.

Consider locally-owned restaurants. Independently-owned eateries have a notoriously difficult time surviving. Sink your teeth into this: an exhaustive study from Ohio State University found that 61% of independently-owned restaurant startups in Columbus, Ohio, failed within their first three years of operation. While the oft-heard contention that “90% of restaurants fail in their first year” appears to be baloney, it nonetheless remains the case that far more restaurants fail than survive.

In so doing, these failed restaurants and other unsuccessful small businesses often default on the small business loans that they have received from either the government or private banks – assuming, for the sake of argument, that there is still a distinction between the two. As a part of the stimulus, the government now gives out hundreds of millions of dollars per week in SBA loans. By defaulting on these loans, failing small businesses do further harm to the already soaring budget deficit. Meanwhile, private banks, already teetering on the edge of insolvency, suffer more as they lose money on small business loans. The federal government may claim that it distributes “loans for small businesses, not grants,” but, in far too many cases, they amount to the same thing. Because of their high failure rate, therefore, small business startups are terribly detrimental to the larger economy. The personal tragedy of a failed business is also a greater tragedy for the country.

Or consider small businesses’ impact on employment. 52% of working Americans are employed by small businesses, which are defined as companies with fewer than 150 workers. But because small businesses often live so close to the edge of bankruptcy, in times of economic tribulation, they are responsible for a stunning number of layoffs. Today’s New York Times has an excellent – if disturbing – report on the myriad small businesses that have closed this year. The same article notes that in the first quarter of 2009, failing small businesses were responsible for laying off over one million Americans. Large corporations (with the exception of American car companies) tend to have far more capital on hand. Thus, when times get tough, they don’t lay off employees like small businesses. Big business could just as easily be called big workforce.

Small businesses are responsible for a disproportionate percentage of American unemployment and of defaulted loans. They may be “small,” but they’re a big nuisance, indeed.


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  1. collapse expand

    From article:
    “Thus, when times get tough, they don’t lay off employees like small businesses.”

    I am not buying this one at all unless you can show me the data.

    I would also like to see ripple-effect data. For instance, when a big company closes down a manufacturing plant, all the small businesses that supply it then lay-off if not close.

    I was originally trained in engineering with a master’s paper very useful in cutting-edge manufacturing. Needless to say, I’ve worked out of field most of my career, but the experience of everyone I know is counter to what you just said, and that includes in high tech, as well as manufacturing. Service is well, you need someone earning something to serve …

    I think you could argue that large companies have a higher statistical multiplier. They magnify both benefits and negatives. But, without data I am not going to accept the one assertion I quoted.

    As a separate counterpoint, from a risk management standpoint, would you rather own one large company of good quality, or a diverse basket of medium-sized companies who’s quality scores also average out as good quality? Using standard investment risk management, I am not sure your theory holds up here on risk to economy. This goes to the risk multiplier view.

    There is risk, competition, resiliency and efficiency. All three need to be considered in the terms of “goodness” of a system.

    The rest is thought provoking though.

  2. collapse expand

    “Because of their high failure rate, therefore, small business startups are terribly detrimental to the larger economy. The personal tragedy of a failed business is also a greater tragedy for the country.”

    Two words to puncture this pile of sophistry:

    Silicon Valley.

  3. collapse expand

    Where on earth is this anti-local, anti-small biz. stream of animus coming from? It seems to be your soapbox and based on what evidence? You assert that Big Corporations don’t lay off as many people as small business — and where are your statistics to back this assertion? AOL, to name only one, is currently laying off 2,500 employees — that’s more than many small businesses even employ.

    The commenter is too polite by half. What he is not saying is that he is also paying 15% FICA and all sorts of other taxes and fees — not to mention finding and affording free-market unsubsidized healthcare — for the putative privilege of running his own business. If you have to pay, which isn’t uncommon, $1,200 or more a month to buy health insurance for a family of four, that’s a pre-tax additional overhead of $14,400 a year just to stay out of the hospital — and avoid becoming a bankruptcy stat or a drain on the public purse.

    Can you rustle up $14,400 easily? Few can in this economy.

    1) Many people are now running their own small business because no one, anywhere, is hiring them, Big Fat Corp. included. If they are doing it below your standards, lighten up. People are doing their best and for that deserve respect, not scorn. Have you ever run a small business?

    2) People who run a small business, as the commenter points out, assume all sorts of risks. How many of them — do you have those statistics — actually borrow from the SBA? Many wouldn’t qualify for a loan or even ask for one.

    3) Due to a clusterfuck of banking and credit card and mortgage decisions — way beyond the control or purview of many small business owners — those who were doing just fine before the recession can no longer access a line of credit or have had theirs reduced and/or their APRs jacked way up. So, now they can’t order supplies or expand and, since everyone is paying late or slow (the subject of my recent NYT story), there’s a domino effect where everyone is screwed.

  4. collapse expand

    After reading back over Ethan’s previous work, the only conclusion I can reach is that he is trying to present contrarian viewpoints and luck out with a hot-button issue, get some attention, and parlay that into a job for corporate and/or conservative media.

    If he didn’t enjoy being contrary, why on Earth would he live in Portland, Oregon and Santa Cruz, California? I used to live in Monterey County, and I’ve never heard of ANYone near the Salinas Valley who refuses to eat local produce. That’s like living in Manhattan and refusing to buy books made by NY publishers. That single region accounts for over 50% of the entire country’s winter produce.

    Nor have I ever heard of anyone who thinks the Jews should get over it, and that we should all forget the lessons of history. (Getting rid of Auschwitz and the Arbeit Macht Frei sign.) That’s the sort of thing one only says to generate argument and get attention.

    • collapse expand

      J,

      I don’t really see any point in responding to your attack on my motives. That being said, please go back and actually read the Auschwitz post: you have grossly mischaracterized it. I in no way said we can “get over the Holocuast” In fact, had you read the post, you would have seen that my point is that we can never “get over” the Holocaust – but never “understand” it, either.

      In response to another comment. See in context »
    • collapse expand

      Hello jacaton,

      You wrote:”After reading back over Ethan’s previous work, the only conclusion I can reach is that he is trying to present contrarian viewpoints and luck out with a hot-button issue, get some attention, and parlay that into a job for corporate and/or conservative media.”

      This does not add up, there is no way any conservative news outlet would ever embrace anyone who says that small business is a drag on the economy. Small businesses are motherpie and applehood to conservatives. The same with “Boycott Local Businesses”, that wins no fans anywhere. Even big businesses will claim that they love the idea of small businesses. He claims to be against “Buy Local” campaigns which every chamber of commerce, conservative hotbeds, endorses. Even conservatives are not against “eat local” because it would benefit US farmers vs. foreign farmers. So if he is trying to suck up to conservatives, he is missing the mark wide.

      I will grant you some of them have a weird conservative-like angle, like Ms. Obama is not fascinating (>whew< that took some guts), environmentalists don't really respect nature, we should ban cigarette bans, and President Obama hates airlines. He also takes the position that the fight against global warming is just a plot by the wealthy to oppress and exploit the poor by denying them airline tickets and the ability to build coal-fired power plants. Perhaps some conservatives might find entertaining, but it is pretty thin stuff.

      However the bigger problem is that it is not entirely clear what it is his saying a lot of the time. He does a lot of innuendo and implication but does not always quite say anything clearly. In the Auschwitz piece he implies that there is no point in preserving the camps there. He asks "Do we 'learn' by preserving Auschwitz? Do we get to the 'roots' of the Holocaust, do we make some 'sense' of it?…Why, then, are we preserving Auschwitz?" but he certainly does not come out and say so. He certainly does not say that anyone should "get over" what happened at Auschwitz but if that is not what he is saying, what exactly is the point of the piece? That we should remember the mass murder that happened at Auschwitz but not by preserving the location itself? Since Auschwitz has actually already been preserved, what does the posting mean by asking the question IF it is right to preserve Auschwitz, that it never should have been preserved in the first place? or that it should dismantled?

      Like all of the other postings, this ends in a complete muddle. This sort of wishy-washy-ness is not going to win the hearts and minds red meat conservatives.

      In response to another comment. See in context »
  5. collapse expand

    Yesterday, I went to Costco, bought a giant box of beef burgers, which had been culled from beef cuttings from cows in Iowa, Texas and Argentina.

    Then I went to Barnes & Noble and bought another copy of “The DaVinci Code.” I can never have too many copies of that. And apparently neither can B & N.

    I stopped at the supermarket and picked up some tomatoes which had been grown in Chile and some British Stilton.

    Then, since it was on my way, I stopped by the Italian groceria in the neighborhood and berated the owner about what a drain she was on the economy and asked her, in no uncertain terms, to close up shop and please fuck off.

    What an awesome day!

  6. collapse expand

    As a quibble, SBA-backed loans are only a fraction of total small business loans in a given year (4% on average).

    Of larger importance, maybe it is the banking system that is failing small business. Rather than extending credit and loans to companies that are established in the community to help local economies rebound, most banks are unwilling to risk anything to bolster their biggest customers (locals). Multiplier effects are strong at the local level, but last time I checked it wasn’t a loan default by the local hardware store that tanked the economy.

    And by the way, who do you work for to the pay the bills?

  7. collapse expand

    Pray tell, how do you think these big, publicly traded companies began? Did they spring forth fully grown from the NYSE? Do you think that most of the innovations in the U.S., even in the past 50 years, have come from major, publicly traded companies?

    Ecosystems provide a nice comparison. If you remove one part of the ecosystem, it can completely destroy it because of the imbalance created. If you remove small businesses from our economic picture, it would cause economic collapse.

  8. collapse expand

    “In any event, one would think that the semantic distinction between publicly-traded and privately-owned would be enough to indicate which form of company is on the side of the angels.”

    A liberal who likes big box corporations. Interesting, um, slant on things. What fundamental problem do you have with private property? You may as well say owning a home is a drag on the economy because you may default on a loan and that’s a drag on a bank- and it’s bad for the bank because then they can’t loan to small businesses which will just default anyway. Everybody should just rent apartments in publically owned buildings and work for big corporations. Or better yet, government-owned buildings and companies! A risk free society! Everybody knows big corporations and the govenment never/can’t by definition go bankrupt, and if they do, then the only people who lose money are the shareholders which didn’t need it in the first place or they wouldn’t have it lying around to invest! What a wonderful world you have invented for yourself.

    • collapse expand

      Hello clairejansz,

      You would be most mistaken if you believed that Mr. Epstein was a “liberal”. He quite certain that Mr. Obama and the environmental community want to deprive the working masses of low cost airline tickets and coal fired power (to say nothing of the fact that they do not respect nature). He is further an opponent of banning cigarette smoking in California. He even suggests that the First Lady is boring. Hardly the stuff from which liberals are made.

      In response to another comment. See in context »
      • collapse expand

        Mr. Los Angeles,

        How interesting that protecting the interests of the poor is not considered a “liberal” postition.

        In response to another comment. See in context »
        • collapse expand

          Mr. Epstein,

          I fear you missed the irony of my comment. Poor people do not actually build or own power plants of any sort, it is actually rich people who do that, albeit they are being built more frequently right now in countries where there are a lot of poor people. Similarly, access to low cost airline tickets is really not one of the issues that poor people place very high on their priority lists. In both cases, it is the actually the wealthy who benefit most directly from the construction of coal fired power plants and the current airline operating practices, not so much the poor. This would suggest that the professed concern for the interests of the poor is actually a cynical camouflage for advancing the interests of the wealthy. It is the conservative position to defend the interest of the wealthy against the interests of the poor which is why I suggested that the positions advanced in your postings are not liberal.

          In response to another comment. See in context »
  9. collapse expand

    Ethan: Why don’t you try this one. “Exercise is really bad for your health”. or.. “People without tattoos are insecure” or.. “Bearded men are more radical than those who shave” or..

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    About Me

    I'm a writer based in Portland, Oregon. My work has appeared in the Weekly Standard, the American Spectator, the New York Press, The Big Money, sp!Ked online, the Epoch Times, the Daily NK, and others. From 2005 to 2007, I wrote a column on culture and politics for the (alas, now defunct) Seattle-based Internationalist Magazine. In so doing, I filed dispatches from Berlin, Seoul, Paris, New York, and, yes, Reno - among other places. In 2009, I reported on business from Shanghai. I attended Reed College, in Portland, Oregon.

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    Followers: 44
    Contributor Since: November 2009
    Location:Portland, Oregon