Are Small Businesses Good For The Economy?
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.