Start-Ups Create Jobs, Right? So Let’s Stop Praising Small Businesses — and Fund More
By pretty much any measure, lending to American small businesses is weak. According to the SBA, for example, a small business is defined in one of the following ways, depending on industry:
- Annual revenues of $750,000 or less for most agricultural industries
- $33.5 million or less for heavy construction industries
- $14 million or less for specialty trade contractors
- 500 employees of fewer for most manufacturing and mining industries
- 100 employees or fewer for wholesale trade industries
- $7 million or less for most retail and service industries
That’s a wide range of range of definitions, especially given the way politicians and Chamber of Commerce types like portray entrepreneurs as an urban version of the family farmer. In fact, even the SBA’s small-business loan data is based on a a sort of proxy measure. The agency defines a loan to small business as any business loan of $1 million or less. So a $1.1 million loan to a chain of dry cleaners with $5 million in revenues doesn’t get counted, while a $500,00o loan to a 150-worker auto parts wholesaler does.
Small businesses often have a relatively thin barrier between success and failure. Facing minimal economic growth—not to mention uncertainty about the effects of healthcare reform and other regulatory and legislative agendas—only the most confident and/or desperate of entrepreneurs will increase their borrowing.
The real Little Engine That Could when it comes to job creation, as shown in a 2010
study from the National Bureau of Economic Research—”Who Creates
Jobs? Small vs. Large vs. Young”—is new companies, regardless of their size. As the authors (
John Haltiwanger,
Ron Jarmin,
Javier Miranda) concluded: ”Firm startups account for only 3% of employment but almost 20% of gross job creation. The fastest growing continuing firms are young firms under the age of five.”
This distinction might seem nuanced—very few business launches start with 1,000 employees—but it’s important. When politicians criticize government for small-business-strangling regulation, they’re being disingenuous. Most small businesses fail to grow because that’s the nature of the beast. What you want, from a job-creation perspective, is government to foster an environment in which starting a business—period—is easy. It’s a numbers game really; since most small businesses will fail or stall, you want to throw as many ideas on the pavement as possible so that the small percentage of start-ups that thrive is part of an increasing pool of new companies. The success rate may not change, but the absolute number of successes will.
Judging by that measure, the state of U.S. entrepreneurship is ripe for meaningful discussion. On the one hand, the Romney campaign might focus on the most recent annual
data for U.S. business start-ups, which dropped to a record low in 201o. Conversely, the Obama campaign might highlight the
World Bank‘s most recent
“Doing Business” annual report, which ranks the ease of organized commerce in 183 countries, based on business-friendly regulations. The U.S.—which finished 4th overall—ranks 13th when it comes to starting a business. That’s the second-highest ranking among the world’s 10 biggest economies.
Rather than arguing over who’s more supportive of existing small-business owners—or harping on regulations, which are not the problem; or worrying about weak borrowing, which is most likely a cyclical phenomenon—both candidates should explain how they’d help wannabe entrepreneurs take the big leap. Because the more of those folks we can guide from fantasy to reality, the more jobs we’ll create down the line.
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