A recent NPR story shined some light on the reality of small businesses in America. Most of them don’t employ a single person, and most would not benefit from the lip service masked as the “small business marketing” in Washington.
This raises a bigger question: does the American economy need small businesses to fail? And from this question it is not a giant leap to another question: does the global economy depend on having both losers and winners?
I’ve heard almost every variation of the statistics. More than half of all small businesses fail. Nine out of ten fail after five years. Whether or not these statistics are accurate, we seem to have internalized the fact that most small businesses fail.
So why do we always hear politicians speak of small business ownership as the pinnacle of America? For starters, the idea of being your own boss and making your own way fits into the story of America as a place where people innovate and lead the world.
But could there be a more sinister reason? Do the political elite, who are indistinguishable from the business elite, need a constant flow of good money after bad to prop up who they see as the true economic drivers: large businesses?
Let’s look at some claims made by Jared Bernstein in a 2011 New York Times op-ed piece. He states that even by the federal government’s grossly overreaching definition of “small business” (499 or fewer employees), half of all jobs are held by people in “large” companies.
“In fact, 57 percent of total compensation is paid out by companies of 500 or more employees, with most of that coming from the largest, those with at least 10,000 employees. And new research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all.”
From this I take away that a) the federal government has a strikingly different view of “small business” than I do, and that b) most of the wages paid in America are paid by very large companies, the kind that are not held up as being “uniquely American.”
This is a strikingly different reality than we have been led to believe.
What Do Small Businesses Mean to Big Businesses?
First off, small businesses need to make purchases, buy supplies, and contract for services. I suspect that they are mostly buying these things from large businesses.
If you start a real estate company and need paper for your office, chances are that as a businessperson trying to succeed, you are going to buy your paper from the cheapest place in town, which is likely a Wal-Mart, Sam’s Club, or an Office Max. Maybe you will order it from Quill, another big business.
To large companies, small businesses are customers who will likely never become competition.
Most small businesses fail because of the reality of math: they spent more than they earned and did not have enough reserves to make it to profitability. For many businesses that are capital-intensive, you have no choice but to spend. If you own a restaurant, you have to buy food for your menu, even if you are losing money.
What Do Small Businesses Mean to Politicians?
If you believe that politicians serve only the largest companies, then small businesses are simply kindling to fuel the fire of those companies that are truly creating jobs and economic activity.
Bernstein makes an interesting claim when he says
“The next time a politician tells you how he or she is for small business (which will likely be the next time you hear a politician say anything), be mindful that to the extent that size matters at all for job growth, it’s really about new companies that will start small and, if they survive, perhaps grow large.”
A constant stream of new small businesses who hire people help make politicians look like they are doing a good job, even if most of them ultimately fail. As long as they are able to sustain their narrative, new companies will be started every day. Though we know that most of these companies don’t hire anyone, some of them do, which helps.
According to the NPR story, the business tax packages being pushed by the Republican Party wouldn’t provide much benefit to those companies who have no employees, or only a few employees (you know, the Mom and Pop operations that politicians love to talk about when they regale us with their stories of fighting for Main Street). The benefits will mainly go to the companies who have many employees, but still qualify as small businesses.
The economy is headed down a dangerous path. With the decline in manufacturing in the US, a service-based economy takes precedence. But when those who are essentially only qualified for blue-collar work (sorry, I don’t buy into the idea that “everyone can be a scientist or an astronaut or start the next Apple!!!!!!”) can’t find work, they have no money to spend on services or the crap at Wal-Mart.
And if you think they are going to pay $25 for a haircut at a small business instead of $15 at Great Clips…