Thinking Small
Veronique de Rugy writes in the June edition of reason about "America's small business fetish":
The cult of the small business is so prevalent that you are treated like a heretic in Washington if you don't pledge to do something nice for the little guys. Targeted tax credits, special regulatory exemptions, preferential access to government contracts--nothing is too good for America's DIY manufacturers and social networking startups. Support for the Small Business Administration (SBA), a federal agency tasked with handing out goodies to the modestly sized, remains strong, despite dozens of compelling studies demonstrating that its efforts amount to little more than poorly targeted corporate welfare.In his 2011 budget, President Barack Obama requested $1.4 billion to fund SBA programs. Most of the agency's money is spent on special credit programs for small businesses that have difficulty getting loans from regular banks. In fiscal year 2011, the SBA guaranteed $30 billion in such loans, which theoretically don't cost taxpayers anything. In practice, however, whenever the economy goes south, the SBA can't cope with the number of small businesses that default on the loans. In 2011 the SBA ended up spending $6.2 billion, a $4.8 billion increase over its requested amount, mainly because so many small businesses couldn't make their payments.
...Our national obsession with small businesses misses the point. It's not micro-firms that drive our new, entrepreneurial economy. Young firms--the startups that will grow to be the next Facebook--do tend to be small. But their newness is the relevant factor, not their size.
A 2010 National Bureau of Economic Research paper by University of Maryland economist John Haltiwanger and researchers at the U.S. Census Bureau found there was no consistent link between net job growth rates and the size of a business. Instead, the researchers found that firms younger than 10 years, particularly startups, are the real sources of job growth.
...Instead of preferential policies, the government should establish an environment that encourages businesses with strong growth potential to evolve into successful large enterprises. This means low tax rates, low levels of regulation, and a stable legal structure that protects property rights.
Taxpayer money should not be preferentially passed out to other taxpayers. If you can't get money out of a bank, you need to get creative and get the money elsewhere.
"small businesses that have difficulty getting loans from regular banks"
Am I dumb or are small businesses that cannot finance themselves from profits and cannot get bank loans either, just the type of businesses not to be suporting / investing in ?
Robbo at May 22, 2012 2:03 AM
Personally, I don't regard a "small business fetish" as a bad thing. But yeah, strangling them with regulation and then trying to paper over the problem with subsidies is a bass-ackwards approach.
Cousin Dave at May 22, 2012 6:17 AM
Robbo:
Not necessarily.
Banks are spectacularly bound by convention. If they ain't seen it before, you're not gonna start with THEM.
I tried to get funding in '93 to start an ISP.
The banks (nicely) told me to take a hike, good luck, this "internet thing" wasn't going anywhere.
One VP even told me that "I can't _imagine_ that our customers would _ever_ want to be able to do banking from home, we pride ourselves - and our customers love! - our teller and officer interactions!"
Of course, I went and took the SBA course at the local University, and the SBA officer told me much the same, he couldn't see more than a few people wanting this internet thing, and maybe I should instead, consider opening a PC repair place.
Unix-Jedi at May 22, 2012 7:05 AM
I personally started a small (1 person) business in 1983, grew it to just over 100 employees, sold it to a Swedish firm in 2010. With that experience, I couldn't agree more with Ms. Rugy: it's not the size that counts. The vast majority of small businesses are not intended to grow beyond a few employees (think your local hair salon), and of those that want to grow, very few make much headway.
Robbo also nailed it: if a small business cannot get a bank loan, there is a reason. My philosophy has always been that the banker WANTS to loan me money (that's how he makes money), so if he won't, then what am I doing wrong?
Interesting factoid: the vast majority of businesses in the US are very small, under 10 employees. The cutoff (in 2008, might be a bit different now) to be in the top 5% of companies by employee count is about 97. Therefore, my little (by financial measures) company, in terms of employees, was bigger than 95% of all companies in the country.
Jim E at May 22, 2012 7:16 AM
I started a small business in the 1990s. It crashed and burned. I had a blast, though. Despite our losses, my business partner and I would do it again in a heartbeat. Oddly, what killed us was the switch in education funding to the internet, which wasn't yet powerful enough to do what we were doing. (And I didn't see the possibility of You Tube.)
Joe at May 24, 2012 7:58 AM
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