Texas governor and Republican presidential nominee-hopeful Rick Perry released his economic recovery plan this week. Among other conservative policies, it includes a flat tax provision. In a video interview explaining – and I use that word loosely – his plan, Perry harps on the idea that easing up tax and regulatory burdens on the wealthiest folks will incentivize them to invest capital into businesses – i.e. job creation.
How well this plan would actually work is a debate I’ll leave to others. I was more interested in the continued allusions to the mystical job creation engine. Political candidates and average Americans, myself included, have a tendency to romanticize small businesses. This is largely due to a casual lumping of small businesses with entrepreneurship into the same slice of American Pie.
In the post Steve Jobs era, the search for the next Apple, Facebook or Google is running full steam. In the post Office Space, 4 Hour Workweek era, startups and self-employment have become the new thing. But is entrepreneurship really the same thing as small business, and can we pin our hopes for new jobs on a collective set of fantasies and daydreams and VC funding? Probably not. While everyone wants to be rich, the majority of small business owners interviewed by two UChicago researchers stated their motivation was the freedom and flexibility, as opposed to a plan to grow.
Here’s some more dirt on small businesses in America:
- 90% of companies in the US are small businesses hiring fewer than 20 employees.
- Just over 60% of small businesses have 4 or fewer employees.
- Big companies (defined here as 20+ workers) hire 80% of workers in the country.
- The strongest economies have more workers in large companies (read the Yglesias quote)
- Small businesses tend not to grow well – 80% of small businesses between 2000 and 2003 didn’t add a single employee.
- Between 2007 and 2010, small business failure increased by 40%.
It’s kind of a mixed bag. Small businesses are undeniably a vital part of our economic makeup, and a growing part of our national identity. But do they really carry the cure for our economic woes?
With regards to economic development, which is essentially what the jobs-creation debate is all about, we can turn an eye towards emerging markets to see what’s been successful there (If you’ve read this blog before, you know that means India) The answer? Big companies are the king of the jungle. Big companies employ the richest people in all nations, have drastically higher rates of productivity, and are the biggest job creation engines in their local and regional markets. A pair of Dartmouth economists summarize: “hope of economic development lies in the creation of large registered firms, run by educated managers and utilizing modern practices.” An MIT study found that in India the average microenterprised shop pulls in $133. A year. People long for a job at a brand-name firm – for workers, big company jobs mean better benefits and higher salaries. The conventional attitude in countries who are adding jobs daily is just that, conventional: work for a big name company if you can. Only two percent of the recent graduating class at India’s top B-school started new businesses, for example.
However, common sense tells you that in developing countries, where people are looking to “make it” in the big cities with flashy jobs, there is a social status associated with working at a high end firm. One of my cousins in India has worked for Infosys and now works for Cisco, and he feels like kind of a big deal. Just as the corporation has been part of the modern worker’s identity in America and other capitalist economies, we’re seeing that idea take root around the world. But those cultures, who can tend to look westward for popular inspiration, aren’t immune to the lure of being one’s own boss. Case in point, my other cousin (the younger brother) is more entrepreneurial and left his job at Wipro to look for an overseas position or a startup idea.
The facts say that starting and growing a business anywhere is just plain harder. They have tighter profit margins and thus less room for mistakes. There’s diminished access to credit markets, particularly in a bad economy when much bank lending has dried out. For small manufacturers, despite the rise of Web-enabled production arbitrage (see: alibaba.com) they often have less access to export markets. The list goes on.
Despite this, people get dollar signs in their eyes thinking about their homegrown company, which has now been reduced to some pages of code, folding into a lucrative corporate acquisition, or being the next household name your grandma is using on her iPhone. In doing a recent market research project about the mobile health and tele-health markets, I was dumbstruck by the dozens of startups who have secured thousands to millions of dollars in funding. There’s also the intrinsic appeal: the thrill of the chase. Having ventured out on my own over the last five months and having been involved with startups for over two years now, I can attest to the creative rush and simple fulfillment of flexible hours and more project ownership. Working remotely is nice, too.
Pinning our hopes of economic recovery on small businesses then, seems less a practical idea, and more of a populist appeal. This seems fine in theory – but it is troublesome when policy positions that are supposed to help turn things around are based on scoring political points rather than facts.
So while no one’s hating on the new American dream of entrepreneurship, or saying small businesses are trivial, we should be careful not to conflate the two in terms of job growth for our nation. Jobs happen when companies grow. Big companies can grow at a faster clip. So in theory, it should make sense to we focus our big guns (corporate policymaking) on helping big businesses do well. But is Perry right about easing up the tax burden on the top of the pyramid? The Occupy Wall Street movement doesn’t think so.
The problem is when additional money is siphoned towards the top rather than getting re-invested and re-distributed. OWS and the 99% movement is the angry cousin of the idealist entrepreneur. Part of the appeal of small businesses is emotional – you know these people, you can see them in your neighborhood, and they aren’t tooling around in corporate jets on taxpayers’ bailout money. So while small business growth can’t provide the shot in the arm for job creation that we need, corporate America has proven it’s an irresponsible steward of our human resources. Maybe everyone should just start their own business.