Small businesses are the focus of much economic action right now. Although they create a huge percentage of new jobs in the United States (something like ninety percent last time I heard), help for small businesses has been noticeably lacking in the economic stimulation bills passed by the government. If anything, the government is making it harder and harder to become an entrepreneur and find success as one, even as billions of taxpayer dollars are funneled to the corporations that are “too big to fail.”
This brings up an important question: how important are small businesses and entrepreneurs to the American economy? Or, more succinctly, are they so important that the government needs to step in and help them? With 14 million people unemployed and the recession hitting its second dip, it is important that the government focus its energy and funds in areas that will make the most impact. Here are a few facts to keep in mind about this important topic.
- Small businesses are important as employers. At the last census, there were six million American companies with paid workers. Nine-tenths of these employ less than twenty people. However, because each of these businesses have such a small payroll, these companies actually account for only one-fifth of all jobs. Only? When you think about it, that comprises millions of working Americans who need their job as badly as someone working for a large corporation.
- Most small businesses stay small. The little shop on your corner is probably not the next Google or Apple. Eighty percent of businesses studied in 2000 to 2003 did not add a single employee. To be honest, not all people want to grow. Many entrepreneurs became such because they wanted a flexible schedule or other freedoms. These people don’t really want to add another employee, which brings us to our next point.
- Many small businesses are not growing because they don’t want to. Before we spend billions making it easier to entrepreneurs to grow their businesses, it is important to keep in mind that many actually do not want to be big businesses. Many small business people own service businesses in which immense growth is impossible—a doctor’s office or a plumbing business, for example. Others are involved in businesses in which scaling up would not significantly affect their profit margin and thus is not as attractive, such as a restaurant. Some entrepreneurs don’t want to make it big… they want to make it medium.
- Small businesses usually grow slowly. The small businesses that do want to grow and have the ability still may not be able to grow enough to collectively carry the economy out of a recession in the near future. Growth has been made even more difficult in recent years because investment capital and paying customers are both dwindling.
- Small businesses are hit harder by the economic “weather”. A recent study found that small businesses that lost employees lost around twenty percent of them. Meanwhile, large companies with more than 200 employees lost only eight percent. This means that while small businesses may not be the savior of the American economy, a lack of attention to them can certainly bring the economy down.
- Small businesses struggle to woo and to keep workers. It can be harder to keep employees or even to treat them the way you might want to when you lack infrastructure. Small business tend to pay employees less, but also to have smaller per-unit profits. This means that many small businesses really cannot afford to be more generous employers. In addition, small businesses are less likely to offer health benefits and about half as likely as their larger counterparts to offer any sort of retirement plan. When you are competing for talented employees, this can be very destructive. You may have to make do with less trained staff while the corporations get all the real players.
- Countries that depend on small businesses as a major part of their GDP usually do not fare as well. A joint study performed by economists at Dartmouth and Harvard found that a country’s wealth is inversely proportionate to the percentage of workers who are self-employed. It should be noted that a third world person selling firewood is not the same in terms of opportunity to succeed as someone who runs an American dental office. Nonetheless, part of this is due to the higher efficiency and productivity in the more differentiated workplaces that corporations can provide. Clearly, we cannot put the burden of economic recovery on our small businesses without putting our nation in peril.
- Small business monies are often given too indiscriminately. Some small businesses want to grow and are in a position where this is possible. Obviously, these are the businesses that should be targeted in any economic growth legislation. Wasting money on small businesses that plan to remain small or cannot grow may be just that: wasting money. I am all for helping small businesses and entrepreneurs, but we need to focus on growth right now.
- Americans love entrepreneurs and small businesses. No politician can be openly hostile to these without alienating a huge percentage of constituents. This means that many politicians may push small business breaks even if they will not really help us right now. It just makes Americans happy. I know as a small business owner it certainly makes me happy! But from an entirely unselfish point of view, I would like to see our nation get out of this slump, which means being very smart about every dollar spent.
What does this mean for the United States? Clearly a lack of attention to small businesses can really harm our economy. On the other hand, small businesses cannot be expected to create fast growth in either the economy or employment. Small businesses are by nature small, although they add up to a massive impact. While helping small businesses will always be an important part of any economic recovery legislation, we need to keep our expectations realistic and maintain a balanced approach.
