Government Boost to Small Business Could Do More Harm Than Good

Published September 22, 2010

President Obama has signed into law the ceation of a $30 billion fund for small business lending, but a prominent economist at George Mason University says there is no good reason to give small businesses special favors.

In signing the bill into law in late September, Obama called small business “the anchors of our Main Streets” and declared small businesses create most of the nation’s jobs.

Republican lawmakers, who had held up the bill for months, likewise heaped praise on small businesses, with House Republican Whip Eric Cantor (R-VA) praising small businesses as “the engine of job creation.”

One thing everyone seems to agree on is that small businesses are the key to creating jobs, rallying the economy, and moving the nation out of the Great Recession.
But economist Veronique de Rugy of the Mercatus Center at George Mason University argues in a new policy brief that this is a misguided assumption based on a misunderstanding of the underlying data.
‘Politically Popular, Bad Economics’
“Politicians’ fetishization of small business makes no sense when you look at the data,” de Rugy said in describing the conclusions of her recent paper. “Privileging small businesses over large business may be politically popular, but it’s bad economics.”
According to de Rugy’s analysis, large multinational corporations created jobs more rapidly than many smaller firms in the 1990s, a trend she suggests will continue.
“New jobs are created by both large and small businesses alike,” de Rugy says. “Firms with more than 500 workers account for about half of America’s total employment. There’s no empirical reason to believe that this won’t continue to be the case.”
De Rugy added, “If the goal is to create jobs, there is no justification in creating policies that favor small firms over larger ones.”
Government Hurting Business
The Small Business Administration defines small businesses as firms with fewer than 500 employees, which de Rugy argues encompasses a wider group of firms than what most Americans would typically consider small. Whereas the term “small business” typically conjures up images of mom-and-pop stores, in reality relatively few small businesses fit this image.
Moreover, de Rugy argues, current policies are likely to do more to retard small business growth than to promote it.
“Businesses aren’t investing and aren’t hiring because of uncertainty about regulation and taxation,” de Rugy says. “There is almost $2 trillion of capital sitting on the sidelines today. Until there’s more certainty about what Washington is going to do on a host of issues ranging from taxes to health care, businesses will be loath to invest and hire.”
Daniel Rothschild ([email protected]) is the managing director of the Mercatus Center’s State and Local Policy Project at George Mason University.

Internet Info

“The Business of Government Shouldn’t be Business,” Veronique de Rugy, Mercatus Center at George Mason University: