FOR IMMEDIATE RELEASE

Read Veronique de Rugy's Working Paper

Everyone in America loves small businesses, most of all the government. Regardless of party affiliations, administration policies are based traditionally on the idea that small businesses are more deserving of government favor than big companies. Leading the way in disbursing subsidies and other help is the Small Business Administration (SBA), whose mission statement states that its role is to “maintain and strengthen the nation’s economy by aiding, counseling, assisting and protecting the interests of small businesses.” For nearly 20 years, political leaders of all stripes have taken as gospel truth that small companies are the chief drivers of economic growth and are responsible for about two-thirds of all new jobs created in the United States. But is this conventional wisdom true? Do the facts justify the many government spending programs, tax incentives, and regulatory policies that favor the small business sector?

• Conventional Wisdom (CW): Small businesses create 60 to 80 percent of new jobs every year.
• Fact: Labor economists have shown that this oft-quoted SBA claim is a meaningless statistic that relies on analytical and statistical fallacies. If it were true, one would expect the job market to be dominated by small businesses. Yet, only about half of private sector employees work in small businesses, and that percentage has remained roughly constant over the last decade.
  
  
• CW: Small businesses create more jobs than do large companies.
• Fact: Job creation is only half of the story. Small businesses not only create more jobs than large businesses, they also destroy more jobs. The real job growth comes not from people dreaming of being small business owners but from people committed to building big companies. Most jobs are created by relatively few firms that start small and grow big.
  
  
• CW: Small businesses are the chief driver of the U.S. economy.
• Fact: The concept of “small business” as an analytical category is rather useless. It is not small businesses per se that are important for economic growth, but flexible, innovative, risk-taking businesses, which tend to start small. It is the next Apple or Amazon.com, not the next mom-and-pop store, that will create jobs and boost our economy.

There is therefore no factual reason to base policies on the idea that small businesses are more deserving of government favor than big companies. Preferential policies will hurt, not help, economic growth.

Market economies generate faster growth when resources are allocated on the basis of profit-maximization rather than political considerations. In the absence of government intervention, resources will be quickly shifted from inefficient uses to more productive ones. Government programs favoring small businesses distort this process and will only hinder entrepreneurs and investors from serving the needs of consumers.

Instead of preferential policies, the government can best help small business--and other segments of the economy--by creating an environment conducive to productive behavior. This means low tax rates, low levels of regulation, and a stable legal structure that protects property rights.

To read this study, please click here. 

AEI research fellow Veronique de Rugy can be reached at vderugy@aei.org or 202.862.7165. For additional media inquiries, please contact Veronique Rodman at vrodman@aei.org or 202.862.4870.

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