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America’s neglected economic engine

Economic statistics can be confusing, contradictory, and sometimes, downright indecipherable.  They often appear as a jumble of observations, predictions, and warnings.  Gathering any meaning from them, particularly in the snippets presented in the popular press is difficult at best.  There is encouraging news about manufacturing and worrisome news about the cost of energy.  However, lost in all that news and analysis, is any discussion of what makes it all run.  While Wall Street and the corporate giants appear to the dominant players, in the United States, when it comes to jobs and productivity, success or failure, growth or stagnation, the future

is almost entirely in the hands of small business.

Small business, according the government’s definition, is any firm with fewer than 500 employees.  However, the vast majority of firms meeting that criteria, and still employing the most people, are firms considerably smaller than that.  And what they do, or produce, covers so many categories, that it’s almost impossible to list them.  Many small businesses have no employees, but that said these one person, or family firms, firms that have no payroll, nonetheless provide income, either solely or in part, to 8 million Americans.  That’s more than the population of the Commonwealth. They range from carpenters, to IT consultants, plumbers, lawyers, landscapers, to wedding planners, photographers, web application designers, painters, and dog washers.  Indeed, the scope of the ideas that Americans have been able to use as the basis for a new business or service is almost limitless.

Small businesses both firms with payrolls and those without represent as much as 55% of all the nation’s jobs.  And according to some estimates, at this very moment they are providing up to 65% of all the new jobs being created during the recovery.  What’s more, while many assume that high tech jobs are the preserve of large firms and government, 45% of all high tech employment, is with small businesses.  And, on top of that, most new patents granted by the government, are the product of the inventive skill of small businesses and their employees.  In other words, while much of the talk about American competitiveness, our ability to create and innovate, is often framed in terms of large corporations, the real engine is in companies whose payrolls are decidedly small.

However, while small business in America, more so than in any nation in the world, drives our economy, it’s a sector that doesn’t get treated well at all.  Just starting a new business, in terms of the paper work, tax forms, incorporation requirements, and various registrations, has been enough to put some people off from even trying.  Indeed, a friend of mine, who launched a small advertising company, spent days just doing the paperwork before he ever got a chance to make his first sales call.  But, on top of that, according to a study conducted by the Small Business Administration, regulatory requirements of all kinds and their cost fall disproportionately on small businesses.  

Small businesses don’t have much flexibility when it comes to overhead.  And the costs of filling out the forms and collecting the data, whether it’s for environmental or workplace compliance, is all overhead.  The SBA study estimated that these costs are 35% larger for a small business than for a large.  In most cases, it wasn’t so much the rule that was the problem, as it was the paperwork and reports associated with complying with the rule.  A large firm can spread its costs more easily, while a small company, with only a handful of employees, has a much higher unit cost for regulatory compliance.  I recently saw an ad for a position working for a firm that had only ten employees, whose only responsibility was to provide environmental compliance data and fill out forms.  I can’t see where that kind of burden either helps the environment or the economy.

It might seem reasonable, that if we wanted to encourage this sector of the economy that government should develop more streamlined reporting processes, do away with duplicative reports, and make as much of it web friendly as possible. There should also be some consideration, depending upon the business and its size, of exempting some small firms, on a case-by-case basis, from the more onerous, and perhaps, unneeded regulations.  

However, not every problem in starting and running a small business rests with government.  The financial services industry, the banks, the very people we bailed out with taxpayer money, are still reluctant to lend to small businesses.  And this isn’t just for high risk startups.  It also applies to firms with a long lending history.  Lenders, during this past recession showed a strong aversion to lending to small business.  And still do.  It isn’t fair, it’s not good economics, but that’s one of the reasons the recovery has taken so long.

Small businesses are the engine that is pulling us out of the recession.  They are also the home of many of the innovative ideas and products that are helping the United States reclaim its competitive edge.  And while politicians give them lip service, and praise them to the Heavens, perhaps it’s time government, and the rest of the economy, start giving them the respect they’re due.

You may reach David Kerr at This email address is being protected from spambots. You need JavaScript enabled to view it.

 

 

 

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