Small Biz Overrated?

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Do small businesses really drive the U.S. economy?

Just as they say that there are two sides to every story, that can also be true with statistics. Sometimes multiple conclusions can be drawn from the same data, especially as it relates to small businesses.

A couple of years ago American Enterprise Institute (AEI) visiting scholar VĂ©ronique de Rugy made the controversial statement that small businesses didn't play as large of a role in driving the U.S. economy by creating jobs as the government and other organizations had claimed for many years. Based on her research, she believes that governmental policies predicated upon these deep-seated beliefs are not only wrong but actually damaging to small businesses and the economy at large. You can read the article, "A Talk with a Small-Biz Heretic", to get a better understanding of her perspective.

Earlier this month Brenda Porter, a journalist with Black Enterprise Magazine, wrote an interesting article about a recently released government report that stated small businesses indeed are an economic engine for the U.S. However, she notes that although the government is touting the growth of small businesses, some are taking exception to the findings. The article quotes Roderick Harrison, demographer at the Joint Center for Political and Economic Studies, as saying that on the surface, the report's conclusions can be somewhat deceiving. In the article he says:

"The report was issued by an office whose job it is to promote small businesses and create an environment that is more favorable. And they’re doing a good job presenting some of the ways small businesses have been successful. But I think the picture is a bit more complex."

In terms of how minority owned businesses are incorporated into this discussion, last summer I discoverd an interesting statistic in a report provided by the Minority Business Development Agency. In 2002, 4.1 million minority owned businesses had 4.7 million employees, which is an average of 1.1 employees per business. This means that a high percentage of those small businesses had only one employee (although I don't know how a business can have 0.1 employees... maybe it's those who are physically but not mentally present, but I digress).

That report also included an analysis that compared the number of minority owned businesses to the percentage of minorities in the population. The analysis revealed that if the number of minority owned businesses mirrored the minority population, i.e. "parity", there should have been 6.5 million small businesses that should have provided 16.1 million jobs. There's a big difference between 4.1 million and 16.1 million.

Another focus of their analysis was a parity study of minority business revenues. Actual revenues for all minority businesses in 2002 was $700 billion. According to their parity projections, actual revenues should have been $2.5 trillion. That's a difference of $1.8 trillion!

Now, there are plenty of reasons and factors why there are gaps between what these employment and revenue numbers are versus what they could/should be, which have been outlined in many studies, including the one here. And of course that was 2002. Still, how much has really changed since then? I wonder how those numbers would look for 2007-2008.

Interestingly, in the Black Enterprise article, Harrison actually points out that many of the small businesses in the government's report are really one-person operations, which he says might be one of the reasons that the unemployment rate is at the point that it is. So, instead of going to look for another job after getting laid off, many people may now go try to start their own business, which would impact employment statistics, especially if there are so many one-person firms.

The conclusion of all of this is that there seems to be a lot of differing perspectives and opinions by those who are looking at the same or similar information as it relates to small business's true impact on the U.S. economy.

What do you think? Does this argument challenge your perspective on entrepreneurship and its overall value to our economy? Do small businesses really drive the economy as much as is purported and promoted? Has the government done enough to create an environment for small and minority owned businesses to grow and create jobs? Should it do less or more? I look forward to hearing from you.

Empowering Champions,
Paul Wilson, Jr.

"The Small Business Economy for Data Year 2006" by Small Business Adminstration

"Is Small Business Driving the Economy" by Brenda Porter

"A Talk with a Small-Biz Heretic" by Stacy Perman

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1 Response to "Small Biz Overrated?"

  1. Verge'N Says:
  2. Your article well summarized a complex issue. I'm not sure what is to gain by questioning the impact of small businesses. The information that implicates minority owned small businesses as one-person firms probably says more about these founders' desire, or opportunity to attract investors in order to generate the revenue to employ other workers. In fact an owner may be dissuaded from acquiring employees due to regulation requiring health coverage and other taxes which strongly affect profitability. What I really want to say here is that I'm not discouraged by these varying viewpoints on the strength or contribution of small businesses in this country. More everyday I appreciate what we have in an American free enterprise system that rewards entrepreneurship, hard work, and charity. I hope that we will not take for granted such freedoms. We are a country that is unique in its allowance and encouragement of charitable and for-profit small corporations.