Small Businesses, Engines, and Backbones

President Obama’s proposal to change the marginal tax rate of millionaires in some unspecified way has given the Republicans another chance to trot out one of their favorite tropes: millionaires and small businessmen are "job creators" and you can’t raise taxes on job creators.

I’ll save the debate about tax rates for another day. What I’m interested in is this Republican tick of calling all affluent people or small business owners "job creators," thereby inuring them against any adverse regulations or tax hikes. These classes are invariably described by politicians as the "backbone" or the "engine" of America.

Dana Milbank has a nice column today poking fun at this tick. It turns out Milbank himself has formed a C-corporation for his various journalistic activities on the advice of his accountant, and so is now legally a member of the venerated American small business job-creating nobility. Except not really:

I am a job creator.

I am not a job creator in the sense that I actually create jobs. I have never knowingly created a job, and my long-term business plan, approved unanimously by my board of directors, does not call for the creation of a single one. […]

Like the overwhelming majority of small businesses, I am a one-man operation. And, like most small businesses, I would not hire anybody even if the government dropped my tax rate to zero.

According to Small Business Administration statistics, based on 2009 Census data, 21.1 million of the 27 million small businesses in the United States are “non-employer firms,” which have no workers other than the owner.

This means, "when officials talk about protecting the "job creators" from tax hikes, they are mostly protecting a bunch of doctors, lawyers, freelancers, contractors and the like." Also, a huge majority of these non-employer firms, including Dana Milbank Inc., do not earn $1 million/year or anywhere near it. It’s true that the remaining 6 million or so firms which do employ people, well, employ lots of people. But that’s just to say that we have a big private sector in America and most people work in it. Arbitrarily venerating a certain sized firm, and fawning over their unique job-creating abilities, doesn’t really make sense, and it’s disingenuous too.

It’s important to distinguish between firms that employ people and firms that actually "create jobs." Most businesses fail and therefore destroy jobs, and established small businesses often have no interest in expansion. Most of the net private job growth comes from a very small handful of successful startups that soon grow large. Figuring out exactly where in the economy true innovation and growth comes from is not nearly so simple as just mouthing platitudes about the nobility of "small businesses" and their backbone- or engine-like features. I think when politicans do this they really are just going for a type of "regular guy" mood affiliation and appealing to certain cultural constituencies which enjoy a nice boot-strap narrative.

Because it turns out that actual small businesses aren’t even that prevalent in this country. Compared to the rest of the OECD countries, the U.S. does not have a large share of people working in objectively small enterprises, defined as those with 50 or fewer employees. In fact, we have the lowest share in the industrial world:

economy businesses 1to50

Conversely, we have the largest share of people working at firms with 250 or more employees. Matt Yglesias makes the point that this is actually a great thing. Look at who we’re grouped with in the chart above, and look at who tops the list. As a general rule, on any economic indicator list it’s nice to see countries like Denmark, Germany, the UK, and France nearby. If instead you find yourself clustered with Greece, Italy, and Portugal, it’s time to worry. An economy that features a lot of small businesses is not a very high-productivity economy, and probably not a particularly functional one either.

Luckily we don’t have that problem! But you wouldn’t really know it from watching politicians fall all over themselves trying to sing the plaintive, romantic ode of the American small-timer, as if all this economy needs is more corner stores or something.

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