Government Boost to Small Business Could do More Harm than Good

Mercatus scholar warns that discrimination over business size lacks economic justification

By Daniel M. Rothschild

With the Senate set to create a $30 billion fund for small business lending and House Republican Whip Eric Cantor (R-VA) praising small businesses as “the engine of job creation,” elected officials and their challengers of both parties are scrambling to praise–and give special privileges to–small businesses.

One thing everyone seems to agree on is that small businesses are the key to creating jobs, rallying the economy, and moving America 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.

“Politicians’ fetishization of small business makes no sense when you look at the data,” de Rugy says. “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 continues, “If the goal is to create jobs, there is no justification in creating policies that favor small firms over larger ones.”

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. While the term “small business” typically conjurs 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 is a Visiting Adjunct Scholar with the Pelican Institute for Public Policy and the Managing Director of the Mercatus Center’s State and Local Policy Project at George Mason University.