Does America Need Small Businesses to Fail?

A recent NPR story shined some light on the reality of small businesses in America. Most of them don’t employ a single person, and most would not benefit from the lip service masked as the “small business marketing” in Washington.small businesses

This raises a bigger question: does the American economy need small businesses to fail? And from this question it is not a giant leap to another question: does the global economy depend on having both losers and winners?

I’ve heard almost every variation of the statistics. More than half of all small businesses fail. Nine out of ten fail after five years. Whether or not these statistics are accurate, we seem to have internalized the fact that most small businesses fail.

So why do we always hear politicians speak of small business ownership as the pinnacle of America? For starters, the idea of being your own boss and making your own way fits into the story of America as a place where people innovate and lead the world.

But could there be a more sinister reason? Do the political elite, who are indistinguishable from the business elite, need a constant flow of good money after bad to prop up who they see as the true economic drivers: large businesses?

Let’s look at some claims made by Jared Bernstein in a 2011 New York Times op-ed piece. He states that even by the federal government’s grossly overreaching definition of “small business” (499 or fewer employees), half of all jobs are held by people in “large” companies.

“In fact, 57 percent of total compensation is paid out by companies of 500 or more employees, with most of that coming from the largest, those with at least 10,000 employees. And new research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all.”

From this I take away that a) the federal government has a strikingly different view of “small business” than I do, and that b) most of the wages paid in America are paid by very large companies, the kind that are not held up as being “uniquely American.”

This is a strikingly different reality than we have been led to believe.

What Do Small Businesses Mean to Big Businesses?

First off, small businesses need to make purchases, buy supplies, and contract for services. I suspect that they are mostly buying these things from large businesses.

If you start a real estate company and need paper for your office, chances are that as a businessperson trying to succeed, you are going to buy your paper from the cheapest place in town, which is likely a Wal-Mart, Sam’s Club, or an Office Max. Maybe you will order it from Quill, another big business.

To large companies, small businesses are customers who will likely never become competition.

Most small businesses fail because of the reality of math: they spent more than they earned and did not have enough reserves to make it to profitability. For many businesses that are capital-intensive, you have no choice but to spend. If you own a restaurant, you have to buy food for your menu, even if you are losing money.

What Do Small Businesses Mean to Politicians?

If you believe that politicians serve only the largest companies, then small businesses are simply kindling to fuel the fire of those companies that are truly creating jobs and economic activity.

Bernstein makes an interesting claim when he says

“The next time a politician tells you how he or she is for small business (which will likely be the next time you hear a politician say anything), be mindful that to the extent that size matters at all for job growth, it’s really about new companies that will start small and, if they survive, perhaps grow large.”

A constant stream of new small businesses who hire people help make politicians look like they are doing a good job, even if most of them ultimately fail. As long as they are able to sustain their narrative, new companies will be started every day. Though we know that most of these companies don’t hire anyone, some of them do, which helps.

According to the NPR story, the business tax packages being pushed by the Republican Party wouldn’t provide much benefit to those companies who have no employees, or only a few employees (you know, the Mom and Pop operations that politicians love to talk about when they regale us with their stories of fighting for Main Street). The benefits will mainly go to the companies who have many employees, but still qualify as small businesses.

The economy is headed down a dangerous path. With the decline in manufacturing in the US, a service-based economy takes precedence. But when those who are essentially only qualified for blue-collar work (sorry, I don’t buy into the idea that “everyone can be a scientist or an astronaut or start the next Apple!!!!!!”) can’t find work, they have no money to spend on services or the crap at Wal-Mart.

And if you think they are going to pay $25 for a haircut at a small business instead of $15 at Great Clips…

 


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27 Comments
  1. I can say that in Barbados, the answer is yes. My thinking is that if every small business was to suceed, the big companies might suffer – no one would want to work for them because they would be working on their own businesses.
    Dannielle @ Odd Cents recently posted..Comment on Prioritizing is the Name of the Game by Miss T @ Prairie Eco-ThrifterMy Profile

  2. Interesting take on small businesses and their place in the economy. It is crazy that they qualify 500 employees as a small business. Someone was obviously skewing those numbers for their own benefit or to help friends who run those mid-level companies. Really the number should probably be under either 50 or 100. Even that many employees though is decent sized.

    Danielle makes a good point in that they need people to be content working at jobs. Imagine how messed up the economy would get if everyone suddenly had business aspirations. There needs to be some level of risk there for people to be wary of.
    Modest Money recently posted..Blog Commenting Etiquette BasicsMy Profile

    • A particular strength of small businesses is their ability to respond quickly to changing economic conditions. They often know their customers personally and are especially suited to meet local needs. Small businesses — computer-related ventures in California’s “Silicon Valley” and other high-tech enclaves, for instance — are a source of technical innovation. Many computer-industry innovators began as “tinkerers,” working on hand-assembled machines in their garages, and quickly grew into large, powerful corporations. Small companies that rapidly became major players in the national and international economies include the computer software company Microsoft; the package delivery service Federal Express; sports clothing manufacturer Nike; the computer networking firm America OnLine; and ice cream maker Ben & Jerry’s.
      Michael Davis recently posted..מחשוב ענן 2My Profile

  3. Are you inferring that government statistics might be skewed? Color me shocked.

    Small businesses have a difficult road to hoe, without the experience, cash, or knowledge base of the bigger firms. If the tax code works against them because big businesses want it that way: game over.
    AverageJoe recently posted..Creating Lucky Investment PicksMy Profile

  4. Most big businesses were once a small businesses, so I think facilitation of small business success is important. I’ve no doubt, however, that if politicans’ fingerprints are on something, the intended effect is all about retaining power.
    Kurt @ Money Counselor recently posted..Self Storage ExplosionMy Profile

  5. Small businesses have to fail sometimes, but even the biggest companies often have humble beginnings. I was just at the first ever Walmart store in Bentonville, Arkansas. It is amazing to see where Walton’s 5 and dime has come.
    Eric recently posted..Saving Time and Money on Quality WineMy Profile

  6. In today’s economy, I would be absolutely terrified of starting up a business. It’s just so much harder to stay competitive with pricing when you’re small and aren’t outsourcing. I do try to support small businesses as much as I can, but I also have to do what’s right for my family’s economy so to speak, and usually WM has it cheaper. :(
    Michelle recently posted..What Would You Pay For A Good Night’s Sleep?My Profile

  7. That’s an interesting premise. Unfortunately, I don’t think that the politicians give a rat’s behind about small business ownership. Their main object is growing the economy by any reasonable means necessary. This growth is more determined by the level of competition. The more that businesses compete with each other, the more growth will occur. If less people choose not to compete, the economy will either slip or remain stagnant at best.
    Anthony Thompson recently posted..Self Management – Basic Ideas for Becoming a Brilliant SalespersonMy Profile

  8. “does the global economy depend on having both losers and winners?” YES. And it sucks, but that’s life. And not just for humans. Works that way in the animal kingdom too!

    As a blue collar dude, I know my type of work is getting smaller, but still, people will always need to have their a/c repaired, roof redone, flood damage repaired, etc. So hopefully I”ll be okay!
    TB at BlueCollarWorkman recently posted..New Air Conditioners Really Do Save You MoneyMy Profile

  9. For one I think the definition of a small business, is in my eyes not small. To me a business with 499 employees is not small. And I do not think politicians care whatsoever about small businesses, they tell you what you want to hear. With 99% of businesses being considered small, that is definitely what everyone wants to hear.

  10. That’s quite the interesting discussion. In terms of scale, large companies have a lot going for them. This includes the ability to influence and lobby, right? Assuming that’s the case, the deck is of course stacked against the majority of small businesses. Big business eats small business for breakfast, lunch, and dinner. It’s the way things work, and it’s the big businesses that employ people and generate tax revenue.

    That being said, small businesses can often be quite nimble, and some can grow into solid “larger” small business that can help local economies quite a bit.
    Squirrelers recently posted..Left Out of a WillMy Profile

  11. I agree that large businesses drive the economy but small businesses are essential in an economy. The reason is that most big businesses started out as small businesses. It might take 100 or more small businesses to make a big business, but we need new big businesses being created to be innovative and to push the established ones.
    Jon Rhodes recently posted..Comment on Can You Build Links Too Quickly? by jonrhodesukMy Profile

  12. It is crazy to think of small businesses that way, but you’re right – they do feed off of large businesses and most of them probably aim to be as large as they would want.

    I think small businesses are great in a sense that they may be created to spark some competition in an industry with only a few leaders (soda/airlines/etc.) but also, they may have been created because large companies overlooked a certain detail or operation that a small company solely focuses on.

    In addition, another way small businesses are eaten up are through mergers and acquisitions! They become part of those large businesses that they intended to compete with.
    From Shopping to Saving recently posted..The "No One Cares What You Wear" ExperimentMy Profile

  13. What a fantastic article. It’s tragic that if one small business fails it doesn’t affect big business one bit. If a big business fails though it can take hundreds, even thousands of small businesses with it!
    Money Bulldog recently posted..Starting A Business That Will Thrive During A Recession!My Profile

  14. I feel like its a little more dynamic than small business versus large business. In fact, many small business are booms for larger businesses who buy them up when they have a break through product and bring that product to a larger market.

    In general, I don’t think it’s fair to split business up and try and make them into political opponents like political parties.
    JP @ My Family Finances recently posted..Frugalistas Know Better Than Income Over-AcheiversMy Profile

  15. I think that small business does have a slippery road ahead but most of their success depends on how well they can position themselves and the support of their communities.
    Sean @ One Smart Dollar recently posted..Tips for Staging a Home to SellMy Profile

  16. I love NPR. They force me to look at things from perspectives I don’t really want to. I don’t want to agree with the story, but it’s probably right. I’d say all the more reason to support small businesses and start them; stick it to the man. Large businesses own our government anyways.

    OH. But when I’m broke, you’re completely right. We go for cheapness over ethics. I feel dirty about it, but when push comes to shove…
    femmefrugality recently posted..How to Re and Upcycle Your WeddingMy Profile

  17. Small business is a base of the economy. If you want a tower to collapse, just ruin the base. I think I don’t need to explain more.
    Alexander Collins recently posted..What Does the Future Hold for the US Dollar?My Profile

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