ECONOMY

Most Small Businesses Don't Want to Grow

Updated: October 6, 2011 | 12:46 p.m.
October 4, 2011 | 11:20 a.m.
AP Photo/Robert F. Bukaty
Shoppers make their way past the many small shops on Main Street in historic downtown Damariscotta, Maine.

The morning after President Obama presented his American Jobs Act to Congress, his usual opponents backed him on at least one thing: supporting small businesses.

“I think that some of the small business tax relief measures that the president talked about are things that we could probably embrace,” said House Majority Leader Eric Cantor, R-Va. On Monday, Cantor said the $447 billion jobs bill will not be brought to the floor as a package, despite repeated calls from the White House.

The Small Business Administration defines a small business as one that employs fewer than 500, and reports that half of the American labor force works for, or owns, such an institution. But economists often draw the line at 20 employees which, according to a recent study from the University of Chicago, made up 90 percent of small businesses surveyed in 2007. But most of those employers never would—and never wanted to—grow their business across that line.  

The study indicates that politicians’ enthusiasm is not matched by small business owners’ ambition to hire new workers. When polled on the eve of opening, only 24 percent of small business owners said they wanted their business to become “as large as possible.” The majority of respondents agreed with the statement, “I want a size I can manage myself or with a few key employees.”

And most businesses stay within those modest expectations for the remainder of their shelf life. That’s what Erik Hurst, the study’s lead researcher, found when surveying small businesses and deconstructing what he called the “nice Americana kind of story” people associate with supporting the underdog. He cited dentist offices, insurance agencies, and construction companies among those who share the most typical idea of what it means to be successful as a small business.

“When you think about it,” Hurst said, “your dentist doesn’t grow or innovate.”

Those who keep their size stable are the lucky ones. Half of all small businesses will fail in the first five years, according to the latest data from the SBA, and only one-quarter will survive 15 years or longer.

But the White House calls small businesses the “engines of the economy” when calling for government-backed investments to incentivize their growth. Vice President Joe Biden used that phrasing when campaigning for the American Jobs Act in Solon, Ohio, on Sept. 20, and added:

“The only way we’re going to turn the vicious economic cycle we’ve been in into a virtuous one is by cutting taxes on our small businesses and making sure they can get the loans they need to grow and hire more workers.”

To that end, the Obama administration is fighting hard to make small businesses the strongest they can be—infrastructure-building, job-creating, technology-innovating engines. The proposed American Jobs Act would allow the SBA to temporarily raise the limit of the bonds it distributes to project owners should a small business fail to complete the job it has been contracted to do, from $2 million to $5 million. Small business employers would see their payroll taxes cut in half and receive further incentives for raising wages and hiring the long-term unemployed. And the America Invents Act, signed into law by Obama on Sept. 16, was specifically designed to fast-track small businesses through the reformed patent system.

But the incentives may be lost on small businesses. Only 2.7 percent of those surveyed by Hurst applied for a patent within the first four years of business. And, according to SBA data, small businesses are more likely than large businesses to cut jobs during a recession.

Small Business Jobs

During recessions, small business loses more jobs than big business, but gains more during economic recoveries.

Net private sector non-farm job change by size of business (in thousands)
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Source: Bureau of Labor Statistics

So why should government invest in small businesses? Because, according to acting Secretary of Commerce Rebecca Blank, “You can’t tell by looking which ones will grow.”

And, if the process works like watering a field, it would be a shame to skip over the seeds with real potential.

“They’re the group facing the most constraints and the most difficulties,” Blank said. “It’s true that not all small businesses will grow, but those that do catch on and grow are a major source of job creation.”

Those success stories are also a major source of political brownie points. Americans still have confidence in small businesses, according to a June Gallup poll, which revealed a 64 percent confidence rating, second only to the military. Only 19 percent of Americans have confidence in big business, though employees of big businesses appear to be most secure during troubled economic times.

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