Just Say No to Small Business Subsidies

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A new paper from the American Enterprise Institute pooh-poohs the veneration of all businesses small and beautiful. From the summary:

This paper concludes that there is no reason to base our policies on the idea that small businesses are more deserving of government favor than big companies. And absent other inefficiencies that would hinder small businesses performances, there is no legitimate argument for their preferential treatment. Hence the paper suggests ending all small businesses' subsidies.

Whole paper as pdf here. It details both the love affair the U.S. has with small businesses and the various breaks and subsidies they get. But the best bit is a table that shows how phony most "job creation" stats are–they routinely account for far more than 100 percent of new net jobs.

The notion that small businesses are the engine of job creation and the one thing that stands between Americans and bread lines is incredibly resilient and popular, with both Republicans and Democrats, cons and libs. Years back–in 1994–former Reason Editor Virginia Postrel punctured "small business myths":

The politics of small-business favoritism has sacrificed truth to myth. And it has encouraged the hubris of would-be planners. Telling government officials that you can identify what size companies will create jobs doesn't encourage entrepreneurship. It supports the old political game of picking winners. It is industrial policy with a populist face.

Whole thing here.

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  1. I propose a trade. Eliminate all the small business subsidies when you elimate all the subsidies given to large businesses as well.

  2. I’m skeptical of the notion that small business is our primary concern regarding government favors. As a bona-fide libertarian, I certainly agree that we shouldn’t be giving them any. However I’ve always found big business with their armies of lawyers and lobbyists to be getting the lion’s share of the pork.

  3. Yeah, I share in the sentiment of the first two posts, and especially when I see this paper comes from AEI, which wholeheartedly has supported this administrations no-bid sweetheart deals to Haliburton and friends. While I agree that government shouldn’t be subsidizing small business, coming from AEI, this smells more like a smokescreen to cover for the massive pork and other benefits the big corps are getting.

  4. Gillespie and Postrel are misguided with respect to the SBIR/STTR programs. Companies with excellent, marketable ideas that VC and other sources will not fund (because often they are too small) often survive on a few of these grants.

    Furthermore, SBIR/STTR polices itself to make sure that one company does not attempt to abuse the program after they’ve secured private funding or generate enough cash to fund their own r&d.

    I know this is heresy to pure libertarians, but consider making an exception for fledgling engineering/technology companies.

  5. Small business owner (currently receiving no subsidies) here. I’m with Grant & Warren.

    BTW, many now big businesses started out as small ones. Anyone who thinks small businesses are not a significant engine of commerce is a dumfuck. They may not be deserving of subsidies, but then is anyone?

    Watch this one get turned into yet another “screw you” in the coming years.

    Typical of every other conservative maxim (smaller government, less government intrusion, more civil liberty) that’s had the screw put to it over the past few years. Funny how all these conservative maxims are now being claimed false.

    Wow, Republicans really ARE turning into democrats.

  6. When was the last time eminent domain was invoked to seize the local Chrysler plant so it could handed over to Joe’s Garage who agreed to open up in return for cushy tax breaks.

  7. I know this is heresy to pure libertarians, but consider making an exception for fledgling engineering/technology companies.

    Jason, as much as this would be in my self interest as an engineer, I have to say no. No business should require confiscation of others’ property, whether by taxation, eminent domain or any other scheme. I agree with those above calling for the abolition of all subsidies to large businesses as well. These entities are, quite rightfully, set up to earn money for their owners; there is simply no justification for compelling others to help them achieve that goal. No business, large or small, should be able to acquire a dollar from you that you do not wish to give it in exchange for goods or services. There should be no exceptions to this rule.

  8. Mmmm… delicious angry comments, with a side of ad hominem attacks….

    (Not saying I don’t agree, of course.)

  9. Aggregation, collusion and anti-competive co-operation are real problems in our aspirationally capitalist economic system. However, small business subsidies are a terrible solution to these problems.

  10. Nick,
    You need to do some background research — your comments are absurd. Small business is indeed the engine of job growth — it’s amply documented. And as others have noted, the susidies flow to those with the power to make megabuck campaign donations, not mom and pop.

    Subsidies for individual Target or Wal-Mart distribution centers, for example, often are tens of millions of dollars.

    More generally, do you really take stuff from the AEI corporate propaganda mill seriously? The transnationals that fund it get what they pay for.

  11. It’s two sides of the same problem. As businesses get bigger, they lose some of the regulatory exemptions they had as small businesses and gain from their ability to influence legislation and get special rules passed. Either way, big business and big government become intertwined.

    I’m becoming convinced that us libertarian types need to pay a lot of attention to this, because this is the sort of behavior that allowed a guy like Karl Marx to make name for himself.

  12. If you are interested in low-regulation policies, how do you advocate for them? Do you argue that Uncle Wally, with $100 billion in annual revenues, is our friend and only has our best interests at heart? Or do you point to the neighborhood boot-repair shop’s being forced to shut down by OSHA regulations against shoe polish?

  13. Do you argue that Uncle Wally, with $100 billion in annual revenues, is our friend and only has our best interests at heart? Or do you point to the neighborhood boot-repair shop’s being forced to shut down by OSHA regulations against shoe polish?

    Well the first option seems rather unlikely (and entirely unnecessary). I know that you don’t have only my best interest at heart and I shouldn’t expect that Uncle Wally does either.

  14. quasibill,
    Exactly my take on Ralph Nader (and many other Greens). Dead on point when critiquing the establishment and criticizing the status quo. However, your proposed solution of “Just put me in charge and everything will be alllllll riiiiight” does not impress me.

  15. And as others have noted, the susidies flow to those with the power to make megabuck campaign donations, not mom and pop.

    Right, there is no such thing as a small business set-aside.

  16. Swill,

    OK, let me hone my overbroad statement: The subsidies flow overhwlemingly, but not entirely, to those with the power to make megabuck campaign donations, not mom and pop.

  17. How much of this favoring of small business comes from the copycat effect of favoring small farmers?

  18. How much of this favoring of small business comes from the copycat effect of favoring small farmers?

    HA HA HA HA Good one! Big business vs small business can’t hold a candle to Big farming vs small farming. Indeed, the small farm doesn’t truly exist anymore. Of those that you can still find, most are tax shelters for ‘gentleman farmers’, all of them are supported by some form of non-agro income.

    (Marijuana being outside the universe of discourse)

  19. Oh and I should explicitly add, that small farms were driven to extinction via government meddling, often in the name of saving small farms.

  20. Warren,

    What do you mean that the small farm doesn’t truly exist anymore? That would be news to my father-in-law and all of his neighbors whose primary source of income is agriculture.

    Am I misunderstanding you?

  21. It seems to me that SBA loans have distorted the market in a big way. They made the sale/lease analysis tip way over in favor of the sale side, farther than it might have. Sure, when rates come up, it’ll flip to the lease side again, but don’t cheap rates make sure that’ll happen much later than it would have happened otherwise?

    P.S. I’m against corporate welfare of all kinds, but I remain dubious of the suggestion that we don’t get more bang for our wasted buck when we give it to small rather than large business.

  22. downstater,

    I don’t think that Warren meant that small farms no longer exist in a technical sense. I think he meant that in terms of the amount of agriculture they produce compared to the megafarms is fairly inconsequential. I’m not informed enough to argue one way or another effectively, but I don’t think a couple of anecdotes destroys his argument either.

  23. I skimmed through the study and what I found remarkable was the vast ignorance of tax law and the bizzare definitions of what constitutes a tax subsidy.

    For example, AEI considers keeping books on a cash basis a tax subsidy to small business. For the layman, cash basis means that it’s income when you put it in the bank and it’s an expense when you write the check. That, my friends, is a friggin’ subsidy. Aside from that, many small businesses are not permitted to keep books on a cash basis anyway. And once gross receipts exceed 5 million per year the cash basis is out altogether, something that is completely overlooked by AEI.

    I don’t know if SBA knows their butt from breakfast but according to them small businesses:

    Represent more than 99.7 percent of all employers.

    Employ more than half of all private sector employees

    Pay 44.5 percent of total U.S. private payroll.

    Generate 60 to 80 percent of net new jobs annually.

    Create more than 50 percent of nonfarm private gross domestic product (GDP).

    Supplied 22.8 percent of the total value of federal prime contracts (about $50 billion) in FY 2001.

    Produce 13 to 14 times more patents per employee than large patenting firms. These patents are twice as likely as large firm patents to be among the one percent most cited.

    Are employers of 39 percent of high tech workers (such as scientists, engineers, and computer workers ) .

    Are 53 percent home-based and 3 percent franchises.

    Made up 97 percent of all identified exporters and produced 29 percent of the known export value in FY 2001.

    Sources: U.S. Bureau of the Census; Advocacy-funded research by Joel Popkin and Company (Research Summary #211); Federal Procurement Data System; Advocacy-funded research by CHI Research, Inc. (Research Summary #225); Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration.

  24. Policies developed to help the “family farmer” help ADM first and if any family farmers are made better off it’s a bonus.

    Even the policy makers who are relatively innovative (i.e. hated by the farm lobby = ADM) still propose handouts that will create inefficiency, although they benefit less powerful entrepreneurs (and could actually kill some of these communities faster than corporate farming.)

    I work with people who do local economic development, and from what I’ve seen it’s apparent that tons of government money, concentrated at the local and state levels, is being wasted by throwing it at whatever is in fashion with the snake oil consultants. Subsidies to big corporations have fallen out of favor (although that really doesn’t stop many communities from shelling out the cash when the corporations come calling) so most of the new fads deal with small businesses and entrepreneurship.

    My colleagues tell me that local government can be effective at encouraging entrepreneurs and small businesses and it’s necessary due to problems with accessing capital. But I would argue that the private capital markets for these small businesses are largely crowded out by all the “free” money being given by governments. Furthermore, the truth is that a lot of communities cannot support profitable entrepreneurs and small businesses, but politicians would rather be pumping tons of money into failing projects than seen as doing nothing.

  25. How about that 2005 Tax Foundation study that concludes that…

    Many charities are similar to for-profit companies, selling private goods and services rather than conducting traditional charitable work. It’s hard to justify tax subsidies for them.

    For example nonprofit’s magazines like Ms., Nation’s Business, Harper’s, Mother Jones (insert: Reason Magazine here) and others are indistinguishable from for-profit magazines.

    Emphasis is mine.

    Pot Calling the Kettle Black Regards, TWC

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