The Small Business Myth

As a small-business owner and chair of the National Small Business Association (NSBA), I strongly disagree with Veronique de Rugy's "The Small Business Myth" (November). In this article, De Rugy continues her nearly decade-long rant against U.S. small business. Refusing to use dynamic job growth data that incorporate job growth and job cuts (as the Bureau of Labor Statistics has done), De Rugy offers merely a snapshot of an issue that deserves a more complex view.

Among the article's failures is its claim that small businesses aren't looking for capital. That's dead wrong. According to NSBA data, only 59 percent of small businesses as of July 2010 are able to obtain adequate financing. According to a recent survey by the Federal Reserve Bank of New York, among the 59 percent of small businesses that applied for credit in the first half of 2010, only half received any funding.

Also dead wrong: De Rugy's claim that money directed toward government-backed loan programs has been fruitless. Using stimulus funds, the U.S. Small Business Administration (SBA) in the second quarter of fiscal year 2010 processed more than twice the number of 7(a) loans as it did in the same quarter of 2009. In June 2010, when the stimulus funding ran out, the SBA approved just $647 million in lending, down two-thirds from the $1.9 billion it approved in May, forcing more than 1,000 small businesses into a loan queue.

Between 1993 and the third quarter of 2008, firms with fewer than 500 employees accounted for 64 percent of net new jobs. Thirty-two percent of those gains came from the creation of new, small firms. According to the SBA's Small Business Economic Indicators for 2003, when the economy gained momentum after the previous downturn in the early 1990s, firms with fewer than 500 employees increased their net employment in the first year after the recession, while large firms continued to shrink.

The role small business has played in driving past recoveries hasn't been repeated yet, and unemployment continues to be high. Surely even De Rugy must see some correlation here.

Larry Nannis, NSBA Chair

Framingham, MA

Veronique de Rugy replies: Small businesses are an important element of the U.S. job landscape. But it is wrong to argue that they deserve preferential treatment because they promote growth or that they should have access to capital because they ask for it.

The government defines firms with fewer than 500 employees as "small." According to the SBA, 99.7 percent of U.S. firms are "small." And while they hire 50 percent of the workforce, so do the remaining 0.3 percent of U.S. firms. That's hardly an argument for giving special treatment to small firms (or large firms). Moreover, if small firms were creating more net new jobs than larger firms, small businesses' share of total employment would increase over time rather than remaining at 50 percent. But it doesn't.

Statistical misinterpretation often lies behind the belief that there is an inverse relationship between net job creation and firm size. Firm size alone says nothing about job creation; in 2010 the National Bureau of Economic Research released findings showing that age matters, not size. 

Finally, SBA lending must be placed in context. According to the Government Accountability Office, roughly 1 percent of small-business loans are SBA loans. Because the private sector finances most loans without a government guarantee, fluctuations in the level of SBA lending are largely irrelevant in the capital market. The fact that small firms didn't all get access to capital upon request doesn't say anything about the unfairness of lending, or about the economic impact of government lending. Not everyone who wants capital deserves it. Nor does it benefit the economy for every would-be borrower to receive funds. Low taxes and light regulation would do more for all firms than the current system, which doles out favors based on unsubstantiated beliefs about small businesses. 

How to Slash the State

I'm a California state employee. If I survive to retirement, I will receive a defined-benefit pension for which I'm exceedingly grateful. Contrary to Tim Cavanaugh's view that we California state employees don't fund our plan ("How to Slash the State," November), I've paid into mine through hefty deductions for more than 20 years. I fund part of it, the plan's investments fund much of it, and the taxpayers fund the rest.

Cavanaugh proposes to end such plans because "public servants," "like the rest of us," should bear the responsibility of "manag[ing] their own retirement nest eggs." That is not a core libertarian position—at least not a sound one—nor does it make economic sense.

Assuming there's an efficient labor market, my salary is lower than the salaries of others similarly situated because the benefit of a set future income is valuable. If a public entity wants employees with certain skills and qualifications, it must pay them a certain amount or lose them to competing employers. Whether the amount comes in the form of current income (the higher salary that must be paid to someone with a 401(k)) or a combination of current and anticipated future income (including the lower salary that may be paid to someone with a defined-benefit plan) shouldn't matter economically, assuming rational and well-informed employers and employees.

People might argue that if the foregoing is true, the form of payment doesn't matter. We may as well scrap defined-benefit plans because over time taxpayers will pay the same for public services either way. Doing so might feel good, if for no other reason than as a robust moral corrective to perceived public-sector indolence (a myth, I would argue). But a defined-benefit plan is more efficient than most people's 401(k)s because it takes advantage of economies of scale that permit professional management. Individual 401(k)s depend on one's own investing skills, and a lot of people don't have any. As defined-benefit plans fade, the dreary old arrangement under which I gather many people worked until about six weeks before they died may be returning. How appealing is that on an individual and social level?

It also feels better to be in a defined-benefit plan even if one's income over time is the same, for the same reason that homeownership feels better to many than does a tenancy of equivalent value. You feel like you're not just renting your labor but acquiring equity out of it. So sure, make defined-benefit plans actuarially sound, but rather than abolish those that remain, we'd be better off generating more of them.

Ted Stroll

San Jose, CA