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Should I Be Worried About the State of Small Business?


Oct 19, 2017 | Jessica Ogilvie

On Sept. 20, the New York Times ran an article called “A Start-Up Slump is a Drag on the Economy. Big Business May Be to Blame.” It reported that the launch of start-ups has declined dramatically since the recession — from 558,000 in 2006 to 414,000 in 2015 — and it pointed the finger at corporate conglomerates and oligopolies.

Later that week, John Oliver’s HBO show Last Week Tonight took politicians to task for repeatedly asserting that “small business is the backbone of our economy” while simultaneously allowing massive corporations to create said oligopolies, which effectively keep small businesses out of the competitive market.

So what’s up with all the attention to small business all of a sudden? Is it really in crisis? And if so, what can we — as small business owners and the people who love them — do about it?

The Cable Boxes You Love to Hate

First things first. Some of the renewed attention to small businesses and their David-and-Goliath fight against corporate giants has to do with the fact that the numbers quoted in the Times were newly released by the Census Bureau the same day the article ran. That made it timely, and, by extension, newsworthy.

However, it brings up a concern that has flown under the radar until now. After all, small businesses don’t just create opportunities for would-be CEO’s; the same Census Bureau report also found that the slowdown of new business launches meant that just 2.5 million new jobs were created by start-ups in 2015, as opposed to 3.3 million annually between 2002 and 2006.

And Oliver’s story added another level, revealing that it’s not just jobs that suffer when new businesses stagnate; products and innovation slow down as well.

“Heavily consolidated industries can lose the incentive to innovate,” he said. Using television cable boxes as an example, he added, “Cable companies have no real incentive to improve them. They’re essentially regional monopolies, and again, they know that you basically have nowhere else to go.”

Adds the Times, “start-ups play a critical role in making the economy as a whole more productive, as they invent new products and approaches, forcing existing businesses to compete or fall by the wayside.”

Finally, We All Agree on Something

The problem doesn’t just affect large cities, nor does it just affect rural areas. Citing a May 5, 2014, Brookings Institution paper written by the economists Robert Litan and Ian Hathaway, the newly created Center for American Entrepreneurship writes on its website that in the year the Brookings paper was released, “new business formation had fallen to a 30-year low — and that this decline is occurring in all 50 states, in all but a handful of the 360 metro areas examined, and across a broad range of industry sectors, including high-technology.”

But if Americans have turned a blind eye towards the problem until now – or been unaware of its existence altogether – that might be changing.

Calling this a “potent political moment,” the Times reports that “populists on both the left and right have responded to growing public unease about the corporate giants that increasingly dominate their online and offline lives.” Indeed, a recent Gallup poll showed that just 18 percent of respondents reported a high amount of confidence in big business, as opposed to 30 percent in 1999. And a 2012 report from the Pew Research Center found that a whopping 75 percent of respondents felt that “there is too much power concentrated in the hands of a few big companies.”

A Bigger Small Business Market

While there is strong anecdotal evidence linking the decline of small businesses and start-ups to massive corporations either elbowing them out or making it impossible for them to enter the marketplace from the outset, the CAE is focused on solutions. They identify five significant issues which, if addressed meaningfully, could lead to more opportunities for new ventures: regulation, new ideas, talent, capital, and taxes. Their ideas for each issue are complex and lengthy, but some of the standouts are:

Regulation

Creating a separate set of regulations for start-ups, subjecting them for the first five years to “only the most essential product safety, environmental, and worker protection regulations.”

New Ideas

Increase government funding for research and development, until it is back to its historic high of 2.2 percent of the country’s GDP; where it was in 1964. The CAE notes that it fell to a low of 0.7 percent of the country’s GDP in 2000, and has since hovered around one percent.

Talent

Instead of halting immigration or intimidating foreign-born individuals so much that they choose to stay out of the U.S., the CAE suggests issuing “graduation green cards,” or permanent residency for international students who meet national security regulations and finish undergraduate or graduate STEM programs.

Capital

The government’s Small Business Association is designed to help start-ups obtain loans, among other things. But its focus tends to be on physical assets, even as start-ups exist more and more in the digital space. The CAE recommends giving the SBA a modern makeover to make it more friendly towards forward-thinking start-ups.

Taxes

Let start-ups defer income tax liability for the first five years — the years during which they are the most fragile and prone to failure. The CAE suggests that those payments could be charged a reasonable interest rate and applied at any time over the ensuing 20 years.

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