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Small firms' job-growth role may be overstated

As President Obama lobbies the Senate to pass an aid package for small businesses, several economists are challenging the notion that such firms  create the most private sector jobs.

If you mess with “Mom and Pop,” prepare for a swift spanking. Especially when so many small businesses are smarting themselves.

As President Barack Obama lobbies the Senate to pass his proposed $42 billion aid package to buoy small businesses, three economists are challenging what they call “the enduring notion” that firms employing less then 500 people “create the most private sector jobs.”

That maxim is “misplaced and wrong,” argues John C. Haltiwanger, a University of Maryland economist and an author of the study, published last month by the National Bureau of Economic Research. “If you think you ought to be targeting the groups that are creating the most jobs — and if you have a misleading target — then you are not going to achieve your goal.

“Yet we have multiple quotes from every president since Ronald Reagan — and they have been supplied (this information) by the Small Business Administration — saying ‘two-thirds of net new jobs are created by small business,’” Haltiwanger added in a telephone interview. “It has been somewhat remarkable to us. Trying to beat back conventional wisdom is not so easy.”

After analyzing 29 years of Census business data, the economists found that when it comes to adding jobs to the economy, a firm’s age matters more than its size. They contend “young” trumps “small”: Startups account for 3 percent of the U.S. work force but fuel almost 20 percent of gross job creation.

“Conditional on survival, young firms exhibit substantially higher growth than more mature firms,” the economists wrote. “The fastest-growing, continuing firms are young firms under the age of 5.” What’s more, “there is no systematic relationship between firm size and growth,” the study said. “Policies that favor various simply defined classes of business (e.g. by size) and ignore this fundamental dynamic will likely have limited success.”

Not surprisingly, many experts familiar with the so-called “mom and pop” business sector have bashed the new study. A brief sampling of reactions:

  • “The reality is most small-business startups are a joke. They typically never employ anyone, and fail within five years,” said Ren J. Carlton, president of 11-year-old Dynamic Advisory Solutions, a Troy, Mich., business consulting firm with 10 employees. “More established businesses — like mine — have weathered storms and have passed the test of time. If the government decides to start subsidizing business startups, it will simply be a waste of taxpayer dollars.”
  • “I am familiar with the study you're referring to, and the conclusions commonly cited from it are very misleading,” said Victor Cheng, author of “The Recession-Proof Business: Lessons from the Greatest Recession Success Stories of All Time.” “Startups by definition can only create jobs — as they are not old enough to eliminate them yet. This artificially inflates the job creation power of a startup.”
  • “The white-tower economists and theorists being used by the government and by MSNBC rarely have a clue about what really happens or what really matters,” said Bill Dueease of Fort Myers, Fla., president of The Coach Connection. His company, which has 120 “active member coaches,” has worked with hundreds of business owners. “I have recognized research and more stories than you can count how small businesses are the driving engines of this country. Period.”

While stumping for his aid bill, Obama has called small businesses “the places where most new jobs begin.” Likewise, the Small Business Administration states on its website that “small firms ... have generated 64 percent of net new jobs over the past 15 years.” The SBA did not return a phone message left by seeking reaction to the economists’ findings.

“I talk to the SBA all the time,” Haltiwanger said. “They view me as a little bit of a thorn in their side. I say to them, only half jokingly, they should be called the Young Business Administration ... They’re such an advocacy group it’s hard for them to break out of that” traditional stance.

So would Obama’s proposed multibillion-dollar package of funding, tax breaks, and loan-term loosening for small businesses — no matter their age — help the American economy?

“What I worry about is that they are justifying this based on this conventional wisdom,” Haltiwanger said. “And we say, ‘Look it’s not all small businesses; it’s startups and young businesses.’ (For) small, mature businesses, any resources you’re going to provide to them, you’re just not going to get as much bang for the buck.”

If Congress ever opts to subsidize young, small firms over mature, small firms, “it better be a pretty big bang for the buck in order to make up for the instability of the jobs start-ups provide,” responds Sabrina Parsons, CEO of Palo Alto Software, a 23-year-old company that employs 45 people. “What everyone in the U.S. wants right now is more jobs and, if possible, more stable jobs. If you don’t provide support and funds for mature, small businesses, you could be squeezing them out of businesses and, hence, losing jobs.”

“If my 20-year-old company had access to some stimulus money, I could guarantee the formation of new jobs,” added Rosemarie Monaco, president of Group M Inc., a four-employee PR and marketing company in Englewood Cliffs, N.J. “Are these economists considering how many startups fail?”

Yes. The study repeatedly describes the “up and out” dynamic that, after five years, eliminates about 40 percent of the jobs created by startups. But young firms, Haltiwanger argues, are typically nimble operations that spawn innovation and allow the American economy to continually reinvent itself. “Microsoft and Apple and Wal-Mart, for that matter, were startups at some point and took off.”

( is a joint-venture of Microsoft and NBC Universal.)

In theory, Haltiwanger added, Obama’s bill could be tweaked to “provide incentives for startups and expanding, young businesses. (But) am I convinced it’s a good idea to do (those types of) subsidies? No, given this volatility. ... (And) the government is terrible at picking winners.”

Even the head of a new, nine-employee business in suburban Philadelphia acknowledges the steep survival odds faced by young companies.

“Pure startups may go from zero employees to 10 quite quickly but then (they) need to establish their product, market, channel (and) customer base — or attract significant funding — before growing to 100 employees,” said Joanne Lang, CEO of, an online family management journal designed to help busy moms use web-enabled devices to manage household information.

“Both existing small businesses and entrepreneurs should receive federal backing but in different forms,” Lang added. Startups, she suggested, could be exempted from paying taxes on their profits for five years to allow reinvestment in their operations. After five years, they could pay a tax on their cumulative profits.

“The engine for growth must be small business in general,” Lang said. “Startups may not result in a turnaround in jobs in the next two years but are (going to be) crucial within five years.”