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Make Small Businesses Great Again!

Make Small Businesses Great Again!
(Dollar Photo Club)

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Thursday, 09 March 2017 12:58 PM Current | Bio | Archive

My favorite show on TV is “Shark Tank.”

It is all about “entrepreneurial” capitalism. I add the adjective to distinguish it from “crony” capitalism, which isn’t capitalism at all but rather corruption. It has long been my view that there are only two alternative economic systems, namely capitalism and corruption.

Sadly, capitalism has gotten a bad rap ever since 1776. Perversely, that’s when Adam Smith, the great proponent of capitalism, published The Wealth of Nations. He made a huge mistake when he argued that capitalism is driven by “self-interest.” Marketing capitalism as a system based on selfishness wasn’t smart. Then again, Smith was a professor, with no actual experience as an entrepreneur.

My experience as the owner of a small business is that entrepreneurs are actually driven by insecurity, not selfishness. Our number one worry is that we won’t satisfy our customers so they will go elsewhere, putting us out of business. That’s why we strive so hard to grow our business because that confirms that we are doing right by our customers in the competitive market. To do so, we have to put our customers first, not ourselves. Our business model has always been based on going viral: “If you like our products and services, tell your friends about us.”

Smith famously wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.” This statement is totally wrong, with all due respect to the professor. The butcher, the brewer, and the baker get up early in the morning and work all day long trying to give their customers the best meat, ale, and bread at the lowest possible prices. If they don’t, their competitors will, and put them out of business. Entrepreneurial capitalism is therefore the most moral, honest, altruist economic system of them all. Among its mottos are: “The customer is always right,” “Everyday low prices,” and “Satisfaction guaranteed or your money back.”

The problems start when the butchers, brewers, and bakers form trade associations to stifle competition. The associations hire lobbyists to pay off politicians to regulate their industry, requiring government inspection and licensing. In other words, capitalism starts to morph into corruption when “special interest groups” try to rig the market with political influence. These groups are totally selfish in promoting the interests of their members rather than their members’ customers. At least Smith got that concept right when he famously wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

The best way to make America great is to allow small businesses to grow in a competitive market. That means lower taxes and fewer regulations on these businesses.

The best way to see how important small businesses are to the vitality and growth of the US is to slice and dice the ADP private-sector employment data available since 2005.

Here are some key findings:

(1) February. Let’s start with the latest monthly ADP report for February. It is yet another data set confirming that Trump’s victory has unleashed the economy’s animal spirits, especially among small business owners. Total payrolls jumped 298,000, the most since April 2014 (Fig. 1). The increase was led by a 193,000 increase in service-providing industries, which has been par for the course for a while.

What really stands out is the 106,000 increase in goods-producing employment, which is the most on record! Trump can take some credit for the 32,000 job increase in manufacturing in February (Fig. 2). Maybe construction companies are jumping the gun on Trump’s infrastructure spending plans (including the “Great Wall”) with a 66,000 hiring gain last month, the most since February 2006.

February’s total gain in payrolls (298,000) was led by small (104,000) and medium-sized (122,000) companies, with large ones (72,000) lagging behind. The outsized gain in goods-producing payrolls was led by medium- (52,000) and small-sized (39,000) companies (Fig. 3).

(2) Size. According to ADP, small companies have accounted for roughly 41% of total employment in the US since the start of the data in 2005 (Fig. 4). Medium-sized companies have steadily accounted for roughly 36% of employment, while large companies have accounted for the remaining 22%-24%. The percentages are quite similar for service-providing firms by size (Fig. 5). Among goods-producers, medium-sized companies lead with 38% of employment, followed by small companies around 33% and large ones at 29% (Fig. 6).

(3) Jobs. Since January 2005, ADP payrolls have increased 12.4 million through February (Fig. 7). This series closely tracks the official data on private-sector payrolls released by the Bureau of Labor Statistics in the monthly Employment Report, which is up 12.2 million since 2005 through January.

The key point is that since 2005, small companies have created 6.5 million jobs, medium-sized companies have created 5.1 million jobs, while large companies have expanded their payrolls by only 700,000 (Fig. 8)! Employment is created by small and medium-size companies that are growing their business. Over the past two years, we’ve expanded our staff by hiring Melissa Tagg as Director of Research Projects and Jackie Doherty as Contributing Editor. We didn’t get any help from Washington. If our taxes are cut, we might expand some more.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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The best way to make America great is to allow small businesses to grow in a competitive market. That means lower taxes and fewer regulations on these businesses.
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Thursday, 09 March 2017 12:58 PM
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