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Small Business Bias

Lydia DePillis has an interesting piece explaining how the new IHOP in Columbia Heights managed to qualify as a small business for the purposes of a small business set-aside rule in the development where it’s located. Basically even though common sense says IHOP is a national chain, it’s in fact organized as franchises, such that the actual business renting the space is a locally owned small business that subcontracts with national IHOP.

So good for them. But the ability of an IHOP franchise to qualify as a locally owned small business highlights the fact that this distinction is somewhat arbitrary — a person musing that she’s like to see more locally owned small businesses in her neighborhood would probably be disappointed to see a McDonald’s, franchise ownership structure notwithstanding. And the widespread bias in favor of small businesses in American discourse makes little sense to me. You often hear this in terms of the fact that small businesses account for the bulk of job creation. But that’s simply because the small business sector is more unstable. Basically if you look at gross figures you see that small businesses account for most of the new jobs and most of the layoffs. It’s neither here nor there.

The other way to look at this is that growth comes primarily from new businesses which are, by definition, small when they start. But the point here is that it’s the process of becoming big that creates the growth and it’s not clear that pro-small bias actually helps this happen. What’s more, with any business you’ve got some consumer surplus and some producer surplus. With a big business, there’s the possibility that unionization can force owners to share a larger slice of the consumer surplus with the workers.

I suspect two things are going on. The main one is a belief that regulatory subsidies to small businesses come mainly at the expense of big businesses. Nobody’s going to cry for the owners and managers of large successful firms. But this is an analytical error. The majority of business income goes to salary and benefits not to profits. So the cost is borne primarily by the hypothetical extra employees of disfavored large firms, not by their owners. The other is the idea that small business profits “stay in the community” whereas a big firm vacuums them up to somewhere. This, however, is obsolete. The whole point of having established large nationwide banks is that it’s now possible to channel capital from anywhere to anywhere very quickly. The location of the financial input is irrelevant.

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I know some commenters here seem to think that since libertarianism is a false doctrine it therefore follows that all instances of government regulation are good. A sounder view is that since wealthy special interests are politically powerful, we should always be on guard against efforts by the politically powerful to enrich themselves at the expense of the public. Local business owners are powerful in local politics, and seem to be gaming the system in a way that’s detrimental to working people.