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Obama and Romney Are Both Wrong on Small Business

Michael Santoli
Friday, 2 Nov 2012 | 1:07 PM ET

For decades, politicians spanning the full ideological spectrum paid devotional lip service to the "family farmer." Today, the economic bloc that is patronized most avidly by Democrats and Republicans alike is "small business," shorthand for honest business people whose work ethic and risk taking magically generate most of the country's new jobs.

Doesn't it figure, though, that in this cutthroat campaign, the one thing both sides seem to agree on turns out not really to be true?

Small businesses, in aggregate, do produce most of the new jobs in the country. But they also destroy almost as many as they create, as Bloomberg News recently noted. The attrition rate of smaller enterprises is pretty high, after all, thanks to the immutable laws of capitalism.

From 1990 through 2011, companies with 500 or more employees were responsible for 65% of net job gains, accounting for 45% of total employment on average during that span, and paying more than half of total compensation. This split in job growth also roughly held during the first stage of the current recovery, with large firms kicking in 56% of net new employment from February 2010 through March 2011, according to a study by economist Jared Bernstein of the Center on Budget and Policy Priorities.

Some of the mismatch between this reality and the popular lionization of small business simply comes from differences in categorizing the data. Most of the numbers showing small enterprises as the growth drivers are also counting the business units of much larger companies as small firms.

Another wrinkle is the effect of new versus longstanding businesses. Start-ups and very young companies do indeed create more than their share of jobs, as detailed in a study by University of Maryland economist John Haltiwanger.

It is true that the volume of new start-ups in recent years has lagged, as Gov. Romney has emphasized. It's unclear how much of that is strictly for policy and regulatory reasons or due to slow economic growth and tight lending markets.

Related: A Romney Win Would "Overall Be Better"

Yet small business remains, along with the middle class, the constituency that office holders and office seekers compete to flatter and fawn over the most. It's not hard to figure out why that is. The friendly shop keeper and the garage tinkerer are beloved figures in the cultural imagination, for good reason. And cozying up to other potential sources of economic growth and jobs risks crossing political tripwires.

In today's climate, openly holding Big Business in high esteem is hardly a vote-getting tactic. Just consider the way last week's open letter from 80 large-company CEOs to Congress urging that it cut a deal to avert the fiscal cliff barely became even a one-day story. Multinational companies are viewed as job outsourcers, agnostic as to where in the world they move their capital and labor.

Related: CEOs' Message for Romney and Obama: You're Both Wrong

For obvious reasons, in this era of government-deficit rage, the only politician who would advocate fixing the economy by hiring a lot more public-sector workers is one who should expect to be voted back into the private sector on Election Day. This leaves small business as the undeserving, default recipient of our leaders' affections and promises.

So where is one to look for the promise of better job growth to come?

In Search Of: More Jobs

Maybe it will be as simple as watching the incoming employment data itself for a job market that is slowly, unevenly, but clearly improving on its own, without much help from specific government efforts at all. Indeed, Friday's jobs report showed stronger-than-expected payroll growth in October, as well as upward revisions for the prior two months. Still, the unemployment rate ticked up to 7.9% and the year-to-date monthly average of 157,000 jobs is barely enough to keep up with population growth.

There is a school of economic analysis that suggests the modern mature American economy has an embedded tendency to be stingy about growing payrolls in the early stages of recoveries. Remember, that this is the third frustratingly slow rebound in employment since the original "jobless recovery" was identified in the years after the 1990-1991 recession.

Jim Paulsen, chief investment strategist at Wells Capital Management, has studied this pattern and believes that U.S. job growth in this era doesn't begin to accelerate until about year four of an expansion. He links this tendency to the peak in overall U.S. labor-force growth in the mid-'80s, which coincided with the maturation of the Baby Boomers. Before that point, post-War labor recoveries were rapid and impressively strong.

Aside from the demographic connection, Paulsen points out that over the last two-and-a-half decades, companies have operated in an ever-globalizing economy with more competition and little pricing power. In the decades before 1990, corporate executives had a strong incentive to restart production and staff up heavily as soon as a recovery was evident to maintain market share. They could always push prices higher if they found they had increased costs a bit too quickly.

Since disinflation became the rule more than 25 years ago, CEOs have had scant confidence in their ability to drive prices higher, so they concentrated on productivity gains through technology and lean labor forces for as long as they possibly could. It was in the fourth year of the past two recoveries that efficiency gains gave way to adding headcount.

Are we now, more than three years from the nominal end of the brutal 2008-'09 recession, reaching that point?

The evidence is incomplete, but it is hinting enticingly at this possibility. The percentage of respondents to the Conference Board's consumer confidence survey who consider jobs plentiful reached its highest level in October since September 2008. Pay and benefits as measured by the employment cost index grew more quickly in the third quarter. While the monthly pace of payroll growth hasn't quickened to the point at which unemployment will drop briskly, this has been the first recovery in history that wasn't accompanied by a housing rebound during its initial two years, even as government payrolls have shrunk substantially.

It's never sensible to massage the data too hard, it seems worth noting that total employment ex-government and construction jobs has climbed a bit faster this time than in the past two cycles. The nascent increase in home construction should further improve the overall numbers.

None of this mitigates the fact that the last recession was particularly broad, deep and damaging to the country's growth engine. And, almost certainly, tweaks to tax policy, a sensible long-term Federal budget path and common-sense reform of regulations could encourage businesses big and small to do a bit more hiring at the margin.

But probably the most important shift that could produce faster employment growth is for companies to start feeling they have no choice but to add workers if they want to meet demand.