Bernanke: Small Biz Needs Support

Fed Chief Ben Bernanke Testifies to House Budget Committee
Fed Chief Ben Bernanke Testifies to House Budget Committee

Nearly 40 percent of U.S. GDP comes from firms that did not exist in 1980, according to Carl Schramm, CEO of the Ewing Marion Kauffman Foundation, and firms younger than five years are most likely to create new jobs. Are new enterprises the key to job growth?

“Small business and entrepreneurship during economic recovery” was the topic of a conference Wednesday at the Federal Reserve in Washington, organized with assistance from the Federal Reserve Bank of Atlanta and the Kauffman Foundation, the leading funder of entrepreneurship research in the United States.

The conference brought together small business owners, lenders, technical assistance providers, government officials, and academics to discuss how entrepreneurs might drive job creation in today’s marketplace.

“Small businesses have played an important role in fueling past economic recoveries,” Chairman Ben Bernanke said in the opening address. “We need to think carefully about how, in the current economic environment, our nation can best provide small businesses and entrepreneurs with the support they need to expand job opportunities."

One of the main drivers of economic revitalization is the nexus between new business ventures and macroeconomic health.

The chief economist of the National Federation of Independent Business, William Dunkelberg, said that the biggest obstacle to job growth is lack of demand, not the issue of credit access that was prevalent during the height of the recession. Most new jobs are at small firms, but Dunkler found that small businesses have a glum view of the economy. These businesses have stopped contracting and firing workers but are not yet ready to hire due to uncertainty, regulatory burden, and weak demand.

A research economist at the U.S. Bureau of Labor Statistics, Eleanor Choi, reported on research finding that the changing industry composition of the American economy—a declining manufacturing sector offset by an increase in services—has led to a change in firm size. Recently established firms are smaller and staying smaller in all industries. The average size of new businesses fell to 4.9 employees in 2010 from 6.8 in 2001 and 7.6 during the 1990s. According to the Small Business Administration, 99.9 percent of current firms have fewer than 500 employees.

Is the key small businesses or new businesses? Attendees at the conference reiterated the growing call to rename the Small Business Administration the “New Business Administration” or “Young Business Administration” in order to more accurately describe the importance of “small” businesses to the economy. Each year, 700,000 new firms are established in the United States. Schramm argued that this number could be increased to 1 million new firms, which would lead to more growth.

But where does the financing come from? It’s no longer the traditional bank loan. Rather, entrepreneurs are looking to personal savings and family networks, credit card companies, and increasingly community development financial institutions (CDFIs), said John Robertson, a vice president and senior economist at the Federal Reserve Bank of Atlanta. Only 14 percent of INC. 500 firms, a respected list of fastest-growing firms in the United States, have relied on venture capital, Schramm added.

If new small businesses are the key to job growth and economic revitalization, what are the conditions that are necessary to create these jobs? The Kauffman Foundation proposes “The Startup Act,” which consists of the following components: (1) welcoming new founders to the United States who could build scale companies by developing entrepreneurs' visas; (2) facilitating early stage financing of startups and access to public markets; (3) accelerating the formation and commercialization of new ideas through intellectual property law changes; and (4) removing regulatory barriers to formation and growth.

John Kenneth Galbraith, the noted economist, declared in 1967 that the age of the entrepreneur and the small business had given way to the age of the giant, mature corporation. The decades since have proven that growth still comes from the entrepreneur. It's important to remember that even firms like Apple, Google and Microsoft started with a couple of motivated people and one good idea.