All week, our Magic Bullets series has focused on big ideas that political leaders say can boost the economy. One you hear mentioned often is small business. But can small businesses really grow enough to help the overall economy? That’s what I set out to find out.
The way politicians tell it, small business IS the backbone of the economy. President Obama has said this many, many times – especially the idea that small business is “the key for us to be able to put a lot of folks back to work”.
It’s not just Obama. Warm feelings about small business come at all levels of governance, and on both sides of the aisle. Michigan’s Republican Gov. Rick Synder is the darling of the state small business community. Earlier this summer, at the Small Business Association of Michigan’s annual meeting, he urged members to “Talk about the jobs you’re creating, even if it’s one”, because, he that would be the “backbone of the reinvention of Michigan”.
This is more than just political talk. In addition to the landmark federal Small Business Job Act of 2010, Midwestern cities and states have created their own policies. Michigan exempted most small business from its 6 percent corporate tax rate earlier this year. Cleveland’s Cuyahoga County is shifting its economic development strategy to help small-to-medium-sized businesses, saying that focusing on the “big project” doesn’t make as much sense anymore.
All of this prompted University of Chicago economist Erik Hurst to explore whether if small businesses do contribute to job growth. Hurst, who teaches at the Booth School of Business, has a pretty simple answer: “No”.
“I think when people talk about small businesses they think about the business that starts small and gets really big, like Google or Wal-Mart,” Hurst said. “They start in someone’s basement, or with one store, and they eventually grow to something quite sizeable. But most small businesses don’t do that.”
Hurst just published research based on an analysis of federal government and foundation data about small businesses.
The Small Business Administration defines small businesses differently according to the type of company. For example, in the case of manufacturing, the SBA thinks a small business is anything with less than 500 workers.
Hurst uses a definition of small businesses of having one to 19 employees, according to his research, what 90 percent of the businesses in this country are.
In Illinois, three-quarters of the 1.1 million small businesses are made up of just one person – people who are self-employed.
“Most small businesses are closer to your normal dentist than they are to Groupon or Google,” he said. “Most small businesses are dentists, plumbers, a small doctor’s practice.”
More importantly, Hurst’s research also looked at intentions of small business owners. This was his big finding: most of them don’t want to grow.
“The vast majority of small businesses are in a very few categories and most of them never grow. Their desire is to be a couple of employees and stay that size into the foreseeable future,” he said.
When Dr. Mark Gamalinda began his Chicago dental practice almost 25 years, it was just “me, myself and I,” he told me.
“For the first year, I was just just slowly growing the practice,” said Gamalinda, who runs his practice from the North side neighborhood of Andersonville.
Dr. Gamalinda seems like the perfect dentist for nervous patients. He’s quiet, his office an oasis of warm, golden walls. Quotes from people like Emily Dickinson are painted inside patient rooms.
Over the years, his practice has grown. He now has a patient base up to almost 4,000, and three assistants, a hygeneist and a receptionist.
He buy supplies for the office at Costco. He supports small, local business too, sending out some work to a lab, and using another company that makes crowns and other dental prostheses he can’t make himself.
Now that he’s 50, he’s thinking about adding one final worker – another dentist who can eventually take over his practice.
Dr. Gamalinda told me he’s proud of his practice, and how it has helped support his family over the past few years. He does believe he’s part of not just the economic fabric of his neighborhood, but of Chicago, and the broader economy.
The few blocks that make up the business area of Andersonville are 93 percent locally owned like Dr. Gamalinda’s, according to the Andersonville Chamber of Commerce.
Ellen Shepard is its executive director. She disagrees with Hurt’s findings – and said that she thinks small businesses, independent businesses, are vital to the economy.
“When we think about the model for economic growth, I think we have to think less of the growth of the wealth of the economy and more towards the growth of self sufficiency, internally, within communities,” she said.
It’s clear those big companies – those Googles, and Groupons – and yes, Wal-Marts still are the biggest drivers of the economy, and of job creation. But Shepard said that doesn’t mean we should count out even the one-man business – because maybe a healthy combination of both is what the new economy should be.
What do you think?