We've heard it all year long, and in every presidential debate: small businesses deserve special handling from the government because small businesses create all the jobs. Even in a debate ostensibly devoted to foreign policy, Romney and Obama were at it again, tussling over who loved small business more.
Funny thing about small businesses. Not only are they responsible for creating lots and lots of jobs, but they're also responsible for the loss of lots and lots of jobs.
That insight comes courtesy of Inc. Magazine's Bo Burlingham, in the intriguing article "Who Really Creates the Jobs?" Burlingham's investigation should be required reading for every pundit who wants to wax eloquent about the government role in spurring small business job creation, because it makes a convincing case that both Republicans and Democrats are going about things all wrong -- at least at the federal level.
"If you were to group together the vast majority of small companies," writes Burlingham, "their net job generation would add up to zero."
Which means broad-brush initiatives (like tax cuts) that don't discriminate between companies with growth potential and companies that are going nowhere are a waste of resources. Burlingham surveys the last 20 years of research into small business job creation and identifies a subset of businesses -- dubbed "gazelles" by MIT researcher David Birch -- that account for the bulk of net job creation. Most gazelles are small -- but not all of them. The characteristic that they share the most is youth.
So what can government do to help promising young start-ups reach liftoff? The most common government tactic, popular on both the left and right, is to lower the cost of capital, whether through loan guarantees or other direct subsidies. But Burlingham argues that such broad-brush tactics distort the marketplace by rewarding both good and bad ideas and end up saddling start-ups with debt that they'll find hard to pay off. Furthermore, state and federal assistance tend to operate too far from ground level -- another round of tax cuts, for example, has little relevance to the real day-to-day obstacles that inhibit growth.
Such obstacles include a lack of qualified personnel for supervisory level jobs -- something that most job training programs don't address -- and problems negotiating local government bureaucracies or integrating with local universities. Burlingham cites at length from a case study of Littleton, Colo., a city that worked hard to put in place an "'economic gardening'" approach to economic development.
Among other things, [Littleton] provides local companies with information on marketing, competitive intelligence, and industry trends. It offers training and seminars in advanced management techniques. It has developed a telecommunication curriculum and an e-commerce course with the local community college and helped local businesses connect with trade associations, academic institutions, and other companies in the same industry. The list goes on. Have such efforts paid off? In 20 years, the number of jobs in the city doubled, while sales tax revenue tripled, without a dime being spent on recruiting outside employers, according to Chris Gibbons, now with the National Center for Economic Gardening, who led the effort.
Youth benefits from a nurturing hand. Seedlings need to be watered, and gardens need to be weeded. It's not about creating a level playing field; it's about tipping the savannah so the gazelles are running downhill.