Gazelles at the Credit Hole: Small Business JOBS

Is it quite as simple as just "jobs, jobs, jobs"?


The recent Obama JOBS act was done under auspices of helping small businesses, notably technology start ups, by reducing documentation requirements.  But does this really seem reasonable to help small businesses so much?  And while on that topic, who are small businesses, and what do they truly do for employment?

The rhetoric on capitol hill tends to be that small businesses are absolutely critical to job creation.  This line of argument had its roots in a 1979 empirical study conducted by John Birch that found that small businesses contributed to a disproportionate amount of job growth.  He subsequently added to his thesis, talking about the business environment as if it were the savannah.  On one side, you had the small businesses, comprised of the mice and the gazelles.  On the other side were the large businesses like WalMart, termed "elephants".  The mice are the low impact firms, the plumbers, the electricians, and the barber shops, whereas the gazelles are the high impact firms, the (as of then nonexistent) Apples of the world.  The mice tend to be relatively unproductive, with high turnover, and really have not much reason to grow.  They're just a part of the increase in service and hospitality, they aren't the technological game changers that politicians love to idolize.  On the other hand, the gazelles, while only about 5% of the small business crowd, were actually the ones responsible about 70% in total job growth.

So do these businesses need easier credit, much like that offered by the JOBS act, to survive?  On a first pass, the answer is no.  In a recent survey of small business owners, only 4% complained of financing difficulties, where as taxes and low sales took up 56% of the complaints.  For mice, who don't grow much anyways, there seems little need for credit.  For the gazelles, credit hardly seems like an issue at all!  Although the recent financial crisis made it more difficult for business, especially small ones, to get access to credit, the gazelles among the small businesses were hardly hit; they just kept on growing.  They have been able to sustain high revenue per employee throughout the recession  These firms were already gazelles,and they had already clearly proven themselves in the most productive fields. How could a credit crunch truly affect them?

This really goes to show how schizophrenic small business policy is in the United States.  While favorable tax policy towards small businesses may give an initial boost, they can also foster a system of incentives in which firms rationally choose not to grow.  Additionally, the policies that we try to enact to reduce compliance costs for small businesses, can have rather dangerous second order effects on hedge funds, which may end up creating new financial crises that devastate businesses.  Why create more market opacity in an attempt to feed businesses with what they're not asking for?

And if credit is somehow the actual issue holding back key businesses, wouldn't this just be another argument for better monetary policy?  If there is a guaranteed level of nominal output growth, there would be more assurance that the demand for your products would be there.  Also, this would be a less distortionary than the current system in making credit more available.  Nominal stability increases the supply of safe assets, meaning firms would have an easier time getting funds.  Banks would be more willing to lend because the NGDP target effectively guarantees that, on aggregate, these businesses cannot all fail.  The Fed would manage the systemic risk; banks would only have to deal with more tractable firm level risk.  More stable sales that naturally arise from a NGDP targeting system would also help these extremely promising firms start out.

The JOBS act really goes to show how dangerous ostensibly liberalizing legislation can be.  Often times, what we wish to fiscally achieve to solve certain persistent problems would be so much less important in a world with a stable monetary policy.  Yet even with all these factors hanging in the balance, monetary policy has remained tight.  What a shame this is.

Funny comic on this issue of presidents, legislation, and jobs from Saturday Morning Breakfast Cereal.  I sometimes wonder if this really is how bills are named.