America's Small-Business Fetish

This excerpt was originally published in the June 2012 edition of Reason. Read the full text here.

On February 12, House Majority Leader Eric Cantor (R-Va.) sent a message to his 62,550 followers on Twitter: “Small business is the job growth engine in this country and we need to pursue policies that reflect that reality to create jobs.” Cantor was wrong on both counts. Despite overwhelming conventional wisdom to the contrary, small businesses are not the engine of growth. And the small businesses that do create jobs rarely stay small for long, which makes crafting policies that favor those fast-growing firms both difficult and unnecessary.

The cult of the small business is so prevalent that you are treated like a heretic in Washington if you don’t pledge to do something nice for the little guys. Targeted tax credits, special regulatory exemptions, preferential access to government contracts—nothing is too good for America’s DIY manufacturers and social networking startups. Support for the Small Business Administration (SBA), a federal agency tasked with handing out goodies to the modestly sized, remains strong, despite dozens of compelling studies demonstrating that its efforts amount to little more than poorly targeted corporate welfare.

In his 2011 budget, President Barack Obama requested $1.4 billion to fund SBA programs. Most of the agency’s money is spent on special credit programs for small businesses that have difficulty getting loans from regular banks. In fiscal year 2011, the SBA guaranteed $30 billion in such loans, which theoretically don’t cost taxpayers anything. In practice, however, whenever the economy goes south, the SBA can’t cope with the number of small businesses that default on the loans. In 2011 the SBA ended up spending $6.2 billion, a $4.8 billion increase over its requested amount, mainly because so many small businesses couldn’t make their payments.

The idea that small is glorious or that small businesses are the engine of growth is based on bad economics, and the result is bad policy...