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Big Business Blunder

December 29, 2012

Over the past few decades, both Democrats and Republicans in Washington have become bonded to the idea that what’s good for big business is good for America. While you hear them pay lots of lip service to small businesses, you rarely see any actual subsidies or other help for them. To a large extent, this mindset has hindered, rather than helped, the economic recovery that we’re now striving to achieve.

I’m certainly not going to make a case for big business being evil, because there is nothing fundamentally evil about it. To be sure, there have been many reports of scandals in recent years, but that’s a function of company management. Their individual choice to behave ethically or unethically rarely (if ever) has anything to do with the size of the company.

The one thing that big businesses don’t do is something that they were never designed to do: create net job growth.

Consider how any company grows. You start with a core group of founders. They sell their innovation to a few clients. Word spreads, perhaps even virally. Suddenly there’s a huge spike in demand for what the founders are selling (or it could be a more gradual increase, but the evolution follows the same route). Now the founders not only have to hire more people to meet this demand, but they also have to hire marketers, accountants, and human resource personnel. Incidental jobs spring up in the neighborhood around the company headquarters. Brand new jobs, and brand new wealth added to the economy. It’s the classic capitalist miracle. Maybe they’ll have an IPO and generate even more wealth.

Now that the founders have a big business on their hands, what happens? By now there are surely competitors offering a similar product or service. Perhaps even one that’s even better, faster, and/or cheaper. Either way, it still means that the big company has to stay on its toes. Above all, they must become more efficient.

How does any business improve its efficiency? By maximizing its economic output while minimizing its expenses – the biggest of which is usually the payroll. Again, this isn’t a bad thing: it’s simply the way every business evolves.

The effect of all this in Washington is that corporate welfare results in more economic output, which indeed is good for the nation, but does nothing to address the employment situation (which is already hurting big business because of softer demand). More jobs need to be created just to keep up with population growth. The lesson to be learned is that we need more new business founders, and that Washington needs to subsidize entrepreneurship. Not wealth preservation.

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