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Let's Talk About the Real Job Creators

At tonight's presidential debate, the candidates will be pushing for better policies for "job creators." Who are they really talking about?
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The true heroes of the last presidential debate were not the candidates--they were small-business owners.

The phrase "small business" was used 26 times in the first presidential debate, with each candidate arguing that his policies would help support "America's job-creators."

At the outset of the debate, President Barack Obama stressed the importance of changing "our tax code to make sure that we're helping small businesses and companies that are investing here in the United States." Republican candidate Mitt Romney, just a minute later, insisted that it's "small business that creates the jobs in America" and that "helping small business" is the cornerstone of his economic plan.

Romney has charged that if we let the Bush-era tax cuts expire--as Obama plans to do--America's job creators will suffer, and the private sector will lose 700,000 jobs.

There are a couple of problems with that argument. 

The first is that the vast majority of small business owners will actually not be affected, should the Bush tax cuts expire.

In fact, only about 3% of small businesses would be affected by the expiration of the tax cuts, according to the Center on Budget and Policy Priorities, which released a related white paper in July. The white paper asserts that, "The claims that allowing the Bush tax cuts for high-income people to expire would seriously harm small businesses rest on an exceedingly broad, and misleading, definition of 'small business'...The definition is so broad, in fact, that under it, both President Obama and Governor Romney would count as small business owners--as would 237 of the nation's 400 wealthiest people."

Romney counterargues that even higher taxes on the 3%, which represent close to one million businesses, would have a substantive impact on the job creation economy.

According to Mark Thoma, an economist at the University of Oregon, that's a minority view. "I think the Romney charge is very much over-inflated," says Thoma. "If there's an increase in taxes, it's not really hitting the mom-and-pop grocery stores everyone is thinking of. They're not really creating or losing jobs themselves."

In fact, according to one recent study released by the National Federation of Independent Business, taxes aren't even a top-five concern among business owners. (The cost of health insurance is No. 1.)

The real problem, Thoma says, is that both candidates have muddled the definition of what a "small business" really is. And it's not just a silly discrepancy: The definition of "small business" is important, because the Bureau of Labor Statistics and Automatic Data Processing--which look at private payrolls--treat job numbers differently, and tax policy is generated based on those assumptions.

The ADP data uses "establishment" data, as opposed to "firm" data. An establishment is defined as merely a physical location where business is done. In other words, using ADP data, a Wendy's opening a new location and hiring three workers counts as a "small business" that has now created three jobs.

"This morning I got coffee from Saint Elmo's Coffee House, a great small firm in my 'hood," writes Jared Bernstein, an economist with the Center on Budget and Policy Priorities. "I then went next door to a UPS outlet, where one employee was at work. But that doesn't make UPS a "small business." More germane, when small businesses are asking for special policy treatment, let's be clear that it's the small firms we typically think we're talking about here, not the small establishments. And those firms are not disproportionate job creators."

Of course, some small businesses are indeed "disproportionate job creators," as Bernstein puts it. But not all of them. That distinction was highlighted in a 2011 report by John Haltiwanger, an economist at the University of Maryland, who asked in "Who Creates Jobs? Small vs. Large vs. Young."

His answer might not be something the politicians want to hear: "Our findings show that small, mature businesses have negative net job creation." That's the bad news. The good news is that start-ups--or young, and fast-growing businesses--"contribute substantially to both gross and net job creation."

In other words, when it comes to generating jobs, firm size is less important than a firm's upward growth at its initial stages. The candidates should talk about policies that could spur more start-up growth, rather than focusing on tax policies that ultimately won't have a significant effect on most business owners.

But these distinctions will likely not take center stage at tonight's debate.

"There's a romanticism about small towns and small businesses,"  says Thoma. "So they're very much using this idea of the American Dream to drive their politics. Everyone loves small businesses, there's nothing political to gain by saying that's not a true story."




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