Here's an oft-repeated saw: Small businesses are the foundation of job creation. Therefore, any policy designed to boost the job market should stimulate the small-business community with increased access to credit, tax cuts, etc.
The idea is mostly true. But Greg Ip points out an important distinction in his book The Little Book of Economics:
Small companies destroy just as many jobs as they create; they aren't disproportionate job creators. By contrast, new companies do create a surprisingly large share of new jobs. A 2009 study by Dane Stangler and Robert Litan of the Kauffman Foundation found that if you took out firms that were five years old or younger, employment would contract most months. So job creation tends to be primarily the product of entrepreneurs who have a crazy idea for starting a new company.
Size is not the important variable; it's age. There are plenty of companies that are large yet relatively young, like Google (Nasdaq: GOOG) and Netflix (Nasdaq: NFLX), that create lots of jobs. Others are small yet outmoded, and add to the ranks of unemployed. Others still, like Kraft (NYSE: KFT) and Altria (NYSE: MO), are extremely profitable, yet have simple business models, so the need to create new positions is rare.
What job growth comes down to is innovation. And if innovation is the key, this quote from CBS News should make you cringe:
The current wait for a patent is, on average, three years, or 36 months. The "in box" at the U.S. Patent and Trademark Office is stuffed with 700,000 applications awaiting review. Ultimately, only 4 out of ten applications, or 42 percent, are approved.
The director of the patent office goes on to admit: "We currently have systems that are not as capable as they need to be -- they're certainly not state of the art. As a result, our examiners are handicapped."
Forget small-business loans. Forget infrastructure projects. Forget one-time tax cuts. Let's give the patent office a boost.
What do you think?
