Why things seem to be falling apart and how it relates to the small business economy

Small and medium sized enterprises are central to the health of democracy, and their decline is at the root of what is going wrong in America.

Technology and globalization have given large, global companies a comparative advantage over small and medium sized enterprises. This has led to their tremendous growth and market consolidation in nearly every industry. It has also resulted in their rising political influence relative to smaller firms, which has allowed them to steer the allocation of credit and development of regulation, further compounding their advantages. These two factors; technology and globalization, credit and regulation, are what steer the economy in the 21st century and determines winners and losers.

The modern labor economy has taken on two forms; a well-paid high-skill labor market, and an increasingly marginalized low-skill labor market. While those in the high-skill bucket have fared well, they are increasingly corporate professionals attached to large corporations. The key difference between being a wage earner at a large company and an owner or executive at a small or midsize firm is stake. Being an economic stakeholder at the upper end of the income ladder shapes awareness and ultimately preferences towards political policies that benefit small and midsize firms. The greater the number and economic share of these stakeholders, the greater influence these small stakeholders will have. Furthermore, the more widely dispersed economic influence is, the more broadly effective economic policies must be to be appealing. While most middle class citizens will not be stakeholders, they also stand to benefit from these public-goods based policies. This is the root of democratization and high governance quality.

The decline in the influence and relative size of small and medium sized enterprises has led to both market and political consolidation. This consolidation of power has led to a political environment that produces less-democratic outcomes. This means political leaders are increasingly beholden to the large corporate interests that are increasingly the center of power in America. They can increasingly ignore public-goods economic issues in favor of symbolic social issues or private-goods economic concerns important to large corporations. Fewer Americans have a real stake in the economy outside of their own labor, and thus the rules of the game can increasingly tilt in favor of larger firms with fewer small- and medium-stakeholders to object. Real economic reform is passed over in favor of entitlement schemes and handouts. 

This hypothesis is confirmed quite easily by examining fiscal and monetary policy in the US. Fiscal policy has tended to focus on two major initiatives; entitlement increases and special interest-driven regulatory changes. The result has tended to favor the growth of large corporations and government agencies. Monetary policy has focused on a large supply of highly regulated credit. The result has seen the depression of yields for highly qualified borrowers. As a result much of this credit flow has been to large corporations, inflating the value of large publicly traded firms, and to other risk assets such as real estate. It has also incentivized government borrowing, and thus the growth of government agencies. 

The decay in small and medium sized enterprise has hollowed out what was once a major generator of wealth and community for the middle class. It has become exceedingly difficult to run a business, a church, or a community organization without access to the advantages held by large companies such as global supply networks, digital mass advertising, affordable credit, and compliance and legal support. Large companies and mass media provide convenient but unfulfilling substitutes for many of the roles that these organizations previously played. The decline of these local organizations led to a poorer and more atomized community life. It has also led to a decrease in the financial independence of the middle class. 

These dynamics are at the heart of the most serious issues facing the US today; rising inequality, expensive private healthcare, outdated education, expensive housing, the decay of community life, even the rise of divisive media and resulting polarization. In summary, it is at the root of all the issues that are contributing to the accelerating decline of the US middle class and emergence of an increasingly severe social (and geographic) divide between the upper class and everyone else. Large corporations, and an upper class, have always existed in every society. This current outcome is not the result of a conspiracy, but the outcome of an economic process. When economic and political power becomes consolidated enough that leaders can effectively ignore public goods issues and override the democratic process, society enters a feedback loop that results in the further consolidation of power.

This decline in small and medium enterprise, and the resulting decline in the middle class and in democratic responsiveness, has contributed to the sense of loss and grievance among the middle class, and has fueled the rise of populism and anti-capitalist, anti-globalist sentiments. It has contributed to the rise of Trumpism, but also to the rise in support for socialists such as Bernie Sanders and Alexandria Ocasio-Cortez. Unfortunately, neither of these movements lead to the resolution of these issues. On the right, Trumpism is a near perfect reflection of the decline of the middle class. Focused on immigration, free trade, and globalism, the movement is attacking all the perceived threats to middle class wages (it misses what is arguably the most significant factor, and also the hardest to manage, which is the development of technology). It is also both a response to and a reflection of the civic decay in middle class America. It can be viewed as a lashing out against decades of poor policy and middle class decline. However, it does nothing to address the root of the problem, which is the consolidation of economic and political power. Defined more by what it is against than what it is for, the movement is ultimately a symptom of middle class decline as opposed to a viable solution. While some Trump economic policies did boost growth, the Trump pro-business policies mostly favored the growth of large companies. This increased growth had some modest effects on job and wage growth, particularly at the low end of the income ladder, but did nothing to retard or reverse the overall decline in middle class independence or vitality. The Federal Reserve has recently admitted as much by acknowledging that economic growth has largely become disconnected from wage growth and inflation. On the left, the democratic socialism of AOC or Bernie would have a similar outcome from an alternate source, raising entitlements for those at the low end of the income ladder, and meanwhile further increasing the size and power of large government agencies. 

The proper response to this situation is to reinvigorate the growth of small and medium sized enterprises by allowing them to meaningfully participate in the technological revolution of the 21st century that has provided such a boost to big business. This includes access to global supply chains and digital marketing, and also access to affordable credit and regulatory relief. While the centralization of business activity and the decline in the value of labor are trends that are unlikely to reverse entirely, making it easier to start and grow and business profitably will provide a greater counterweight to the influence of large companies and their government partners as the economic and political rules of the future are decided. An economy with generous entitlements, but no agency, community, or upward mobility is a bleak future.

What are some examples of policies that affect this end? Firstly, providing small and medium sized businesses with affordable access to online marketing and online transactions without paying fees to the companies which own these online utilities. Platforms such as Facebook and Google are natural utility monopolies, similar to other natural monopolies such as railroads and highways. Treating them as utilities would subject them to higher regulatory oversight and prevent monopoly pricing schemes. Second is access to global supply chains. Large firms are able to negotiate cheaper manufacturing and shipping arrangements. Charging tariffs on large-firm imports to compensate for unfair labor practices is a good start. However, a more proactive approach is to subsidize small-firm import costs through tax write offs. Third is access to credit. Large firms have access to what is in essence an endless supply of cheap capital, both from investors and the Federal Reserve. Smaller firms, which are seen as higher risk, cannot participate in the financialization boom. However, a state-led effort to equalize the distribution of capital would alleviate this. This would entail an insured agency dedicated to providing loans to small and medium sized enterprises. Some Small Business Association and Veterans Affairs programs meet this aim already, but a massive expansion in availability and eligibility is needed. Lastly, regulatory relief. Small and medium sized enterprises suffer greatly from having to compete under the same rules as larger firms with access to cheap healthcare plans, compliance staff, and legal assistance. A national program to provide these benefits to small business is needed, and deregulation and tort reform targeted at smaller firms is absolutely necessary.

In addition to these economic steps, political steps are also needed. Trying to fight the influence of money in politics is a loser’s battle. However, we can even the odds by allowing small and medium sized firms to organize more easily. A lobbying national organization for these firms would be a good start. The Small Business Council of America achieves some of these aims, but providing federal subsidies to these types of organizations would be a shot in the arm. Additionally, results can be achieved in a decentralized manner by incentivizing political participation. An easy way to do this would be to make the political donations of small and medium sized businesses, churches, and community organizations tax deductible.