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Small Business & Public Policy

By Kennedy Kibler

Edited by Vedanth Ramabhadran and Brooke Qiao


Society would not function without small businesses. Although a seemingly niche topic, small business public policy has a tremendous impact on practically all Americans. The definition of a small business itself is a heavily debated topic that is important for policy makers to understand. According to the Small Business Association’s (SBA) definition, “a roofing contractor is defined as a small business if it has annual revenues of $16.5 million or less. But an Asphalt Shingle and Coating Material manufacturer is defined as a small business if it has fewer than 750 employees.” [1] Definitions have changed over time, but trends that distinguish small businesses from large businesses have remained mostly constant. Based on factors like number of employees, annual sales, amount of assets, management organization structure, and industry dominance, a small business can be defined as “a business in which there is no public negotiability of common stock and a business in which the owners must personally guarantee any existing or any planned financing.” [2] The public policy regarding small businesses from 1945 to the present can be explained best by issues of interest (such as access to capital, research/development funding, taxes, and trade regulations) being expanded to a greater frame in order to achieve legislative action, also known as the conflict expansion theory. Interest groups have expanded regional issues to a broader frame through lobbying, advocacy, and reframing, and the public policy created through these fluctuations in governmental attention directly affects the way that small businesses must operate to survive in the market.

Small businesses pose tremendous value to society in their contributions to economic growth, innovation, and job simulation. For example, “Small and medium-sized enterprises (SMEs) accounted for one-fifth of manufacturing sales in the USA in 1976, but the small firm shares of sales had risen to over one-quarter by 1986.” [3] Additionally, small businesses “produce 16 times more patents per employee than large businesses and universities and employ nearly 40 percent of America's scientists and engineers.” [7] Public policy directly impacts the behavior and livelihood of these businesses. Results from a multiyear survey sponsored by the SBA’s Office of Entrepreneurial Development finds that “managerial and technical assistance have a positive effect on both survival and growth” of small businesses; these findings imply that government-sponsored assistance has a tangible impact on the success and survival of small businesses. [4] For instance, when the government imposes regulations or taxes on a specific sector, investors may lose interest; conversely, tax exemptions or deregulation on a particular sector can do the opposite [5]. Institutions (formal rules) and culture (informal rules) represent two critical influences on small businesses. In this context, culture includes the norms and attitudes of society towards small businesses that affect the environment for change whereas institutions include the formal laws constraining or aiding these businesses. If both of these conditions are favorable, there is a positive cycle whose incentives move in the same direction; however, unfavorable culture and institutions can limit and stagnate entrepreneurship and small business success. Policymakers also influence small businesses through the manipulation of the competitive environment, like regulated operating hours or zoning restrictions that constrain small businesses from land use. [6] Some of the policy issues that small businesses struggle with are providing healthcare for employees, involving themselves in trade and e-commerce, implementing disaster assistance programs, accessing contracting, and minority small business owners overcoming institutional barriers. Additionally, the National Small Business Association reports 41 percent of small businesses having a lack of capital and too little time to prepare and file returns for a tax code that is long and complicated. [7] All of these issues demonstrate the overarching connection between public policy and small business success.

Conflict expansion is the idea that conflict must expand to a broader frame to make arguments more salient and to achieve legislative action. This theory “has long recognized the importance of how a policy is understood, or its issue definition, to explanations of policy change.” [8] Essentially, this means that seekers of change must expand a conflict to overturn the control of the policy issue by another group. This could involve nationalizing and/or judicializing the conflict, involving powerful policy actors, or changing the public perception of the policy issue. For instance, the National Rifle Association (NRA) used conflict expansion through the expansion of the ideas associated with gun control beyond the mere argument of hunting rights, to include ideas of freedoms, self-defense, and constitutionalism. Another example is climate change, where proponents use topics like lung disease and energy security to expand the conflict beyond just the environment itself. Small business public policy similarly demonstrates conflict expansion.



Figure 1. U.S. Bills and Hearings 1946-2020 [17]


Figure 1 shows the bills proposed and hearings that occurred between 1945 and 2020; these are measures of governmental attention as both bills and hearings are representative of legislative action. Conflict expansion is one explanation for the overall correlation between small businesses and the policies that guide them through the fluctuating governmental attention.

The history of this policy topic reveals that increasing salience, the changing power of small businesses, and reframing of issues all contribute to trends of the conflict expansion theory. Although the need for policy reform for small businesses may have been known for quite some time, the Small Business Act of 1953 and Small Business Investment Act of 1958 were the first major laws passed. Both years are seen as peaks in bills and hearings on Figure 1, representing the high rate of governmental attention during this time. The Small Business Administration was created under the 1953 Act to represent the interests of small businesses through initiatives like the Financial Assistance Program and Small Business Investment Company Program. [9] Governmental attention continued to increase in the 1970s, and this can be linked to increasing salience –– “the extent to which people cognitively and behaviorally engage with a political issue.” [10] Additionally, Birch’s publication of The Job Generation Process can be correlated with the 1979 peak, as it reframed the issues of small businesses and gave them spotlight attention, underscoring the issue among more people. His research revealed that small businesses create more new jobs in the U.S. compared to larger businesses. Specifically, “small firms generated 66% of all new jobs created in the U.S.” [11] Further research confirmed these theories and provided the topic with even greater political engagement, explaining the still relatively high amount of bills and hearings in the following years. [6] William Dennis, a member of the National Federation of Independent Business (NFIB) Research Foundation, argues however, that Birch’s work did not start the process of policy change, but actually acted as a catalyst that increased the progression after it began. He argues that prominence grew as a result of the growth of small business listings, student interest in entrepreneurship college courses, articles on the entrepreneurial revolution, and rising public curiosity. [12] Regardless of whether the cause was Birch’s paper, these other factors, or a combination of both, they all represent a form of conflict expansion through them broadening the scope of information on small business concerns to gain governmental attention.

Dennis also argues that small business public policy evolved through a change in agenda and small business’s ability to influence policy content as well as expanding use of carve-outs, which refer to “different rules for large and small businesses.” [12] Small businesses can gain political influence through advocates in and out of the government who can promote policy change, coalitions and interest groups to lobby and support/oppose specific policy proposals, and public demand that forces policy-makers to consider the needs of small businesses. Following the spread of Birch’s paper, small businesses gained policymakers’ attention. The 1980 White House Conference on Small Businesses resulted in a draft written by small business owners, with two more conferences in 1986 and 1995. The National Small Business United Research Foundation captured more opinions between 1982 to 2012 on topics like capital formation, taxes, regulations, employee issues, and government spending. [12] Another initiative to help small businesses during this time of increased power was the creation of the Small Business Innovation Research (SBIR) program in the early 1980s, which provided a research budget to small businesses in three phases. Overall, it “represents about 60 percent of all public SME finance programs.” [13] These examples imply that small business owners were able to gain traction via conflict expansion from Birch’s paper and other factors of growing public interest to create greater salience. Dennis argues that the impact is difficult to measure but states “When Birch (1979) published his findings, the policy atmosphere was ripe to embrace them, and it did. The setting was as if the Job generation process provided a reason to do what many already wanted to do. Small business could now be an economic centerpiece, and by extension a political centerpiece.” [12] Ultimately, the post-Birch-paper policy agenda and the creation of committees and conferences shifted traditional interests of primarily support and shelter programs to alternative programs meant to eliminate government impediments. This transition from supporting small businesses facing government induced barriers to removing these barriers from the get-go shows the effect of conflict expansion on small business public policy over time. In contrast, Figure 1 shows little activity from the late 1980s to early 1990s because there were still issues that failed to gain traction, despite massive strides. Two of these were the lack of successful antitrust regulations and debt finance policy modifications. Limited political attention towards antitrust policy may have been a combination of factors like the 1970s inflation leaving a premium on consumer price increases or international competitiveness which increased the need for large firm dominance. Moreover, borrowing concerns were barriers preventing debt finance issues from gaining traction. [12]

Next, carve-outs involve rules that make compliance for small businesses easier, such as the Regulatory Reflective Act of 1980. This act evolved due to the Small Business Regulatory Enforcement Act in 1996 and Executive Order 13272 in 2002, both of which are years with peaks on Figure 1. These evolutionary measures strengthened the original intentions of the Regulatory Reflective Act because regulation-writers pursued more flexible regulations. Another example was the Section 179 carve-out, which increased the availability of tax benefits to smaller firms through efforts like the Economic Recovery Tax Act of 1981, compensation from Congress, and the Protecting Americans from Tax Hikes (PATH) Act of 2015. The Affordable Care Act of 2010 is also a carve-out example that showcases the conflict expansion theory best, specifically through reframing. Small businesses were concerned about being mandated to provide health insurance to all employees. To achieve carve-out, small business proponents had to reframe their original argument to one that implied that they would pass premiums back in the form of lower pay and benefits, resulting in fewer jobs and lower wages. Therefore, they reframed a positive outcome for employees into a negative one, forcing policymakers to make an exemption for small businesses. [12]

Dennis summarizes this overall history of small-business political influence into stages: the rise from 1976-1985, the climax from 1986-2000, and a decline from 2001 to the present, which roughly match Figure 1. Furthermore, the rise and climax can be associated with boosts from Birch’s Job Generation Process, advocacy in and out of government to increase salience, the development of coalition politics and small business organizations, and reframing of issues to the public through methods like carve-outs. [12] Recent years have brought policy responses to the negative consequences of the COVID pandemic on small businesses. Government programs like relief packages, direct cash transfers, subsidized low interest loans, and policies to defer payments have targeted small businesses hurt by negative consumer spending, deteriorating future expectations, and revenue loss. The 2020 Paycheck Protection Program provided loans to cover payroll and certain expenses; however, the “first-come, first-served” format caused many small businesses to miss out on the opportunity due to lack of knowledge and waiting times. [14] Another recent development for small businesses has been Biden’s Small Business Boom Plan. He plans to offer over $300 million in loans and equity investments until 2030 and to invest $100 million in the SBA’s Community Navigator Program, which would provide greater access to services for those attempting to start a business. [15] Biden's plan hopes to provide greater access to capital, investments to help small businesses find resources and support themselves, and reformations to the tax code. Post-pandemic, small business jobs represent 49% of the net job growth, the second highest share on record, so policy is crucial to small businesses in this time of recovery. [16]

Small businesses have become important political actors, but it is unknown whether they can regain the political influence they once had or gain enough traction to increase governmental attention, especially in an era of divided politics. The overall history of small business public policy is a prime example of the conflict expansion theory due to critical issues gaining greater support because of lobbying, advocacy, and reframing. These policies are undoubtedly important to the livelihood of small businesses and therefore the livelihood of the U.S. economy. Only time will tell if small businesses can continue to accomplish their goals


 

[1] Frank William, The Effects of Government Policies on Businesses, Chron, Mar. 8, 2019, https://smallbusiness.chron.com/effects-government-policies-businesses-65214.html.

[2] Adam Thorn, Issue Definition and Conflict Expansion: The Role of Risk to Human Health as an Issue Definition Strategy in an Environmental Conflict, 51 Policy Sciences (2018), https://link.springer.com/article/10.1007/s11077-018-9312-x.

[3] George Solomon et al., Survival of the Fittest: Technical Assistance, Survival and Growth of Small Businesses and Implications for Public Policy, 33 Technovation (2013), https://www.sciencedirect.com/science/article/abs/pii/S0166497213000643?fr=RR-2&ref=pdf_download&rr=82081b88eb4b274e.

[4] The U.S. Senate, U.S. Senate Committee on Small Business & Entreprenuership, https://www.sbc.senate.gov/public/index.cfm/democraticissues.

[5] Jerome S. Osteryoung & Derek Newman, What Is a Small Business?, 2 Journal of Small Business Finance (1993), https://www.econstor.eu/bitstream/10419/114658/1/jef-1993-02-3-c-osteryoung.pdf.

[6] Philip Moniz & Christopher Wlezien, Issue Salience and Political Decisions, Oxford Research Encyclopedias (2020), https://oxfordre.com/politics/display/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-1361.

[7] Donald Judd, Biden Will Tout ‘Small Business Boom’ in Roundtable with Small Business Owners at White House, CNN, Apr. 28, 2022, https://www.cnn.com/2022/04/28/politics/small-business-roundtable-white-house-biden/index.html.

[8] John Eric Humphries, Christopher A. Neilson & Gabriel Ulyssea, Have Government Policies Helped Small Firms Cope with Coronavirus?, Economics Observatory, Jan. 14, 2021, https://www.economicsobservatory.com/have-government-policies-helped-small-firms-cope-coronavirus.

[9] The White House, THE SMALL BUSINESS BOOM UNDER THE BIDEN-HARRIS ADMINISTRATION, (2022), https://www.whitehouse.gov/wp-content/uploads/2022/04/President-Biden-Small-Biz-Boom-full-report-2022.04.28.pdf.

[10] Andrew W. Hait, The Majority of U.S. Businesses Have Fewer Than Five Employees, (2021), https://www.census.gov/library/stories/2021/01/what-is-a-small-business.html.

[11] Larry D. Gilbertson, Small Business Financing under the Small Business Act and the Small Business Investment Act of 1958, 8 Kansas Law Review (1959), https://heinonline.org/HOL/LandingPage?handle=hein.journals/ukalr8&div=58&id=&page=.

[12] William J. Dennis Jr., Entrepreneurship, Small Business and Public Policy Levers, 49 Journal of Small Business Management (2019), https://www.tandfonline.com/doi/abs/10.1111/j.1540-627X.2010.00316.x?casa_token=xmL9oLlQMToAAAAA%3Aw638bbFW8kpUyk28pfOoEA0RtnVUMf57DgMy4hWGdMVna9wiiPNF5S_MM8MOZbFGCjGwN9zY53Wi.

[13] William J. Dennis Jr., The Evolution of Public Policy Affecting Small Business in the United States since Birch, 23 Small Enterprise Research (2016), https://www.tandfonline.com/doi/pdf/10.1080/13215906.2016.1269243?needAccess=true.

[15] David B. Audretsch, Sustaining Innovation and Growth: Public Policy Support for Entrepreneurship, 11 Industry and Innovation (2010), https://www.tandfonline.com/doi/pdf/10.1080/1366271042000265366?needAccess=true.

[16] David B. Audretsch, Standing on the Shoulders of Midgets: The U.S. Small Business Innovation Research Program (SBIR), 20 Small Business Economics (2003), https://link.springer.com/article/10.1023/A:1022259931084.

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