Some Final Thoughts on Small Business (part 3)

I'm going to try to wrap up this series today.  I may in the future follow up with some evidence, it's not hard to find evidence of how small business is more reliably right leaning than big business and that entrepreneurs tend to vote more Republican.  It's somewhat harder to get firm evidence of my central claim though, that small business is being particularly badly shortchanged.  To address this, a case study of acts such as the ACA would be required as well as a somewhat trickier look at tax policy, which tends to favor small over large business.  A number of other regulatory compromises would fit the bill as well.  Probably too big of a task for a blog, but I find strange things entertaining so I may get around to doing it for kicks.

Back on topic (and apologies for possible incoherence, I'm short on sleep today), there's a few loose threads hanging I want to clear up.

First off, individual level motivations.  I don't need to say much here, just Google entrepreneurship and character traits (or qualities or whatever).  People that succeed in opening up a small business are much more likely to be self-reliant, have a strong opinion of themselves, be risk takes, and thrive under risk.  Bully for them.  However, not infrequently people with these character traits are going to be a bit less empathetic, after all if you're ignoring the risk and advice of everyone to gamble on starting your own business you probably don't spend a lot of time listening to other people.  Now, these attitudes are necessary and beneficial for entrepreneurs, it helps business to grow.

The problem is this often blinds these individuals to systemic issues.  We are all strongly impacted by things beyond our control, successful entrepreneurs will tend to ignore things they can't change to focus on things they can.  This thinking doesn't work when it comes to the systemic issues that government should focus on, these issues are very much about the things that individuals can't change but society can.  Regarding these issues, most people don't want the entrepreneur's world, more people freeze up when exposed to risk rather than thrive on it.

This gives small business owners a skewed attitude towards what works, they thrive under conditions that are bad for most people.  This doesn't create a situation where one side's loss benefits the other however, small business owners still need the great bulk of individuals as customers and workers.  Greater risk may lead to the risk loving individual having better relative prospects, but their absolute prospects have a lot to do with the general health of society.  Whatever it is that drives the entrepreneurial spirit, there aren't many people that better themselves in the face of adversity.  Far more people drop out than step up.  This makes the entrepreneur's individual self-interest self-defeating when it comes  to policy.

Ok, just realized I probably strayed into incoherence.  What I'm trying to get at is that the very character traits that makes an entrepreneur so successful in competition with others is a liability on the political stage (and probably one reason they get so angry at politics).  They tend towards being uncompromising and believing in their individual vision at the expense of shared realities.  This sets up a situation where natural character biases reinforces ideological biases and makes compromise more difficult relative to big business elites who were more likely to get their position through success in school and climbing the corporate ladder rather than the entrepreneurial risk taking of the small business owner.

From society's viewpoint, this is a very bad situation.  Policy compromises with small business owners would almost always be far more optimal than with big business, we'd all be better off if the compromise had been between the left and the Chamber of Commerce or National Small Business Association than we are with the compromises that were actually made.  Policies favorable to small businesses would take the onus for providing health care off of them and onto either the state or individuals, in either case this would move small business closer to being equally competitive with large business than they are today.  Similar things can be said regarding tax policies, cuts in the capital gains rate favors large business over corporations posting profits on individual incomes, for example.  Our tax code is riddled with these compromises, most small businesses pay something far closer to statutory marginal tax rates than do large businesses which are able to take advantage of myriad loopholes.

This tends to create a situation where small businesses find themselves in a self-reinforcing downward spiral of declining power and influence.  They are justifiably angry over taxes and regulations that erode their competitiveness and that they pay in full.  They find it difficult to sympathize with left wing criticisms of lax taxes and regulations because, for them, their taxes and regulations are anything but lax.

This tends to make them side with big business that wants both lower taxes and regulations.  However, the left is rarely sophisticated enough to note that there are wide discrepancies in how much in tax is paid by the top 1% or by corporations, the focus on the headline rates that mostly apply to small business.  This means that when it comes time to hash out a bill big business can throw small business under the bus to reach a compromise with the left that leaves current laws in place or further slants the game in their favor (CAFE rules instead of a gas tax being an excellent example).  Small business is left angry at the left for having such intransigent demands and rarely focuses its ire on the right.

The way out of this situation is difficult to see.  Small businessmen tend to be focused on their own concerns and to think of themselves as future big businessmen, they aren't interested in bringing big business down to their level, they want the taxes and relatively low regulatory costs that big business enjoys.  This isn't realistic however, the bulk of people simply don't function well under a laissez-faire system.  The only realistic compromise is one that shifts the costs from small to large business, which is a violation of both ideological principles as well as personal level characteristics common to small business owners (like anything, there is more within group than between group variation, there are of course small business owners that couldn't be more unlike what I'm describing, but, as a group, there is a tendency in this direction even if its predictive power is basically zilch for an individual).

I fear that the most likely scenario is that we'll continue on an optimally inefficient path where the compromises are between the left and big business.  It is very hard to see how small business groups can break out of their current ideological stances to build compromises over the head of big business.  Since they're such a reliable voting block defection seems impossible so their needs will rarely be heard.  It's a pity, but I just can't see what could change this.

It is peculiar to think about how a fairly powerful group pursuing its own self-interests can put itself in a perpetual equilibrium where it will lose out every single time.  That's where small business is in the US though.  Just one more driver of our current polarization.