The Decline of Small Business and What to do About It

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Americans have long seen small businesses as the heart and soul of their economy, but small firms have not fared well in recent years. Corporations, in contrast, seem to be on a roll, with profits and stock prices soaring to record highs. Is small business really in decline, and if so, what should we do about it?

First, some data

One striking indication that small business is falling behind is the divergence between corporate profits and proprietors’ income. The trend is evident in data, shown in the following chart, that were released last week by the U.S. Bureau of Economic Analysis.

It is true that the two series in the chart correspond only approximately to the popular distinction between big and small business. Proprietors’ income includes the current income of unincorporated businesses that have the legal forms of proprietorships, partnerships, and tax-exempt cooperatives. It does not perfectly match up with small firm size because some small firms are incorporated and some proprietorships, partnerships, and cooperatives are large. Also, proprietors’ income is not, in an economic sense, a pure measure of the profits of small businesses, since it includes the imputed income of small business owners who live off the net proceeds of their enterprises without paying themselves a salary or interest on funds they have loaned to their firms.

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Even given these caveats, though, the chart is strongly suggestive. It shows that corporate profits reached an all-time high of 12.74 percent of GDP in the fourth quarter of 2011. Although profits for Q1 2013 were down slightly to 12.30 percent of GDP, that is still higher than they had ever been before their peak of two years ago. Meanwhile, proprietors’ income was up slightly to 7.9 percent of GDP, but it remains well below its all-time high of 8.8 percent in 2004. Before the early 1990′s, the two forms of income rarely differed by as much as two percent of GDP.

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