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 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. >>>Read more