The Truth About Big Business

A new defense of the monopolization of the U.S. economy relies on cherry-picked data and misleading arguments.

Small businesses have been a vanishing part of the American landscape for decades now, and the trend seems only to be gaining speed. Between 2005 and 2015, the number of small retailers—those with fewer than 100 employees—fell by 85,000. That’s more than one in five. Small manufacturers likewise saw their ranks shrink by over 35,000, a drop of 13 percent. A mere twenty years ago, local banks and credit unions accounted for nearly half of the banking industry. Now they make up only about one-fifth. And so it has gone across most industries.

Big Is Beautiful: Debunking the Myth of Small Business
by Robert D. Atkinson and Michael Lind
MIT Press, 368 pp.

The shuttering of existing businesses is only part of the story behind these figures. There’s something else at work, too: we’re no longer creating new businesses at the pace we once did. The number of new firms launched each year in the U.S. has fallen by nearly two-thirds since 1980. This drop-off has paralleled other stark trends, including stagnating wages, growing inequality, and a widening gap between the fortunes of a few thriving metros and the persistent malaise that has taken hold in other regions. All of these trends began around the same time, and recent scholarship suggests that they may all be a consequence of the same root cause: nearly every corner of the economy, from milk processing to hospital care, has become dominated by an ever-smaller number of ever-larger corporate giants.

In Big Is Beautiful, Robert D. Atkinson and Michael Lind have delivered a book designed to put our minds at ease. We should welcome the demise of small businesses, they argue, because “the facts are eminently clear that on virtually every measure, big business is superior to small.” At a time when there’s growing concern that large corporations have achieved their dominance by bending markets and government policy to their own advantage, Atkinson and Lind offer a different explanation. They contend that the chief driver of rising concentration is the inherent efficiency of bigness, abetted by technological progress, which naturally favors bigger corporations.

There are legitimate debates to be had about these issues. Some industries do require large-scale production, and there are things that bigger firms can do that smaller ones can’t. At the same time, small businesses often provide important consumer benefits that large firms simply can’t match. Efficiency is important, but it’s easy to overlook impacts that are harder to measure, such as the cost to communities of absentee ownership. And while technological change may spur centralization, it can have the opposite effect, too: it has made distributed solar a more economical choice than big coal and nuclear plants, for example, much to the consternation of large electric utilities.

A book that offered nuanced insights about the role policy should play in navigating these dynamics would be most welcome. This is not that book. Atkinson and Lind are not interested in meaningfully engaging with hard questions. Their purpose, rather, is to shore up the status quo at a moment when doubts are creeping in. They aim to dismiss concerns about the decline of small business and marginalize the people raising them. In pursuit of this goal, they often cherry-pick data and deploy arguments that leave out crucial information and context.

The book’s argument is organized into two sections. In the first part, Atkinson and Lind make the case that large firms outperform small ones: they create more jobs, pay better wages, offer lower prices, and lead the way in innovation. This section is chock-full of statistics and studies, and the relentless stream of figures makes it a slog to read. The overall effect, though, is to create a sense that the evidence in favor of bigness is so extensive and detailed as to be unassailable.

Efficiency is important, but it’s easy to overlook impacts that are harder to measure. A book that offered nuanced insights about the role policy should play in navigating these dynamics would be most welcome. This is not that book.

A closer look, however, reveals that the authors are masters at presenting facts that are at once narrowly accurate and entirely misleading. To take one of many examples: “In 2015 workers employed by large firms earned on average 54 percent more than workers in companies with fewer than 100 workers.” That seems at first glance like a devastating argument against small business advocates. But it has a number of crucial flaws.

For starters, the data they cite is about “establishments,” not firms. Establishments with fewer than 100 workers include the locations of many of the nation’s biggest chains, from the Gap to Dollar General. Most of these chains pay rock-bottom wages to low-level employees, so counting them as “small” allows Atkinson and Lind to report a lower average wage for small businesses and a higher average wage for large ones. Nobody would call the Gap a small business, but the average reader is unlikely to catch the distinction.

With the right data, it’s still true that big firms pay more on average than small ones, but the gap is much narrower. And the significance of that gap changes with the addition of another piece of information: for workers in the bottom half of the income distribution, there is no difference at all in wages between large and small firms. In other words, the higher average pay at big corporations is largely driven by the salaries of top executives and other high-level employees, who make orders of magnitude more money than low-level workers. This is an example of how averages can conceal more than they reveal.

In fact, economists have recently found strong evidence that consolidation is one of the main reasons that wages haven’t been growing. With many industries now dominated by just a few giant companies, and fewer new businesses starting, people don’t have as many employment options as they used to. This means there’s less competition for labor, which allows companies to hold down wages. A resurgence of start-ups and small businesses might be just the thing we need to restart wage growth.

Atkinson and Lind assemble many similarly dodgy facts. Arguing that concentration has not led to inflated prices, they insist that the U.S.’s infamously high broadband prices are actually low, given the fact that the U.S. is “the second least densely populated nation, which makes deploying broadband wires a lot more expensive.” The U.S. is not even close, in fact, to being the second least densely populated nation. More importantly, it turns out that the lowest broadband prices in the U.S. are in rural areas where electric co-ops have built networks that provide cheaper service than the urban offerings of Comcast and Time Warner.

They also frequently shift the definition of “small business” to achieve a point. When they want to argue that small business owners are wealthy elites, they reference data about people who report “pass-through” business income on their taxes. But a majority of pass-through income is, in fact, generated by large firms, notably hedge funds, real estate development companies, and other investment vehicles created by and for the wealthy. Meanwhile, when the authors want to argue that small business owners cheat on their taxes, they draw on a study about the unreported income of sole proprietors, the least formal legal structure available. Yet among businesses with fewer than twenty employees, only 16 percent are sole proprietorships; most are incorporated.

Having made their misleading case for the overwhelming superiority of large corporations, the authors turn in the second section to the question of public policy. Atkinson and Lind believe that to maximize U.S. productivity and global competitiveness, the law should look favorably on consolidation. They quote with approval the words of the influential twentieth-century economist John Kenneth Galbraith: “There must be some element of monopoly in an industry if it is to be progressive.” Today, Atkinson and Lind argue, we’ve abandoned that ideal. “Government policy,” they argue, “deeply and consistently favors small business.” Big corporations have gained market share in spite of an “elaborate discriminatory system” aimed at impeding them. 

This claim runs exactly counter to the last forty years of American economic policy, which have been defined by an overwhelmingly permissive posture toward mergers and consolidation. It’s true that federal policy used to look out for small business. For much of the twentieth century, one of the goals of antitrust law was to preserve the ability of entrepreneurs to enter and compete in a given sector. But that began to change in the late 1970s, as Robert Bork and other Chicago School economists successfully argued that the only legitimate goal of antitrust policy was efficiency. They further insisted that larger companies are naturally more efficient, and that mergers are therefore almost always justified, while the loss of small firms is both welcome and inevitable. 

These ideas proved highly influential, and they led to a radical change in both regulatory policy and Supreme Court doctrine. Regulators were no longer “concerned with fairness to smaller competitors,” declared William Baxter, who was appointed by Ronald Reagan to lead the Department of Justice’s Antitrust Division. This thinking was broad and bipartisan. Over time, it infected far more than antitrust policy. In the 1990s, the Clinton administration led the fight for major changes to banking law, which ushered in a wave of mergers and put small banks on increasingly precarious footing. An overhaul of telecommunications law, as applied by the Bush administration, had a similar effect, giving big media firms a market advantage. The AT&T–Time Warner merger, green-lighted by a federal judge in June, is only the latest high-profile example of these trends.

Atkinson and Lind are aware of this history, of course; they just think the counterrevolution hasn’t gone far enough, like conservatives who continue to insist that labor unions are too powerful. For their evidence, they observe that politicians on both the left and the right like to profess a love of small business and that even the GOP “indulges in outright vilification of large business.” To the extent that this is even true, corporate executives probably aren’t losing much sleep over it. The real prize is writing legislation, and there are plenty of examples of their lobbyists doing just that. Even so, Atkinson and Lind contend that small businesses have the upper hand in lobbying: “the top spender, the US Chamber of Commerce, represents many small firms,” they write. In fact, nearly all of the Chamber’s 106-member board, its equally massive budget, and its policy agenda are supplied by big corporations. 

Finally, Atkinson and Lind identify specific areas of policy that they say work against big business. The first is that small firms are exempt from some environmental and workplace regulations. While I agree that they shouldn’t be, to argue that the regulatory system as a whole tilts in favor of small businesses is to ignore the ways in which they’re ensnared by regulations written with their big competitors in mind (and sometimes written by their big competitors). New rules adopted after the financial crisis, for example, have saddled local banks with the costly task of producing lengthy compliance reports that cover complex trading activities they don’t engage in. Or consider the local retailer trying to open on Main Street and struggling to comply with a building code designed for new big-box construction. Or the local food producer tangled up in USDA regulations designed for giant food companies that make no sense at a smaller operating scale.

Atkinson and Lind’s second example, that the tax system subsidizes small businesses, is similarly flawed. Yes, there are write-offs in the tax code for small firms. But far more substantial goodies flow in the opposite direction. Loopholes available to global companies have, for example, allowed Amazon to enjoy an “extremely advantageous tax rate,” according to the Newsweek journalist Simon Marks. Over the last five years, Amazon has paid an average effective rate of just 11 percent, a figure that’s the envy of many small retailers.

The authors also point to the U.S. Small Business Administration’s loan program, which guarantees about $24 billion a year in loans to small businesses that don’t quite meet the criteria for a regular bank loan. This program supplies only about 4 percent of small business lending, and it operates in the context of a much larger policy failure: the scale of our banking system is mismatched to the needs of the real economy. Small banks supply the lion’s share of small commercial loans; as their market share has declined, so too has small business lending, leaving more would-be entrepreneurs unable to find financing. It’s also worth noting that, while Atkinson and Lind describe the SBA loan program as a “subsidy,” it pays for itself through fees charged to borrowers.

Throughout the book, Atkinson and Lind present straw man versions of today’s anti-monopoly thinkers. In this magazine, Barry Lynn of the Open Markets Institute has offered nuanced ideas about how competition policy could best approach the scale dynamics of different sectors of the economy, from public interest regulation of networked industries, to insisting on at least a few competing firms and strong unions in industrial sectors that necessitate scale, to favoring decentralization in areas like banking, retail, and farming, where localization has significant upsides. Yet the Lynn that appears in the pages of Big Is Beautiful belongs to a group of thinkers who apparently have nothing to offer but a future in which we all return to being farmers and shopkeepers. (I should note that Atkinson and Lind count me in this “cult of small business,” and some of my own work, on North Dakota’s pharmacy ownership law, comes in for this straw man treatment.)

Big Is Beautiful’s subtitle styles this as a work of myth busting, but Atkinson and Lind trade in plenty of stereotypes and unexamined assumptions about the inherent inferiority of small businesses. Scale matters, and not always in the way we assume. Locally owned pharmacies provide better care and lower prices, according to a variety of sources, including Consumer Reports. Independent retailers, by virtue of their own diversity, enable a broader range of products to find a market; shoppers at a local bookstore are three times as likely to discover a new book they’d like to read than those browsing on Amazon, according to the Codex Group. Community banks successfully make a wider variety of loans than big banks do, because their localness enables them to access a rich trove of soft information about borrowers and markets.

As small businesses disappear, we’re losing these distinct market benefits, and something much more valuable, too: a diverse economy that keeps concentrated power in check and ensures that citizens and communities have the ability to chart their own course. Atkinson and Lind are right that we need to take a fresh look at long-held assumptions about scale. They’re just wrong about which ones.

Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance, where her research focuses on economic concentration and the health of local economies. Her recent reports include “Amazon’s Stranglehold,” coauthored with Olivia LaVecchia, and “Monopoly Power and the Decline of Small Business.”