Supporting Small Business

Daniel Hamermesh discusses two issues in his recent blog post:

1. Incentives for businesses to shut down quickly
2. Subsidies for small businesses

I am a fan of rapid plug pulling in businesses (internet businesses, to be precise).  I think the opportunity costs of a slow death are high.  So the example Hamermesh points to in the case of Germany, makes sense to me (again, in internet ventures, not necessarily in restaurants or other lifestyle businesses, about which I am quite ignorant).

However, on the subsidies of small businesses issue, I disagree with him, when he says:

I have grave doubts about this policy and about subsidizing small
businesses generally: if there are scale economies naturally, why
should the government try to offset them? And it’s hard to imagine that
there are too few new small businesses — or that people are so
unwilling to take risks that the government should offer subsidies.

I see no good economic rationale for these policies, but they are widespread in Germany — and in the U.S. too.

I think small businesses are very efficient utilizers of resources.  Yes, there are economies of scale in business, but innovation is rarely a product of this phenomenon.  It may be true that the market should adjust and there should not be a need for intervention, but since the government ultimately benefits from innovation (through economic growth), the intervention may be a natural market move rather than an artificial one.

Let’s take the tax deduction you can take in the US for equity investments in small businesses as an example.  It makes angel investment more attractive, which in turn, produces a group of companies ready for venture capital, one of the great levers of technology innovation.  I am not sure if similar programs exist elsewhere (they don’t in Turkey), but I suspect they are an important factor in the success of angel investing in the US.

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