Op-Ed; Without `dinosaurs,' economy is extinct

THOMAS M. KEANE
858 words
11 October 2002
Boston Herald
All Editions
029
English
(Copyright 2002)

So Gillette, FleetBoston and Raytheon are "dinosaurs"?

That's Shannon O'Brien's take on it. She's spent the week mocking Mitt Romney's commitment to go after large, Fortune 500 businesses and attract them to the state. She doesn't want them. They're part of the old economy, lumbering and out of touch, not worth a governor's time.

Instead, she's a fan of small companies. "Gazelles," she calls them. Inventive and fast growing, 68 percent of recent job growth came from small businesses, O'Brien says. Speaking to the Massachusetts Software and Internet Council, she criticized Romney for saying he'd travel the country, meeting with CEOs of big companies. Sounding a bit like Dorothy in "The Wizard of Oz," O'Brien promised she'd never leave home.

Let's hope she's kidding, for both rhetorically and substantively, O'Brien is way off base.

The rhetoric, of course, simply feeds into the widespread perception that Massachusetts is hostile to businesses. Like them or not, big companies employ tens of thousands. As they expand, seeking new states in which to locate their operations, O'Brien, if she becomes governor, will have to do more than be welcoming - she'll have to court them, just as Romney is promising to do.

Moreover, other states are wooing Massachusetts' own large corporations. TJX (No. 179 on the Fortune 500), John Hancock (No. 209) and BJ's Wholesale (No. 331) are all based here. When New Hampshire comes knocking, what will it dangle as incentives? Lower tax rates? Less oppressive regulations? How about a governor who doesn't think the company is a "dinosaur"?

Eventually, I expect, O'Brien will apologize for her rhetoric, perhaps by noting that velociraptors were dinosaurs too, and - if "Jurassic Park" is to be believed - they were pretty fleet of foot as well.

The real problem, though, is that O'Brien is substantively wrong. Her attacks on Romney display a misunderstanding of the roles that large and small businesses play in an economy. She buys into some erroneous myths and fails to balance the often competing demands of innovation and job stability.

Let's start with the myths.

The notion that small business is responsible for most job growth stems from work done in the 1970s by economist David Birch (who was the first to dub small businesses "gazelles"). The burst of new start-ups in the 1990s, giving rise to what was called the "new economy," seemingly proved Birch correct. It became commonplace to say that small businesses, not large, were the real drivers of growth.

But a number of other economists, such as James Medoff at Harvard University, have since challenged Birch's conclusion. It is true, for example, that small businesses create new jobs. But they also fail at far higher rates, meaning that many of those new jobs don't last long. The collapse of NASDAQ stocks and the ongoing wipeout of "new economy" businesses give credence to that argument. Moreover, it is not all small businesses, but rather just a few (perhaps 3 percent) that account for most net job growth.

Even Birch thinks politicians have misunderstood his research. "The claim that small firms create jobs greatly oversimplifies things and leads us as a country into some very fuzzy thinking," he has said.

There's more to it than that, however. Large companies actually play a critical role in the success of small businesses. Big businesses purchase parts and material; small businesses pop up to feed their appetites. Small businesses, particularly those in high tech or biotech, frequently team up with much larger companies to take advantage of their marketing or production muscle. And many small companies are spinoffs of big businesses, or exist because employees trained at a large firm gained enough knowledge to begin their own ventures.

There's another surprising thing about O'Brien's singular focus on small businesses: Generally the jobs are of poorer quality. Employees of large firms earn, on average, 10 percent to 15 percent more than do those in small companies. Large businesses typically offer better benefits, are more likely to be unionized, have fewer layoffs and generally provide more in the way of worker training. (In fact, avoiding these high costs is one of the things that drives the creation of many small firms, which then compete effectively against their bigger brethren because they can deliver the same product more cheaply.)

The point of all this is not to diminish the importance of small businesses. Start-up companies act as goads against complacency and as laboratories for new ideas. Without them, the U.S. economy would be in deep trouble.

But pitting small against large, as O'Brien's "dinosaur" and "gazelle" formulation does, is a mistake. A healthy economy needs both. Massachusetts certainly benefits from the dynamism of its start-ups. And the "dinosaurs?" Framingham-based Staples (No. 178 on the Fortune 500) employs 27,909 people.

We could use a few more dinosaurs like that.

Tom Keane can be reached at tomkeane@tomkeane.com.

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