EYE ON THE PIE: What really drives Hoosier economy?

I enjoy the propaganda of government agencies pleading the causes of special interests. This is the opening sentence of our state profile prepared by the U.S. Small Business Administration’s Office of Advocacy: “Small businesses are the heart of Indiana’s economy.”

Frequently, we hear that farming is the beating heart of our economy. Others claim the thumping sound we hear is that of manufacturing. Teachers tell us the economy is only as steady as its educational footing. Steel has a claim to being our economic backbone. Trucking and rail lines are our circulatory system. Thus far, no sector has claimed to be our gall bladder.

In this frame of mind, I turned to the data. First, I looked at non-farm Hoosier proprietors, those who are single owners of, or partners in, an unincorporated business. In 2006, there were 607,100 proprietors in Indiana. This was an increase of 23 percent from 2001, according to the U.S. Bureau of Economic Analysis.

During the same period, the total number of jobs in Indiana rose a mere 4 percent. Nationally, the number of proprietors rose at a more rapid 27 percent and total jobs at a 7-percent rate. Thus, Indiana’s business heart was beating with less vigor than the nation’s, while our entire body was torpid.

But we do not know how many proprietors also held jobs that paid wages or salaries. For example, a person might run her own plumbing company and also work part time as a urologist’s assistant.

The average earnings for all jobs in Indiana was $35,000 in 2001; by 2006, the figure was $41,000, up 17 percent, compared to a slightly better 18 percent at the national level. Hoosier proprietors, however, saw their average earnings climb 11 percent, while nationally the growth rate was just 4 percent.

Nonetheless, proprietors’ earnings were well below those for all jobs. In Indiana, being a proprietor brought in just 59 percent as much in earnings as all jobs, while in the United States overall, the figure was only slightly higher, at 63 percent.

The difference between the earnings of proprietors and the earnings for all jobs might be that a proprietor works only a few hours a week at her own business while holding a full-time job. Proprietors may include expenses in their business operations that other workers cannot claim. For example, a real estate agent may legitimately charge off part of her automobile expenses, while an ordinary employee has no such privilege. Further, a barber might under-report cash receipts, while the factory worker is paid by check and a report of his earnings winds up with the Internal Revenue Service.

Next, I looked at the most terrible number favored by the SBA. It counts as a small business any establishment with fewer than 500 employees. That is an unjustifiable inflation of the concept of “small.”

An establishment is a place of business. A firm like McDonald’s owns many establishments. A bank has at least as many establishments as it has branches. Since most controls and policies are centralized in these businesses, the size of the establishments is a statement about the firm rather than about entrepreneurial activity in a community. These numbers provide no heartbeat at all.

Finally, I looked at the data on businesses with no employees. These 368,600 Indiana firms could be among the 607,100 proprietorships discussed earlier. This might be the guy who runs online services for those who want to know which stock or horse is the next sure thing. It could be someone who fashions herself, based on experience, as both a wedding and a divorce consultant.

Since the data are gathered by the IRS from actual income-tax returns, they are subject to under-reporting. They indicate average receipts of $39,200; those are gross figures, not net earnings. Who knows the size of the stockbroker’s phone bill or the cost of his business lunches?

Thus, fans of small business, although I could not locate the heart you hear, I will not deny the existence of a pulse.

Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at [email protected]

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