Big Firms and the Economic Landscape

Eakinomics: Big Firms and the Economic Landscape If you listen to the pundit world, the U.S. economy is being strangled by a few gigantic firms running rampant across the landscape. This depiction of the state of affairs lies behind the left’s desire to rewrite the standards for competition policy, steps toward which have already been undertaken by the Federal Trade Commission and the Department of Justice. It underlies as well recent legislation targeting tech platform firms and app stores. Sometimes it is useful to look at the facts. The table below shows the distribution of firms by size (number of employees) as taken from the Bureau of Census Statistics of U.S. Businesses for industries as classified by the 2017 North American Industry Classification System (NAICS) codes. Consider the first column of data for business as a whole. As the rows indicate, the fast majority – 61.9 percent – of firms are under five employees. Indeed, as the next row indicates, 89 percent of businesses are under 20 employees. A staggering 99.7 percent of firms are under 500 employees (which, you may recall, was the dividing line for businesses small enough to qualify for the Paycheck Protection Program). Large firms – those with more than 5,000 employees – are very rare: 0.04 percent of businesses. Looking across the sectors of the economy, an interesting picture emerges. Most sectors have very few large firms – the exception is management services – and most have a majority of very small firms – the exceptions are management services, education services, and accommodation and food services. But most important, all sectors contain firms of a variety of sizes. There is no one-size-fits-all approach to firms in any sector. It is hard to reconcile these facts with the recent push on antitrust standards. Of course, this is a very simple cut at the data. But more detailed looks at the data on industry concentration (e.g., Nancy Rose) show no alarming rise in concentration that should merit policy action. From a policy perspective, there appears to be no need to target policy at any single size of firms. Instead, the strongest strategy is to ensure that it is as easy as possible for new firms to enter and grow to their appropriate scale. That would support fair and effective competition.