For National Small Business Week, l'd like to draw attention to the potential of business ownership to address the wealth gap in all of our communities. Most of the attention of the inequality gap has been on the disappearing middle, but there's a racial component to the problem as well. Wealth owned by white households is more than 10 times that of Latinos and 13 times that of African Americans. Janet Yellen, Chair of the Federal Reserve, has said that business ownership is one of the four pillars of wealth creation.
We know what works to grow small businesses. In California, $2 million in funding provided to the Small Business Development Center, leveraged $200 million in new loans, which is a fantastic return on investment. Let's build on this success and target low-moderate income communities and communities of color. Entrepreneurship and business starts are a real pathway to closing the wealth gap and generating new jobs and could put a serious dent in economic inequality.
Why business ownership?
The Congressional Budget Office found that disparities in business income account for most of the rise in income inequality between 1979 and 2007. So let's increase 'business income' for everyone across the entrepreneurial spectrum including the food cart owner on the streets of Los Angeles and the Etsy sellers in rural areas. Instead of handouts and promises of trickle-down job creation, help people create their own businesses and have them close the income inequality gap themselves.
A woman microbusiness owner generates up to $13,000 more in annual household income than similar households without a microbusiness owner. This small amount can be the difference between sending a child to college or buying a home. Children in families with a microbusiness owner do better in terms of education and social mobility.
Business ownership reduces wealth inequality. The median net worth of business owners is two and a half times greater than that of nonbusiness owners, and for African Americans the difference is eight times higher.
The Aspen Institute's FIELD program found that when business owners receive training and coaching help, 80% are in business after five years, compared to 50% of those that did not get such help; and when microbusinesses succeed, they create on average another two jobs. Also, businesses that received capital and business services have 30% higher median annual revenue growth than those that did not.
What can the policy makers do?
In California we have a strong infrastructure of mission-driven entrepreneurial training programs and microlenders to help small business owners with coaching, capital and connections to markets. We need to triple the State's investment in these programs. A $6 million investment would create 2,000 more jobs in the communities that need them the most with a possible additional 4-6,000 over five years.
The federal government can increase the investment in business assistance programs. We are thrilled that the Women's Business Center (WBC) program is in process of being renewed with a 28% increase in funding. The WBC program traditionally has a large client base that is low to moderate income. The renewal is a step in the right direction, but the total investment of $21.75 million will be shared between 50 states. We'd like to see that investment and other investments in similar programs doubled. The businesses and jobs created plus the tax revenue generated easily pay for the programs (and then some).
Most economic development strategies target firms that have more than 100 employees. But 98% of firms have fewer than 100 employees, and about 88% fewer than five. To have maximum impact, we need our leadership to champion economic policies that target the very small businesses in and around low- and moderate-income communities.
Americans trust small business. The Buy Local trend is gaining traction. Politicians say that they love small businesses. We have a great opportunity and address wealth inequality by showing substantial support for small business ownership. What a fine way to bring hope to our communities that have so much untapped entrepreneurial potential!