Small Business Favoritism is Real
Unpacking the Hidden Architecture of America’s Small-Business Favoritism
Every now and then, a piece of scholarship lands that makes you want to stand up and applaud. Brian Feinstein’s Small Business Favoritism is one of those cases. As he explains, “This Article offers the first comprehensive account of how federal law, in ways both conspicuous and obscure, systematically privileges small businesses.”
Why does this matter? Because small businesses are everyone’s favorites. And as a result, there is never any resistance to using government granted privileges to boost their bottom lines or protect them.
Using AI tools, Feinstein documents that federal law contains more than 1,300 statutory provisions that explicitly privilege small firms. He categorizes them into seven broad areas, revealing the vast scope of government support for small firms:
Training and Technical Assistance (415 provisions): Business counseling networks, mentoring programs, incubators, and cluster development.
Loans and Grants (300): Subsidized credit through SBA programs, microloans, disaster relief loans, guarantees, and sector-specific grants.
Government Contracting (263): Set-asides, subcontracting goals, mentor-protégé schemes, and preferential bidding rules.
Regulatory Exemptions and Preferences (138): Reduced compliance burdens, delayed deadlines, and procedural advantages under laws like the Regulatory Flexibility Act.
R&D and Commercialization Support (92): Direct research funding and technology-transfer programs such as SBIR and STTR.
International Trade (67): Export financing, trade-mission assistance, and tariff advantages.
Tax Relief (36): Targeted tax credits and other incentives.
Together, these provisions form a dense web of subsidies, exemptions, and privileges that reach into nearly every policy domain—from contracting and credit to innovation, trade, and taxation.
The Small Business Administration (SBA),in particular, has evolved into a machine for conferring benefits, with its loan guarantees, grants, contracting preferences, and regulatory carveouts for firms that are labeled “small” mostly by bureaucratic definition, not by any common-sense meaning of the term.
Feinstein also classifies the activities federal agencies must perform under these small-business provisions. Again, using AI text analysis, he identifies five main functional categories:
Establish Offices or Programs (391 provisions): Create or operate new offices, designate officials, or launch dedicated initiatives for small firms.
Inform Congress or the Public (201): Produce reports, dashboards, or updates on small-business participation and outcomes.
Promulgate Policies (115): Write or amend rules, publish regulatory guidance, or set new standards.
Conduct Studies (87): Evaluate impacts, conduct program reviews, or perform assessments of small-business effects.
Solicit Advice (44): Consult advisory panels or stakeholder groups representing small firms.
In short, the small-business favoritism system doesn’t just hand out benefits; it also generates continuous bureaucratic activity, embedding small-business advocacy deep within the machinery of federal agencies. Though the SBA leads, most provisions are run by other agencies—from Defense to the Export-Import Bank. In all, 32 agencies administer at least one such program, ensuring the political rewards are broad and the fiscal burden obscured.
He then goes on to measure the cost of favoritism. It’s vast and not just in terms of budget cost. He also shows how most of the arguments for this favoritism don’t hold water, including the claim that small businesses are more innovative, the engine of growth or necessary to level the playing field with large firms.
My own research, starting with my early paper, “Are Small Businesses the Engine of Growth?” challenged the sacred cow of “small business exceptionalism.” I then showed (as the data still demonstrates today) that small firms are not systematically more innovative, productive, or better job creators than large ones once you control for age and sector.
Feinstein’s analysis gives empirical weight to that argument, though he may not go as far I do in wanting to end all small business favoritism (or large business favoritism, for that matter). The notion that small businesses need all subsidies or loan guarantees they can get for various reasons turns out to be economically dubious. It distorts markets, encourages firms to stay small to retain eligibility, and undermines the very laws meant to protect workers, consumers, and the environment. Unlike Feinstein, I wouldn’t subject small businesses to all regulations that large firms are subjected too but instead I would remove rules for everyone.
It remains that, Feinstein is correct that the more we privilege “smallness,” the more we divert capital and talent from productive uses toward rent-seeking. We are subsidizing inefficiency under the banner of Main Street populism. And we’re doing it on a massive scale, through rules that now span nearly every corner of the U.S. Code.
Feinstein’s paper is worth reading.
The small business contracting preferences are waste, fraud, and abuse by design. There are a patchwork of “box pushers” that act as middlemen between manufacturers or other vendors that are “too big” and government purchasers. Those box pushers get a 30-100% markup for essentially drop shipping things that could and should be ordered directly.
I’m not sure I disagree with any of this, but… with one passing exception, you ignore the elephant in the room: all of the favoritism and rent-seeking rules that large business gets.
The most notable generic one: the more there is onerous government regulation, the greater the advantages of scale to minimize the cost of handling the government regulation and paperwork.
I’d of course be all for removing all of this favoritism. But I strongly suspect that the economic drag from most of these small business favoritisms is smaller than that from the ones that favor larger special interest groups.