Census Statistics Twisted

The Way The U.S. Counts The Number Of `Firms' Owned By Minorities Paints A Distorted Picture Of Their Success

May 22, 2006
By RITU KALRA, Courant Staff Writer

For the past three months, statistics on minority-owned businesses have made headlines across the country, singing a picture of progress for Hispanic and African American entrepreneurs.

The figures, broadcast monthly with fanfare by the U.S. Census Bureau, raised images of a new class of minority storekeepers and start-up firms. The news stories chronicled colorful entrepreneurial energy contributing to the country's economic engine.

Combined, they seemed to point to the success of scores of government and banking programs designed to help minorities participate in America's economic prosperity.

But a close examination of the data reveals that the numbers - while technically accurate - radically contort the picture.

In reality, black- and Hispanic-owned businesses did not surge ahead of other groups. Instead, the opposite is true: They actually lost ground.

The number of Hispanic-owned businesses with employees fell 6 percent between 1997 and 2002, the two years in which the Census Bureau last surveyed minority-owned firms. Those owned by blacks barely budged. This during a period when the total number of firms with employees rose 4 percent nationally, meaning that established businesses owned by groups such as whites and Asians are the ones that really expanded.

The data the Census trumpeted, meanwhile, said firms owned by Latinos grew three times as fast as all firms in the country between 1997 and 2002, while black-owned firms eclipsed the rest by growing more than four times as fast.

The discrepancy rests with the way the Census uses the term "firm." Anybody who files a tax return and earns more than $1,000 in business income qualifies.

By that definition, a "firm" includes people with second jobs as freelancers and self-employed contractors such as laborers, carpenters or consultants. The word does not necessarily mean businesses with employees.

"They're basically characterizing moonlighters as business people," said Joel Naroff, president of Naroff Economic Advisors.

The picture is further distorted when the economy is in a slump, as was the case in 2002.

"You have people who are laid off and try to earn some money on their own, or people who are trying to survive and do some work on the side," said Russ Williams, a senior research fellow at Northeastern University's Center for Urban and Regional Policy. "That gets you a sizable increase in the number of businesses. That doesn't mean that things are better."

Not only does the discrepancy raise questions about the accomplishments of programs created to assist minority entrepreneurs, it also raises questions about how the Census Bureau presents its figures - and about the ability of the news media to sort through the numbers.

Combined with unemployment rates among blacks and Hispanics that remain consistently above the national average, it also raises questions about how secure the minority groups are in the U.S. economy as a whole.

"It certainly muddies the waters," said Rae Rosen, a senior economist with the Federal Reserve of New York. "It's hard to disentangle a free-lance writer who's unlikely to ever want to become a business, from high-tech consultants who might form a business down the line, from the Korean fruit cart owner who probably won't. The word `firm,' the way the Census is using it, isn't the way you would normally think of the word."

The Census Bureau, which has been conducting its survey of minority business owners since 1969, conceded that its data make it difficult to draw any conclusive pictures.

"At some point we may have to reconsider what we consider a business, and whether we raise the receipt cutoff to exclude some people or ask additional questions on the form," said Valerie Strang, who runs the Census Bureau's quinquennial survey of business owners.

Opinions vary on what it all means about the progress for black and Latino entrepreneurs. To those in the trenches of assisting minority businesses, the discrepancy comes as little surprise.

"You always have a lot of show and tell. People like to say things are better than they are, because that's the kind of message they use to get elected," said Cortland Cox, former director of the Minority Business Development Agency under President Clinton, and now the director of local, small and disadvantaged business development for the District of Columbia Sports and Entertainment Commission.

"The basic problem you have in the country when it comes to minorities is that opportunities really don't exist, except for those the government provides and insists on. In the private sector there's a wasteland. In the capital markets, the same thing. Nothing has changed fundamentally from 50 years ago."

Others say the rise in the total count of black and Latino-owned firms shouldn't be dismissed.

"I wouldn't write off the level of economic activity it illustrates," said the Fed's Rosen. "You're looking at the embryonic formation of a firm. It's still a good sign of economic activity."

It may not be a reliable sign, however. The economic term for it is `counter-cyclical.' When the economy is flourishing, jobs are plentiful and the number of businesses, as defined by the Census, drops. But when jobs are tight, those on the margin find themselves involuntarily self-employed - in business, as the Census sees it, but not necessarily better off.

"It's not that the economy's booming and people are finding opportunities to start businesses," said John Schmitt, an economist with the Center for Economic and Policy Research. "When the economy goes up, people get a job. When the economy goes down and they used to have a job working in construction, then they become a contractor. It's really hand to mouth. And as soon as the economy picks up and there are jobs again, they close up shop."

A better barometer, say researchers, is to look at businesses with paid employees - a subset of the Census figures. By that measure, the data show that Latinos and blacks have fallen behind.

"A lot of firms got hurt in the early 2000s. It wouldn't surprise me in broad brush terms to see black- and Hispanic-owned businesses with employees to take a hit," said Schmitt. "Relative to white-owned businesses, they are less capitalized. So in a downturn, they're closer to the margin."

Another way to cut through the numbers is to look at receipts. In 1997, the average revenue of all Latino-owned firms - those with and without employees - was $143,866, according to the Census data. The average revenue of all black-owned businesses was $77,426. Firms owned by whites, meanwhile, had average revenues of $417,395.

In 2002, revenues for black- and Hispanic-owned businesses fell further than for whites, and the gap widened by 1.5 percentage points for both minority groups.

What are the implications for organizations such as the Minority Business Development Agency, whose mission is to nurture minority entrepreneurs?

"The MBDA is not the issue," said Cox. "The issue is the marketplace that's still closed and has never been open, and the capital markets that are still closed and have never been opened. If there's no light, the plant doesn't grow."