WHERE AUSTRIAN ECONOMICS MEETS REAL WORLD ACTION

Washington's own papers say its small-business line punishes growth. The fix raises the line and removes the ceiling. The cliff is still there, just higher.

You run an engineering firm. Most of your work comes from federal contracts set aside for small businesses, and you have built the firm around winning them.

An agency has just offered you the biggest job you have ever bid for. Win it, and in time it will lift your firm's average over the line that makes you "small".

Over the line, you can no longer bid for set-aside work. You will compete for every contract against much larger firms with long track records.

Your finance director has done the sums. The new contract is profitable. The question is whether it is worth the contracts it will cost you afterwards.

You thought you were deciding whether to grow. You are deciding which side of a line to stand on.

On 20 August 2026 the US Small Business Administration (SBA) published a proposed rule rewriting its size standards: the lines that decide which firms count as "small" for federal purposes. Comments were due by 21 September; that day, SBA extended the deadline to 20 November 2026. Until a final rule is adopted, today's lines stay in force.

Small status matters because of what it unlocks. In SBA's words, it confers advantages in three areas: "preferential access to federal government contracts through set-aside programs, access to subsidized and guaranteed financing, and protection from regulatory burdens". Contracting officers can restrict a competition to small firms. Prime contractors with small-business goals favour subcontractors that "still count toward" them. And SBA-backed loans go only to firms that qualify.

Size is measured as an average, not as a single year's figure: average annual receipts in some industries, average headcount in others. Receipts are averaged over five years (SBA's loan programmes also allow three), and headcount over the past 24 months. One big year moves a firm's average only part of the way.

Today there are 102 different size levels covering 978 industries, plus 18 exceptions. The proposal replaces them with 338 standards set for broader groups of industries. Where SBA has a choice, it now defaults to headcount, to "reduce the number of firms fluctuating between small and other than small business status".

Today's size lines and the proposal

Today the split between receipts and headcount is roughly even, and five more industries are measured by refining capacity (one) or assets (four). Under the proposal most lines are in headcount. SBA's summary counts 129 standards by revenue and 208 by headcount, one short of 338, and doesn't say how the last one is measured. SBA puts the rise in the number of small firms at about 1.8%.

The government's case is serious. SBA says small businesses generate "roughly 44 percent of U.S. GDP, two-thirds of net new jobs". The federal government spent over $883 billion on contracts in fiscal year 2025. The law sets a goal of at least 23% of contract value for small firms, and in fiscal 2024 the government beat it, awarding them a record $179 billion. Firms that lose small status lose set-asides, subcontracting work and SBA-backed loans. SBA says its old, slow-moving lines "often leave small businesses with a decision to forego new growth opportunities in order to remain within the limited size threshold", and that the new ones give small firms "room to grow". And 338 standards are simpler to use than nearly 1,000.

Take every word of that as true. What follows is unaffected.

What "small" means now

Under the proposal, a gambling business with $744 million a year in receipts is small. So is a fruit farm with 3,500 employees, and a cattle ranch with 3,000. A dry cleaner stops being small at $47 million.

SBA arrives at these numbers by formula: the size of the national industry, the number of separate markets it competes in, and an adjustment for imports. Then it decides whether to use them. In 45 industries the formula said the line should come down, and SBA declined to lower any of them. Three of the 45:

Where SBA kept today's line over its own formula

In each case the proposed line is today's line, kept. The formula's answer was set aside.

None of this makes the new lines wrong and the old ones right. Any line is a choice, made by whoever draws it, for reasons of their own. "Small" is not something you can measure in a firm. It is a label the regulator assigns.

And the label steers what firms do. Where the test is headcount, a firm can grow its sales as far as it likes, as long as it grows with machines rather than people; every hire brings it closer to the line. Where the test is receipts, it can hire freely but not sell more. The rule doesn't only decide whether a firm grows. It decides how.

The cliff, moved

SBA's analysis cites a study by Girth and Brown (2018), published by the Naval Postgraduate School's Acquisition Research Program, which describes a "benefit cliff" that "disincentivizes growth". SBA's answer is that the proposal "effectively pushes out this benefit cliff".

Pushes it out. It doesn't remove it. A firm over the new line on SBA's measure can no longer bid for set-asides, no longer counts toward a prime's small-business goals, and no longer qualifies for SBA-backed loans. With no maximum, the edge simply sits higher: at 1,500 employees, or 3,500, or $744 million. A relief that does not scale is a penalty on expansion, wherever the line is drawn.

Ludwig von Mises made the general point almost a century ago: an intervention, judged by its own aims, produces results its authors don't want, and the usual remedy is another intervention. Set-asides were meant to help small firms grow. They created a reason not to. The remedy is a higher line.

Who gains first

SBA estimates that 37,002 firms that held federal contracts in 2025 would become small the day a final rule takes effect: roughly 105,655 contracts, worth more than $71 billion. In engineering services alone, 5,314 firms. Agencies would be able to count contracts awarded to these firms toward their small-business goals "regardless of whether such procurements were restricted to small businesses".

So an agency can meet more of its goal without changing whom it buys from. SBA is plain about who pays for that inside the set-aside pool. More firms competing for set-asides "may reduce some small businesses' chances of securing a government contract", and "Growing small businesses closer to the size standard are therefore likely to face the greatest competition from the newly eligible firms." The firm in our opening, just under today's line, would compete for set-asides with firms that are "large" today. Its own line will probably rise too, as most do under the proposal, so it may get room and rivals at once.

Who pays

Every one of these contracts is paid for by taxpayers, who never chose the supplier. A business buying with its own money picks whoever offers the best work for the price, because it bears the loss if it picks badly. A contracting officer spending other people's money bears no such loss, and a set-aside narrows the choice further: before price or quality comes into it, the bidder must be under the line. In SBA's summary, the same study finds that restricted competition "contributes to weak competitive procurements, limiting the range of cost, quality, and delivery options". The cost of that narrower choice falls on people who aren't at the table.

A rule, with discretion attached

The formula is published, and a published rule can be priced. The edges are softer. SBA overrode its own results in 45 industries. It may depart from the analysis with "a detailed explanation". And it "may also adjust monetary size standards more frequently ... as it deems necessary".

Under today's rules, receipts lines move only with inflation reviews, at least once every five years; the last took effect on 19 December 2022. Between reviews, a firm whose prices rise with everyone else's can cross the line without growing at all. The proposal adds productivity to inflation, and moves many industries to headcount, which doesn't drift this way. But when the lines move is still SBA's call.

You can price a rule. You cannot price a discretion.

This is analysis, not legal, tax or investment advice. Check your own position with an adviser.

SBA wants firms to stop choosing between growing and keeping their status. Only one line never punishes growth: no line.

The implementable version is one rule for every bidder. The buyer chooses whom to buy from, at a price both sides agree, on price and performance. Set-asides, subcontracting credits and SBA loan guarantees end, so no firm gains or loses anything by crossing a headcount or a receipts line.

A small firm and a large one bidding for the same job take the same risk to do the same work. The larger one has more capital to absorb it if things go wrong. A buyer weighing price and performance can see that without a label. So can a lender weighing risk with its own money. Neither needs a regulator to say which firms count.

Could small firms compete? SBA's own analysis cites the Girth and Brown study. It tracked 977 federal suppliers from 2005 to 2014; in 2005, every one of them held set-aside contracts. By 2014, 553 had no prime contract work at all. Of the 424 that did, 316 still had some set-aside work and 108 had none. In SBA's words: "Growing firms successfully competed with large businesses in an open market, relying less and less on set asides."

Read narrowly, the figures show it can be done: about a quarter of the survivors grew out of set-asides entirely. They don't show it is typical.

Equal treatment favours nobody. Every firm competes on the same terms as its rival, at whatever size suits it.

Stay free,

Jean-Pierre

The Austrian Actor

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