Jobs, Finance & Economy Special Report

Entrepreneurs the Key to Growth

Entrepreneurs the Key to Growth

By Carl Schramm - November 1, 2011

A maxim of crisis management holds that extraordinary times call for extraordinary measures. As the United States endures the third year of a sluggish recovery following the most severe recession since the 1930s, policymakers in Washington need to throw away their mental models of the economy and move toward an entirely different frontier of economic growth.

Few people should have expected a "normal" recovery—comprehensive economic research demonstrates that full recovery from a financial crisis takes years, sometimes a decade. The expansion that preceded the recession was one of the weakest on record. This was especially apparent in the statistics on what has historically been the most dynamic sector of the economy: new businesses. Since the late 1970s—and likely for many years before that—new and young companies have accounted for the lion's share of net job creation in the United States. Additionally, entrepreneurs have been disproportionately responsible for breakthrough innovations in information technology, biotechnology, and other dynamic industries.

Yet, in the mid-2000s, this engine of innovation began to slow down. Compared to the 1980s, for example, job creation from startups fell by a full percentage point, a trend that began prior to the recession. The average starting size of new businesses has been slowly falling for the past decade. Indeed, these trends were aptly captured in the title of a recent Kauffman Foundation report, "Starting Smaller, Staying Smaller." New companies not only started with fewer people—thus dampening their impact in terms of net job creation—but also grew more slowly than new companies started in prior decades. These trends accelerated during the recession, with new firm formation and their employment contribution falling 25 percent.

Entrepreneurs may not be the silver bullet solution to economic recovery, but a full recovery, especially in employment, will not happen without entrepreneurs. It’s true that in certain parts of the country, the startup scene is booming. Yet this mini-entrepreneurial boom is as unevenly distributed as the impact of the recession was. There is no law, of course, that says entrepreneurship does or must occur uniformly across the United States. But part of what will help those areas of the country still struggling with poor economic growth is new business creation. What, if anything, can policymakers in Washington do to help reinvigorate entrepreneurship?

Start with a no-brainer: immigrant entrepreneurs. If there is no such thing as a free lunch in economics, then immigrant entrepreneurship is like happy hour—cheap, easy, and with enduring spillover effects. We know from empirical research and anecdotes that immigrant entrepreneurs have contributed enormously to the American economy for over two hundred years, creating jobs and developing innovations. Today, however, we make it as difficult as possible for immigrants to come here and start companies or, for those who study at American universities, to stay here and start companies. We should immediately grant start-up visas for this population. The trade-off here is stark—immigrant entrepreneurs will start their companies no matter what happens in Washington, but they will start them in other countries if we don’t welcome them.

A second idea is just as obvious: make the commercialization process out of university labs as smooth and painless as possible. The federal government could help nudge universities toward a “free agent” model, which would free academic innovators from the current monopoly of technology licensing offices in which they are now trapped. No less important are taxes: we should create capital gains tax exemptions for startup investments held for a period of years and offer tax incentives for startup operating capital.

These ideas and more are elaborated upon in the Kauffman Foundation’s Startup Act, a set of policy suggestions, which, happily, is gaining momentum. Two recent developments—both of which are based on ideas contained in the Startup Act—are worth noting. In September, Congressman Ben Quayle introduced the Startup Expansion and Investment Act, which proposes changes to the Sarbanes-Oxley Act that will lower barriers for small companies as they go public. More recently, on October 14, during a speech on the Senate floor, Senator Jerry Moran vowed to introduce “pro-growth” legislation to spur new firm formation and job creation. These are indeed encouraging steps.

Entrepreneurs are the vital core of economic growth and job creation, and while much of Washington is busy squabbling, they are out there doing their best to build a better economic future for their communities and their country. Let’s help them out. 

Carl J. Schramm is president and CEO of the Kauffman Foundation. He and Robert Litan have authored Better Capitalism, which will be published next year by Yale. 

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