Freedom Line Blog

The Kauffman Foundation for Entrepreneurship’s newest report on business creation rates across the United States offers some intriguing insights for policymakers.

According to Robert Litan, the foundation’s vice president of research and policy, “The Great Recession has pushed many individuals into business ownership due to high unemployment rates.”  “However, economic uncertainty likely has made them more cautious, and they prefer to start sole proprietorships rather than more costly employer firms.  This ‘jobless entrepreneurship’ trend negatively effects job creation and the larger economic recovery.”

No doubt, regulatory barriers and confiscatory rates of taxation are causing start-ups to make the same kind of cost-saving hiring decisions as larger, more established firms.  Across nearly every industry these days companies are hiring people to independent contracts rather than salaries, converting many ‘company men’ into standalone consultants.

While becoming an accidental entrepreneur may not be the first career choice of many people – and according to the Kauffman study the college educated cohort saw the steepest decline in their willingness to start their own business – the movement of millions of people into the ranks of the self-employed could have huge consequences for policymakers.

For starters, this army of new business owners is much more likely to demand rollbacks of costly regulations and profit-killing tax rates on corporations.  Your perspective changes when you go from receiving a paycheck to making a payroll.

Remember, the people that lose a job and start a business are the people whom the government should want to help the most.  They aren’t looking for a hand-out or even a hand-up, just space to make a contribution that others in the free market will reward.

This constituency is a natural growth area for the conservative movement.

The best part about the Kauffman report is that entrepreneurial activity can be found in important electoral pockets.  Consider:

• Entrepreneurial growth was highest among 45- to 54-year-olds, rising from 0.35 percent in 2010 to 0.37 in 2011
• The top five highest entrepreneurial rates among the fifty states were:

(1) Arizona with 520 per 100,000 adults creating businesses each month during 2011;

(2) Texas with 440 per 100,000 adults;

(3) California with 440 per 100,000 adults;

(4) Colorado with 420 per 100,000 adults; and

(5) Alaska with 410 businesses started per 100,000 adults

The key to our economic recovery rests on policymakers understanding that Americans want to work.  I submit that any politician willing to make the necessary changes to tax and regulatory rules so that start-up owners can become employers as well as entrepreneurs will find a loyal constituency, and one well worth fighting for.

California Democratic Governor Jerry Brown appointed Michael Rossi, former Bank of America executive and GMAC subprime mortgage guru, to be his unpaid “jobs czar.” Brown hopes that Rossi will be able to tell Brown how to revive the state’s sagging economy.

It’s telling that Brown chose a career Big Business executive instead of a successful entrepreneur.  The two types of people – and their skill sets – couldn’t be more different.

Rossi’s path to success involved managing large corporate structures that focus heavily on exploiting government-created revenue streams, such as subprime mortgages that but for government-owned Fannie Mae and Freddie Mac’s guarantee would never have been made.  It also doesn’t help that today BofA is announcing its second straight year of layoffs (3,500 employees this year alone).

It would be far better for Brown to enlist the help of an entrepreneur with success starting and growing businesses.  As the Kauffman Foundation showed in a study released last summer, “new firms add an average of 3 million jobs in their first year, while older companies lose 1 million jobs annually.”

Here’s the Kauffman Foundation’s explanation:

Most notably, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

“These findings imply that America should be thinking differently about the standard employment policy paradigm,” said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. “Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

If Governor Brown wants to create jobs he should consult the people creating jobs – not those managing a declining workforce.

There’s a fascinating article in today’s Wall Street Journal discussing the best way for government to help spur job creation.

Unfortunately, in troubled economic times the language of recovery is too often tilted toward large, established companies or to “small businesses,” a broad term that traditionally applies to businesses with fewer than 500 employees. The conventional wisdom is that such businesses account for half of the labor force and are therefore the engine of future job creation.

That’s not quite the case. The more precise factor is not the size of businesses, but rather their age. According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.”

The article by three experts at the Kauffman Foundation targets four measures needed to “create incentives to foster the creation and growth of new businesses.”

• First, welcome immigrants seeking scientific training at American universities by creating a “job creator’s” visa for immigrants who have founded a company in America and demonstrated they have at least one employee.

• Second, unleash America’s academic entrepreneurs by allowing university professors to commercialize ideas outside of their home university’s technology licensing office.

• Third, provide easier access to capital so that more flexible standards would allow prudent lending, when it is sorely needed by many firms to remain alive or meet demand when it begins to grow.

• Finally, make it easier for companies seeking capital to go public by allowing shareholders benefited by Sarbanes-Oxley to vote on whether or not they want to comply with all of the law’s (costly) requirements.

You can read the entire article here.