issue: Small Business & Entrepreneurship

The Case For The Kerry-Hutchison Infrastructure Bank

Posted on by The Progressive Policy Institute

You could almost see the eyes rolling last week as Senators John Kerry and Kay Bailey Hutchison introduced the latest version of a bill to create a National Infrastructure Bank. After all, President Barack Obama calls for an infrastructure bank in every budget, and bills have been in play every session since 2007.

Today we live in an age of austerity. How does yet another government institution fit into this picture?

As a small business owner who helps people think through infrastructure issues, I’m struck by the extraordinary opportunity here. We’re all aware of the need: A national infrastructure bank that uses federal borrowing authority to leverage private investment for roads, bridges, water systems and power grids is the only way for the U.S. to increase infrastructure investments in tight fiscal times.

And the technical opportunity is irrefutable. Why not raise money for infrastructure at a time of historically low borrowing costs? What’s more, every major economy in the world has an infrastructure bank, so we should have one, too. Need is not the issue.

Opportunity is. We need a model for smart government. Forget the weirdly inefficient, old-style European model.

Re-engineering an old public sector is nearly impossible, and no one has the patience for it anyway. Think about a national infrastructure bank as an exercise in creating smart government, in an area that is strategically important for the future of our country.

Doubling Annual Investment

A high-functioning infrastructure bank would have three characteristics, shaping its overall role of doubling our annual investment in infrastructure, from $150 billion a year to $300 billion.

First, the role of the infrastructure bank is catalytic rather than managerial. Rather than creating a large bureaucracy, the bank would assemble a corps of focused professionals: engineers, financiers, economists and what I term strategic leaders — people who get things done, driven by a vision to make this country more competitive.

Their job will be to set projects in motion, then to make sure that those projects meet or exceed guidelines. Monitor, not manage; act strategically, not operationally. Move fast, don’t get bogged down, get the job done.

The result will be an elite, rapid, infinitely smaller and infinitely more qualified leadership team than what we have today, an instructive model for other infrastructure related agencies at every level of government.

Energize Private Sector

Second, the function of the infrastructure bank is to guide and energize the private sector. An infrastructure bank goes into the guts of the process — project selection — and gets at the frightening issue of cost. Our costs are often twice that of our European brothers for urban mass transit projects, 10 times those of China.

The bank’s day-to-day business will be to invest in ventures and networks of ventures that serve for 20, 30, 40 even 50 years, providing a competitive return throughout that period. In this sense the bank will be a welcome, violent change agent, smashing open three areas in the infrastructure project-creation process that are costing this country a fortune:

— It takes more than 10 years on average for a project to move through the approval process, a period that would need to be reduced to three years for projects to be bankable.

— At least 50 percent of large U.S. projects suffer cost overruns in the 30 percent-or-greater range. This would be eliminated through bank leadership.

— The selection of projects tends to be willy-nilly, based on political interests. A bank ideally would be a model of focus, restricting its attention to projects that generate competitiveness.

Results Oriented

Lastly, the infrastructure bank will be results oriented and transparent: your bank, investing in your public assets. The bank will be a great experiment in the Facebook Age, bringing in funds from all over the world to build our strategic infrastructure.

The very nature of the smart-government model is to set goals and report performance. This new institution will go beyond that, creating knowledge, developing metrics and pioneering ways of communicating: from project approvals, to performance reporting to championing new technology.

Maybe the Kerry/Hutchison proposal is the opening salvo in a bipartisan effort to build smart government. Thinking about an American infrastructure bank in this way makes an attractive experiment that we have to explore. Creating a model in an area critical to our economic future is a strategic option we can’t ignore.

Recognizing that the bank would double our infrastructure investment and increase the efficiency of each dollar spent is a good deal for every citizen.

This piece is cross-posted at Bloomberg Government

 

The President’s New “Better Buildings Initiative” Builds on a PPI Memo

Posted on by The Progressive Policy Institute

President Barack Obama today announced a major new policy agenda to improve energy efficiency in commercial buildings by 20 percent by 2020, and it looks like he’s been reading PPI’s memos.

Last November, PPI released a policy memo calling on the President to support commercial retrofits as a key to powering America’s economic recovery. It called for a “targeted set of short- and long-term policies to spur jobs and drive investment in retrofitting commercial buildings”. With one in four construction workers unemployed, an aggressive plan to upgrade commercial buildings will not only create jobs, but it will also make small businesses more competitive.

The President’s new Better Buildings Initiative (announced on today’s visit to Penn State University to spotlight the school’s recently developed “Energy Innovation Hub”) is a signal of support for commercial retrofits as a driver of America’s economic recovery. The White House estimates that this will generate energy savings of $40 billion by 2020 for American businesses.

To meet this goal, the President proposed a number of policy actions. The most significant is to change the existing “Energy Efficient Commercial Building Tax Deduction” into a tax credit. Currently, the tax code provides an incentive to building owners for retrofitting buildings through a tax deduction of $1.80 per square foot.

Bipartisan support for the tax deduction already exists. Recent legislation from Senators Bingaman (D-NM) and Snowe (R-ME) on energy tax incentives would increase the deduction to $3.00 per square foot. Groups such as Rebuilding America, a broad-based coalition of labor, business, utilities, manufacturers, and policy groups, support updating the commercial building tax deduction to make it more usable for existing buildings. Rebuilding America issued a press release saluting the President’s Better Buildings Initiative.

Other elements of the Better Buildings Initiative include a ramp up of energy efficiency financing opportunities for commercial retrofits, with support from the Small Business Administration; a competitive grant program at the state and local level called “Race to Green”; an initiative to encourage CEOs and universities to commit to increase the energy efficiency of their buildings, called the “Better Buildings Challenge”; and a Building Technology Extension Program.

Jones Lang LaSalle, the nation’s second-largest commercial property manager, called the President’s proposal “exactly what’s needed to jump-start major energy and carbon reduction initiatives and to create jobs and efficiencies that enhance our global competitiveness.” (A White House fact sheet is available here.)

The President’s announcement on commercial retrofits sets the stage for renewed efforts in Congress to pass clean energy legislation. This will be part of deliberations in Congress over the President’s Budget. Over the past year, energy efficiency policy has garnered the support of Republicans and moderate Democrats alike. The Better Buildings Initiative goes a long way to outline a strategy for innovation and competitiveness in America and should be supported in the debate over the President’s Budget.

Reviving Jobs and Innovation: A Progressive Approach to Improving Regulation

Posted on by The Progressive Policy Institute

Today, the U.S. is suffering from a regulatory paradox: Too few and too many regulations at the same time. On the one hand, financial services were clearly under-regulated during the 2000s, making financial reform essential. Similarly, President Obama’s healthcare reform bill was a key first step to reining in medical costs.

But in other areas we see an accumulation of rules and regulations over the past decade. The trend started with the vast expansion of homeland security regulation under the Bush administration and continued through the first two years of the Obama administration.

That’s why President Obama should be applauded for issuing his executive order “Improving Regulation and Regulatory Review” on January 18. The order asked agencies to pay more attention to promoting innovation as part of the regulatory process. In addition, agencies were directed to come up with a plan for reviewing their existing significant regulations.

However, the president’s executive order did not go far enough. A regulatory ‘self-review’ process has been tried repeatedly in the past, and it’s always fallen far short of expectations. Regulators have a tough time trimming their own regulations, given internal bureaucratic pressures. But don’t blame the agencies—neither Congress nor the executive branch has a good way of reviewing and reforming existing regulations, even when they have become outdated or burdensome.

The regulatory system needs a mechanism to address this need for periodic review. We propose a Regulatory Improvement Commission (RIC), an independent body analogous to the BRAC Commissions for evaluating military base closures. This is designed to build on the president’s executive order, and in the process improve its effectiveness. The RIC will take a principled approach to evaluating and pruning existing regulations, gather input from all stakeholders (not just business or just agencies), and do so in a manner that ensures we protect public health, safety, and the environment.

Download the entire memo

The History of Retrospective Regulatory Review

Posted on by The Progressive Policy Institute

As part of President Obama’s executive order on “Improving Regulation and Regulatory Review,” he called for agencies to conduct ”Retrospective Analyses of Existing Rules,” and to “modify, streamline, expand, or repeal” the ones that are ”outmoded, ineffective, insufficient, or excessively burdensome.”

Definitely moving in the right direction….but the key is how to implement this requirement in a way that works. Unfortunately, the track record of agencies performing such mandatory retrospective analyses on their own rules is not dissimilar to the results of doctors conducting surgery on themselves.

I quote from a 2007 GAO report entitled ”Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews.”

Every president since President Carter has directed agencies to evaluate or reconsider existing regulations. For example, President Carter’s Executive Order 12044 required agencies to periodically review existing rules; one charge of President Reagan’s task force on regulatory relief was to recommend changes to existing regulations; President George H.W. Bush instructed agencies to identify existing regulations to eliminate unnecessary regulatory burden; and President Clinton, under section 5 of Executive Order 12866, required agencies to develop a program to “periodically review” existing significant regulations.17 In 2001, 2002, and 2004, the administration of President George W. Bush asked the public to suggest reforms of existing regulations.

For the mandatory reviews completed within our time frame, the most common result was a decision by the agency that no changes were needed to the regulation. There was a general consensus among officials across the agencies that the reviews were sometimes useful, even if no subsequent actions resulted, because they helped to confirm that existing regulations were working as intended.

Our limited review of agency summaries and reports on completed retrospective reviews revealed that agencies’ reviews more often attempted to assess the effectiveness of their implementation of the regulation rather than the effectiveness of the regulation in achieving its goal.

Agencies reported that the most critical barrier to their ability to conduct reviews was the difficulty in devoting the time and staff resources required for reviews while also carrying out other mission activities.

Most agencies’ officials reported that they lack the information and data needed to conduct reviews. Officials reported that a major data barrier to conducting effective reviews is the lack of baseline data for assessing regulations that they promulgated many years ago. Because of this lack of data, agencies are unable to accurately measure the progress or true effect of those regulations.

Agencies and nonfederal parties also considered PRA [Paperwork Reduction Act–MM] requirements to be a potential limiting factor in agencies’ ability to collect sufficient data to assess their regulations. For example, EPA officials reported that obtaining data was one of the biggest challenges the Office of Water faced in conducting its reviews of the effluent guideline and pretreatment standard under the Clean Water Act, and that as a result the Office of Water was hindered or unable to perform some analyses. According to the officials, while EPA has the authority to collect such data, the PRA requirements and associated information collection review approval process take more time to complete than the Office of Water’s mandated schedule for annual reviews of the effluent guideline and pretreatment standard allows.

This last one is especially fun, and shows up over and over again in the literature on retrospective regulatory review. Basically, the OMB has to review and approve data collection by the government, which means that collecting data to prove that a regulation doesn’t work requires more paperwork.

This piece is cross-posted at Mandel on Innovation and Growth

Photo Credit: hashmil

China’s Reverse Robin Hood: Stealing Intellectual Property from the Poor

Posted on by The Progressive Policy Institute

Many of the facts relating to the globalization of intellectual property (IP) theft over the last decade are not debatable. For example, IP theft has decreased the market share of U.S. firms and destroyed or prevented the creation of millions of U.S. jobs. While currently 18 million Americas are employed in IP-intensive industries, the U.S. economy loses over $20 billion annually to IP theft and in 2007 IP theft reduced global trade by 5 to 7 percent.

However once one gets beyond a simple fact-based analysis the debate over IP theft becomes more contentious. Specifically when it comes to policy prescriptions such as the true societal cost of IP theft, enforcement strategies and stakeholders rights, there is significant disagreement. One of the most contentious elements of IP theft is how to deal with developing countries. As technology spreads to emerging markets, specifically in Eastern Europe and Asia, faster than legal frameworks to prosecute IP violations, theft has steadily risen. For example, although emerging markets only account for 20 percent of the software market, they make up 45 percent of software piracy. China is a particular conspicuous violator. According to the EU, China remains the number one country in terms of number of seized pirated goods, both in number and volume, at EU borders. And over 90 percent of video games consumed in China are pirated.

Still many IP opponents like to argue that IP is a plot hatched by the North to keep the South poor. Countries like China argue that they are poor and technology transfer (much of it forced or stolen) is an integral part of their development strategy. If IP laws keep developing countries from getting drugs or other IP-based technologies critical to overcoming barriers to growth then an argument could be made that IP laws should change. Indeed, IP laws are not divinely manifested, but created within a legal geography because society values the creation of knowledge and believes such knowledge ought to be protected in the marketplace. The question becomes, is this the type of IP violation that is coming from China—a form of redistribution from rich OECD countries to China, a developing nation?

No it is not. China and other IP violating nations are willing to take IP wherever they can find it, not just pulling a Robin Hood of stealing from the rich to give to the poor. They will steal from the even poorer to give to the poor. This point was has hit home to me when I recently met an entrepreneur named Emanuael Narh while in Ghana. Narh is the CEO of Step Technologies, a small start-up based out Accra that allows customers to monitor their home security system through mobile devices. Step Technologies came into existence through the Ghana Multimedia Incubator Centre (GMIC), Ghana’s sole IT incubator program. Narh designed his prototype while still an undergraduate at the University of Ghana and developed it further in his year of compulsory national service where the concept was noticed by representatives of GMIC. Over the last several years GMIC has provided work space and helped Narh develop his idea to a commercial level, file patent work, find seed funding, and partner with distributors, and two years ago Step Technologies was finally ready to begin manufacturing. After going through an extensive bidding process a Chinese manufacturing firm won the contract and Step Technologies transferred their technical details and information for production. However, over the next several months GMIC noticed something peculiar; within the Chinese manufacturer’s supply network in China devices identical to that of Step Technologies’ began to appear in the market without the permission of Step and without paying a licensing fee.

When I asked Narh about what he thought happened he was cautious to not make any accusation without evidence. He simply said, “We eventually changed manufacturers out of fears our concept was not safe.” Others I have met with involved in developing Ghana’s IT sector who are aware of Step Technology’s situation were less cautious, telling me flat out, “of course the manufacturer stole the idea.”

Step Technologies’ story is not unique. China has developed an explicit strategy that holds that it is acceptable to take IP from anywhere in the world, not just from the rich North. If the victims of Chinese IP theft are from rich countries it is coincidental and if they are from poor countries, then it is collateral damage. To emphasize the point consider the fact China’s GDP is 192 times greater than Ghana’s and China’s GDP per capita is over seven times greater. Rampant IP theft from China (as well as other developing countries like Russia) is not some kind of Robin Hood strategy to bootstrap the poor on the backs of those who can afford it, it is a systemic national strategy to use or take whatever from whomever possible.

Leaders throughout Africa are well aware that in order to grow their economies they must move from commodities to knowledge-based enterprises. Step Technologies is a model for doing so; an Africa entrepreneur, aided by a government-funded incubator program, is eventually competitive in the marketplace. (By the way, Step Technologies has found another manufacturer and is now in major markets throughout Africa with plans to go global in the next several years). This is the type of economic development that benefits Africa and the global economy. Yet the process of creating knowledge-intensive industries is long and difficult and without any potential recourse for IP theft from market-dominating countries the route can be next to impossible. As one Ghanaian fund manager responded to my question about IP theft from China, “It’s a struggle but what can we do?”

Africa has enough challenges to development, IP theft from WTO nations should not be yet another hurdle.

This piece is cross-posted at Innovation Policy Blog 

Photo Credit: Nick Humphries

 

 

 

 

 

 

Where the U.S. is Building Knowledge Capital

Posted on by The Progressive Policy Institute

I’ve been posting about knowledge capital writedowns, so now it’s time for a post on where the U.S. is building knowledge capital.

Let’s start with research and development: R&D is not the only type of knowledge capital investment, but it’s one of the more important parts.  In my upcoming paper “Biosciences and Long-Term Economy Recovery”, I wanted to compare biosciences R&D  in the U.S. with infotech R&D.  (Biosciences, by my definition, includes pharmaceuticals, medical equipment makers, and biotech).

Now, these numbers are not published by the government,  but I was able to take a decent shot  using NSF data. Take a look at the chart below:

By my calculations, the U.S. R&D effort, outside of defense, is divided into thirds–one third biosciences, one third infotech, one third everything else.

I estimate that  biosciences accounts for  approximately $100 billion a year in domestic R&D spending. This includes domestic business spending, nondefense federal spending and nondefense academic spending.

U.S. domestic infotech R&D totals roughly $95 billion, outside of defense. However, my calculations don’t pick up the portion of the government defense R&D that goes into IT-related projects, which would gross it up to $100 billion. For all intents and purposes,  domestic IT R&D is roughly equal to biosciences R&D.

In these two areas–biosciences and IT–it’s likely that the rate of U.S. knowledge capital creation exceeds the rate of knowledge capital writedown. Other areas of R&D? Much dicier.

Note: These are preliminary estimates. I will likely update them in the full version of the paper.

This piece is cross-posted at Mandel on Innovation and Growth

Why Some States are New Economy States

Posted on by The Progressive Policy Institute

When it comes to innovation-based growth, not all states are equal. Certain states are on the front lines, and are accordingly most likely to lead the way to economic recovery. According to a new report from the Information Technology and Innovation Foundation, the most leading New Economy states all excel at supporting a knowledge infrastructure, spurring innovation, and encouraging entrepreneurship.

The new report, The 2010 State New Economy Index, uses 26 indicators to assess states’ fundamental capacity to successfully navigate economic change. It measures the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven and innovation-based – in other words, the degree to which state economies’ structures and operations match the ideal structure of the New Economy.  Indicators include percent of the population online, fastest growing firms, exports, industry and state R&D among others.

The top five states – Massachusetts, Washington, Maryland, New Jersey, and Connecticut —are at the forefront of the nation’s movement toward a global, innovation-based economy.  Massachusetts has been the top ranked state in all iterations of the report (1999, 2002, 2007 and 2008). The Bay State boasts a concentration of software, hardware, and biotech firms supported by world-class universities such as MIT and Harvard in the Route 128 region around Boston. It survived the early 2000s downturn and was less hard hit than the nation as a whole in the last recession. And it has continued to thrive, enjoying the fourth-highest increase in per-capita income. Washington State  (which ranked fourth in 2007 and second in 2008) scores high due not only to its strength in software (in no small part due to Microsoft) and aviation (Boeing), but also because Puget Sound region has emerged as entrepreneurial hotbed.

Maryland remains third (as it was in 2007 and 2008, as well), in part because of the high concentration of knowledge workers, many employed in the District of Columbia suburbs and many in federal laboratory facilities or companies related to them.  These and the other top ten New Economy states (New Jersey, Connecticut, Delaware, California, Virginia, Colorado, and New York) have more in common than just high-tech firms. They also tend to have a high concentration of managers, professionals, and college educated residents working in “knowledge jobs” (jobs that require at least a two-year degree). With one or two exceptions, their manufacturers tend to be more geared toward global markets, both in terms of export orientation and the amount of foreign direct investment.

All the top ten states also show above-average levels of entrepreneurship, even though some, like Massachusetts and Connecticut, are not growing rapidly in employment.  Most are at the forefront of the IT revolution, with a large share of their institutions and residents embracing the digital economy. In fact, the variable that is more closely correlated with a high overall ranking is jobs in IT occupations outside the IT industry itself. Most have a solid “innovation infrastructure” that fosters and supports technological innovation. Many have high levels of domestic and foreign immigration of highly mobile, highly skilled knowledge workers seeking good employment opportunities coupled with a good quality of life.

The two states whose economies have lagged most in making the transition to the New Economy are Mississippi and West Virginia. Other states with low scores include, in reverse order, Arkansas, Alabama, Wyoming, South Dakota, Kentucky, Louisiana, and Oklahoma. Historically, the economies of many of these and other Southern and Plains states depended on natural resources or on mass production manufacturing, and relied on low labor costs rather than innovative capacity, to gain advantage. But innovative capacity (derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive) is increasingly what drives competitive success.

While lower ranking states face challenges, they also can take advantage of new opportunities. The IT revolution gives companies and individuals more geographical freedom, making it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce. Moreover, notwithstanding the recent decline in housing prices, metropolitan areas in many of the top states suffer from high costs (largely due to high land and housing costs) and near gridlock on their roads. Both factors may make locating in less-congested metros, many in lower ranking states, more attractive, particularly if their metropolitan areas offer high-quality schools, high-quality and efficient government, and a robust infrastructure.

Perhaps the most distinctive feature of the New Economy is its relentless levels of structural economic change.  The challenges facing states in a few years could well be different than the challenges today.  But notwithstanding this, the keys to success in the new economy now and into the future appear clear:  supporting a knowledge infrastructure (world class education and training); spurring innovation (indirectly through universities and directly by helping companies); and encouraging entrepreneurship.  In the past decade a new practice of economic development focused on these three building blocks has emerged, at least at the level of best practice, if not at the level of widespread practice.  The challenge for states will be to adopt and deepen these best practices and continue to generate new economy policy innovations and drive the kinds of institutional changes needed to implement them.

photo credit: Chantal Wagner

 

Spur Job Growth By Making Business Registration Easier

Posted on by The Progressive Policy Institute

Americans love small businesses and admire the job-creating doggedness and independence of entrepreneurs and dreamers.  Then why aren’t we making it easier to start a business?  Aspiring business owners face a daunting amount of red tape and hassle.  With job creation at the top of the national agenda, the time has come to do better in making it easier to start a business

The OECD, which measures barriers to entrepreneurship (including administrative burdens to open a business, legal barriers to entry, bankruptcy laws, property rights protection, investor protection, and labor market regulations), ranks the U.S just 14th of 29 OECD countries.

We know that small businesses are the engine of job growth in the United States, accounting for 2/3 of new jobs over the past 15 years, according to the Small Business Administration. That’s why one way to spur desperately needed job creation in the United States would be to make the business registration process faster, more comprehensive and thoughtful about the needs of small businesses, and thoroughly integrated with the state business registration process.

We propose the Administration task the Federal CIO, Vivek Kundra, with redesigning business.gov and undertaking a strategic design review of the federal and state small business registration process, redesigning it to create an integrated business registration website encompassing both federal and state requirements and contemplating the entire lifecycle of needs for small business start-ups, thus creating a one-stop shop for business registration in the United States.

The portal would incorporate all states’ business registration requirements into an integrated one-stop system. The registrant would need to only visit a single website to register his or her business both with the Federal government and the relevant state government. (This would have to be done with federal leadership, with the federal government providing a framework and platform to let states add their requirements to it.)

The website would have interactive components, modeled along the lines of TurboTax, with wizards/dialogue boxes, and with the registration process asking questions, demonstrating intelligence, and providing constructive guidance and advice. It should be smart enough to recognize, “You’re registering an electricians business in Arkansas with 10 employees. We recommend a sole proprietorship as the corporate form of governance.” That is, it wouldn’t have just a bunch of links where one can learn more about different corporate forms. It could give advice based upon the information the registrant is entering—in part by tapping into a database with insights on how other similar businesses are structured.

The redesigned business registration process would also contemplate the entire lifecycle of needs and concerns for the small businesses. For example, it would bring information forward to the registrant about whether there are loan programs the business is eligible for, such as relevant Small Business Administration (SBA) or Economic Development Agency (EDA) loans, or information about lines of credit from local commercial lenders. (And the system should actually go in and automatically use the already-entered data to populate the information on that loan form – almost getting to the point where all the registrant needs to do is click “Submit.” Indeed, the system architecture would have a principle that the registrant never needs to enter the same information more than once.)

If the entrepreneur signals the company will be in the business of making products, the website should proactively present any export promotion programs the company might engage with through the Department of Commerce. Again, not just providing links to the Department of Commerce website, but recognizing, “You’re producing custom machine tools and the Department of Commerce has Program X to support it.” Thus, the business registration process would directly support the Administration’s goal to double U.S. exports in five years.

Also, the system should tie directly into the country’s statistical agencies so they can recognize, “We have a small business that just registered,” and that data should go directly and immediately to Bureau of Economic Analysis and the Census Bureau so that we get a much more real-time view of the state of the economy. Of course, implicit in this vision is the need to connect disparate and siloed federal and state databases and information technology systems so that they communicate with one another and bring to bear information in real time to support the small business.

Finally, the small business registration process should be made on an open application platform, in such a way that it could allow competition in the marketplace. So a Citibank or Bank of America, for example, could co-brand it as a “Small Business Starter Kit.” Thus, if an entrepreneur goes into a BofA location to apply for a line of credit, BofA could say, “We’ve got everything you need to start your business right here. Get set up online here now.” The point is the government should make the web interfaces to the registration process open and accessible, so other companies can integrate them with other value-added services they provide to small businesses.

One model is Portugal, where the new “Firm Online” program has completely digitalized the process of registering a business, streamlining the process from it taking 20 different forms and roughly 80 days to launch a business to creating a single website through which new businesses can register in as little as 45 minutes. Within months of launching the new service, more than 70,000 new businesses registered. Portugal’s system uses electronic (digital) signatures (which the U.S. system does not) when authentication is required. It is also responsive to the life cycle needs of a start-up business, providing suggestions for sources of capital, talent, etc. Portugal now ranks 2nd of the 30 OECD countries in online business sophistication. Other countries like South Korea enable entrepreneurs to create firms through their mobile devices.

The modern economy is marked by incredibly intense competition, both globally and domestically. American businesses need every single advantage they can get—and making the process of new business registration in the United States the very best in the world would be an excellent place to start.

Photo Credit: Muffet’s Photostream

Andy Grove and a Needed Conversation

Posted on by The Progressive Policy Institute

The recent Bloomberg BusinessWeek cover story by former Intel CEO Andy Grove, “How to Make an American Job,” has stimulated no shortage of reaction in the blogosphere. From the even-handed and the thoughtful, to the politely skeptical and the sharply critical, bloggers and commentators have weighed in on Grove’s essay.

What precipitated this running debate is Grove’s apparent suggestion that, to spur job creation and innovation, the United States should instigate a national-level industrial policy which favors some companies over others. He points to successful Asian economies as potential models. The distinguishing characteristic of the favored companies would be, what Grove asserts is the real engine of job creation, the scaling process:

Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

Other commentators have already pointed out that Grove perhaps focuses too much on manufacturing (and specifically technology manufacturing such as semiconductors), and that he misses the critical importance of startup firms to job creation and innovation.

I agree that the long-running lament over the loss of manufacturing jobs in the United States is overdone—much of that employment reduction has come about through productivity gains rather than offshoring. The scaling process Grove celebrates is in fact partly responsible for the loss of technology manufacturing jobs. Since 2000, industry concentration in Silicon Valley has increased dramatically in sectors such as computer equipment manufacturing and semiconductor manufacturing while employment has fallen. Just last week, my colleague Tim Kane published a report on just how much startups matter to net job creation in the United States. As Tim puts it, startups aren’t everything, they’re the only thing.

Finally, Vivek Wadhwa offers what is probably the best take on Grove’s article—Vivek is hugely knowledgeable about innovation in China and India, and offers, as others have not, actual concrete suggestions for how we can reignite economic growth in the United States.

Despite the flaws in Grove’s essay,  it should not be dismissed. For one thing, he is a highly intelligent and highly successful entrepreneur who has lived through—indeed, helped shape—dramatic transformations of the U.S. economy.

Furthermore, scale companies are important to economic growth. No one can talk about the economic history of the United States without mentioning the scale companies that, at each stage of development, pioneered innovations, reduced costs and generally helped spread prosperity: Union Pacific, Standard Oil, Ford Motor, Wal-Mart, Intel, Microsoft, Google. Obviously, economic growth cannot solely be ascribed to such firms—they are only one piece of the economic ecosystem and while Grove may have overemphasized scale, he certainly was not wrong to discuss it. But the process of scaling must be contextualized: startups are essential in part because, without them, we do not even get to the scaling process. Competition helps ensure that scaling is accompanied by innovation and efficiency. Once they reach a certain level of scale, large firms depend on the acquisition of startups as a source of innovations and new jobs.

Scale firms can also be merely seen as incidents of deeper factors driving growth. After I gave a presentation on the economic contribution of high-growth firms a few months ago, an eminent economist dismissed everything by saying, “well, yes, but this is all simply explained by information technology; that’s the real story of growth.” The IT-as-the-root-of-all-prosperity argument has been popular in recent years but, as Paul Kedrosky later pointed out to me, this is a “turtles all the way down” type of argument. Behind IT is cheap energy, behind cheap energy is access to natural resources, behind natural resources … and so on. (Scale companies, in fact, could even be seen as a fertile source of knowledge for economists themselves: Thomas McCraw, inter alios, has argued that the rise of scale firms in the second half of the 1800s helped prompt the marginal revolution in economic thought.)

All of this still overlooks the most important part of Grove’s article, a point that escaped me upon first reading: “A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer.” The reason that the scaling process—rather than simply scale itself—is economically important is the learning-by-doing path by which it proceeds. Knowledge accumulates, innovations come and go, companies iterate back and forth—this is the messy process by which economic growth happens. If this reading is correct, Grove is claiming that the offshoring of technology manufacturing jobs threatens such learning-by-doing. In this formulation, productivity gains in manufacturing can actually undermine future cycles of learning and iterating.

The conversation Grove is trying to stimulate is worth having. It is probably too much to extrapolate technology manufacturing to the entire U.S. economy. There are certainly sectors, aside from manufacturing, in which learning-by-doing drives growth and it is not clear that those sectors have lost such capacity. Software development and certain institutions in the world of health care rely on this process. Yochai Benkler’s work can be seen as emphasizing the extent to which learning and iteration underwrites a great deal of innovation across the economy today.

But Grove’s point should be taken seriously in the sense that real barriers exist to innovation and the scaling process in many areas of the economy. Rather than seeing his article as a call for a government-driven competitiveness agenda or industrial policy, we should read it as a starting point for seeking out release valves at which small changes can be made that would release huge amounts of pent-up entrepreneurial energy. The stunted process of commercializing innovations out of universities leaps to mind as an area ripe for such analysis, as does current immigration policy. The national conversation about innovation and economic growth should be engaged in exactly this type of search.

Photo credit: jurvetson

The State of U.S. Infrastructure: A Snapshot

Posted on by The Progressive Policy Institute

We all want the infrastructure market to pick up dramatically and generate jobs, build productivity, and create competitiveness. But there is a yawning gap between public expressions of optimism and what infrastructure executives have been telling me about the state of their business. We continue to hear good news about the infrastructure industry in the media and from the administration, yet head counts at infrastructure firms are still down by as much as 25 percent, and executives say that the U.S. market is still essentially flat.

To get a granular picture of the state of infrastructure, my firm, CG/LA Infrastructure, last week sent out a survey of about 11,000 infrastructure executives and professionals throughout the U.S. and in all sectors of the industry. While only a fraction of the responses have come in so far, I’d like to share some preliminary results, which affirm the pessimistic mood that I’ve picked up in conversations. Here’s a snapshot of the state of U.S. infrastructure through the eyes of the men and women running our top firms:

1.) What is your current perception of the U.S. infrastructure market? Fifty-one percent of executives who have responded so far say that the market is “getting worse,” while 33 percent said that it is essentially flat and 15 percent said that it is improving.

The grim results may seem surprising, but it makes sense when you think about it. Most states have not recovered from last year’s cataclysm and continue to cut their budgets across the board. Considering that 70 percent of infrastructure spending is the responsibility of states and municipalities, it would be a surprise if infrastructure spending didn’t go down.

2. In your day-to-day infrastructure work, what are the most problematic issues in terms of improving project development speed? The U.S. needs to dramatically increase investments in infrastructure. Our survey question tried to get at the barriers to that kind of increased investment, and the current problems for restarting the market.

In our menu of options — respondents were allowed to choose as many as they wished from a list of factors — fifty-four percent of infrastructure executives mentioned “financing” as a problem. Meanwhile, 30 percent highlighted weak public sector capacity. This is significant. If we are going to invest in infrastructure, then we need a highly capable public sector.

Additionally 30 percent of executives also highlighted permitting issues as a barrier. Surprisingly, environmental issues, normally the biggest ‘problem’ on any industry survey, ranked fourth, highlighted by only 24 percent of executives.

Clearly the overriding issue is financing. How is that going to be addressed, and who will benefit? These are questions for another survey, and deserve a lot more attention than they are getting – particularly given the preponderant role of state and municipal budgets, and the dramatic weakness in those budgets. And lurking behind these concerns is a question few people are asking: What has become of the Obama administration’s initial National Infrastructure Bank proposal?

3. High-speed rail (HSR) is a signature initiative of the Obama administration. How do you rate this proposal in terms of current progress, and future potential, on a scale of 1-10, with 10 being excellent and 1 being poor? Another striking result: 53 percent of respondents clustered their answers in the 1-3 range (97 percent scored the high-speed rail program “7” or below). The results reflect my experience with industry, where the initial excitement about the program has rapidly given way to doubt and incredulity.

This question allowed for comments, and those comments clustered into two groups: justifications for their scores, and constructive comments on what is wrong with the program. Under the first category, one commenter noted that there were “serious issues…of whether the funding provided will be sufficient to implement a meaningful program and whether the funding will be concentrated on the most promising HSR opportunities.” Another, more critical respondent wrote, “I have not seen any significant developments since the topic was broached.”

On the constructive side: “Existing rail corridors that host HSR should be exempt from most of the overly burdensome environmental laws. This is unnecessary and needless bureaucracy and is slowing everybody waaaaaay down.” Another comment noted that the program “needs a long term funding source; it will not survive as a jobs program.” Perhaps the most critical comment, in terms of strategy, was the following: “There are a few corridors where high speed rail makes a lot of sense; the Northeast corridor in particular. However, there is no national consensus on its utility in other parts of the country.” Without consensus, at a time of tremendous austerity, it is indeed difficult to see this “man on the moon” initiative moving forward. Note that nothing has been spent from the original authorization of $8 billion.

4. In infrastructure, where are the greatest [geographic] opportunities for your firm over the next 12 months? The answers to this question were surprising and underscore that the U.S. infrastructure industry is focused on the home market – and at the same time, does not see much future for itself in that market. Overall, 42 percent of executives surveyed see their greatest opportunities in the U.S., a market that they qualify as depressed. After the U.S. market, 32 percent of respondents see the greatest opportunities in Latin America (a region with four percent of global GDP), followed by North America (the U.S., Canada and Mexico), with 29 percent. Europe and the Middle East were each ranked at 20 percent, while non-China Asia was ranked below 10 percent. None of the infrastructure executives surveyed see opportunities in the closed Chinese market.

5. You expect your firm’s gross revenue in 2010 to _____. Only seven percent believe that their firm’s revenue will grow “significantly” in 2010, with 48 percent projecting moderate growth, and 32 percent stating that economic performance will remain flat. Two facts stand out: It is a cause for concern that 13 percent of executives see their firm’s performances actually declining and 80 percent see moderate or no revenue growth for their firms in 2010. Considering their point of comparison is 2009, the worst year for infrastructure in 80 years, this is dismal news.

All in all, the survey results speak for themselves. U.S. infrastructure executives don’t see much hope for revival this year – in fact, they see things getting worse. President Obama’s signature program, high-speed rail, does not receive anything like passing grades and it is increasingly not being taken seriously. The financing issue — not a surprise for anyone in the infrastructure business — is the number one problem facing the industry.

When I was starting in the infrastructure industry a friend would tell me, over and over, that “nothing is as stubborn as a fact.” Well, these are the facts. We should all take them seriously if we are going to create jobs, generate competitiveness and build opportunities. And it seems like the executives in this most public of industries have a pretty clear grasp of reality, and some good ideas about what should be done.

Photo credit: SP8254

Divorce Washington at Your Peril, Silicon Valley

Posted on by The Progressive Policy Institute

Silicon ValleyWashington, D.C. and Silicon Valley are separated by 3,000 miles and vastly different cultures. But if the Valley itself and, more broadly, the U.S. economy are to thrive, then Washington and Silicon Valley need to appreciate each other more than they currently do. From my perch inside the Beltway, I’d like to offer some words of advice for the Valley.

First, I salute your entrepreneurial and organic spirit. It has helped transform the world and create jobs and wealth. But while Washington doesn’t always understand what Silicon Valley does or needs, you need to abandon the myth that Washington had nothing to do with your creation.

Remember: the Internet emerged from the Defense Department’s Advanced Research Projects Agency (ARPA). Oracle got started doing work for the Central Intelligence Agency and Intel sold much of its early output to the Pentagon. Sergey Brin was working on bibliographic research with an National Science Foundation (NSF) grant when he conceived Google. The founders of Genentech and other Bay Area biotech firms relied in part on federal research money to universities. Granted, these and many other companies became forces in the market independent of government, but does anyone really think that the federal dollars that flowed into Stanford, U.C. Berkeley and the Lawrence Livermore Lab had nothing to do with the Silicon Valley of today?

Second, whatever tangential role the feds played years ago, many in Silicon Valley agree with Michael Arrington, editor of the widely read blog Tech Crunch, that it was time for Washington to “just leave Silicon Valley alone.” Oh really? No need for a more generous research and development tax credit? What about intellectual-property infringement? Are the busy people creating and running the companies in the Valley going to lead the charge for cracking down on IP theft in countries like China? What about federal funding for research? I don’t need to tell you that a lot of the best minds and ideas that end up in your companies were trained and/or nurtured at these prestigious California institutions, where federal money flows in from NSF, the Department of Energy, the National Institutes of Health and others. Imagine where the Valley will be in the future without the public private/partnerships and government research dollars. The countries with the fastest broadband are the ones in which government invested in the networks.

Third, don’t kid yourselves — while success in the IT industry in the past might have depended on private companies simply commercializing and marketing their good innovations, success going forward depends on robust public-private partnerships. Intelligent transportation systems, the smart electric grid, mobile payments, digital signatures, health IT and, of course, broadband all represent transformative changes in how we live and work. The commercial opportunities for private companies will be huge, but can companies alone lead the way? Probably not. As we have shown in a report, other nations are ahead of us in all these areas and it is because of smart public private IT partnerships. Only when government commits to the historic redesigns of how we travel, communicate, share data, conduct commerce and use energy will the vast commercial opportunities become accessible for Silicon Valley companies.

Fourth, don’t assume that if government simply loosens up H-1B visa restrictions and lowers taxes, everything else will take of itself. Yes, we need to be able to attract and retain the best minds in the world so we are not starved for talent in the U.S. And yes, we should lower corporate taxes to compete for mobile, high-value-added jobs with countries that have lower effective corporate tax rates. We need to make our R&D credit more generous (we now rank 18th among OECD countries) and should explore tax incentives tied to investment and workforce training workers. But it’s important to note that these countries are matching tax cuts with proactive government efforts to marshal resources to establish leadership in IT and other key economic sectors. Silicon Valley is hanging its fate on a very narrow reed by focusing on worker visas and taxes, and giving short shrift to the many other ways where government plays an integral role in its future.

That leads to the fifth and final piece of advice: Play a more active role in shaping policy in Washington that is good for the country and good for Silicon Valley. Rather than wishing the government would simply cut taxes and leave, get behind government efforts to make innovation a more central part of economic policy. Support more robust investments in national laboratories and university research. Stand up for government efforts to kick start the development of “platform technologies” like the smart grid and intelligent transportation systems. Lead the charge for a better trade policy that defends U.S. innovators against foreign technology mercantilism. Silicon Valley has been the chief beneficiary of Washington’s research and vision, and stands to gain the most from these policies going forward.

Photo credit: caccamo

Kill All the Lawyers Entrepreneurs

Posted on by The Progressive Policy Institute

On the heels of a severe recession, with stubbornly high unemployment and a still-sputtering recovery, economists and policy-makers are casting around for something — anything — that might jump-start economic growth and rapid job creation. One place we might expect them to look for ideas is our own economic history: Where have new jobs come from in the past? What is the pattern of recent economic recoveries?

As it turns out, job creation in the American economy comes disproportionately from new and young companies. Sluggish economic times, moreover, can be the cradle of entrepreneurship: Over half of the companies on the Fortune 500 were founded during a recession or bear market. Entrepreneurs are also responsible for introducing a large share of innovations that improve our standard of living.

One would think, then, that the conditions for job creation would be obvious: Avoid steps that would discourage new companies from starting and that would make it as difficult as possible for them to grow. But alas, one would be wrong. In recent weeks, we have seen signs that policy-makers and legislators still have no clue how to solve the jobs dilemma.

An Assault on Startups?

First, Bloomberg BusinessWeek reported last week that the Internal Revenue Service (IRS) is targeting the use of freelancers and “perma-temps” by many firms. At issue is the classification as freelancers of workers who remain on a company’s payroll months and even years, a violation of the tax code. Because such workers offer flexibility and help reduce costs, many companies that use them are young and small. As Nick Schulz pointed out, this “assault” on voluntary work arrangements might not be the best idea when we’re interested in encouraging job creation.

Data from the Census Bureau and Bureau of Labor Statistics indicate that the average size of new firms has been shrinking by about one or two employees for several years. On one hand, that’s a potentially worrisome trend as it suggests a Red Queen effect whereby we need to start more and more new companies just to generate a steady level of jobs. On the other hand, as the BusinessWeek story pointed out, this trend also indicates that more new and young companies are using flexible employment — freelancers, independent contractors, temporary workers — as a way to help boost their chances of survival and growth.

Just last week the CEO of a young firm explained to me how he and his co-founder opened up their office space some time ago to anyone who wanted to come in and write software for them on a temporary basis. Some of those who did became full-time employees, while others ended up starting their own companies in the same office. It’s difficult to predict what effect the IRS action will have on new and young companies, but it seems safe to say that it won’t be the job creation elixir for which policy-makers are searching.

Another recent, admittedly less worrisome development was the appearance in the financial reform bill of some provisions that likely would have suppressed startup activity. One provision required startups that raised funding to register with the Securities and Exchange Commission and then wait four months for review. Another hiked the monetary thresholds for “angel investors” — wealthy individuals who play an increasingly important role in financing new companies — which could have worked to prohibit much startup financing.

The anti-startup and anti-angel provisions have since been watered down, but remain testaments to how easily and quietly we might kill the golden goose in this country. Who sits down and asks, How can I depress entrepreneurship today?

Entrepreneurship Essential to Any Recovery

These recent episodes take place against a backdrop of an apparently anti-startup zeitgeist taking shape. An impressionistic gaze at the landscape reveals an increasing tendency for policy-makers to focus on things large and well-established, even as our economy and society are driven more and more by the new and small.

One indication of this is well-known: The rush to bail out some of the biggest and oldest companies in the economy sent the wrong message to potential entrepreneurs. There was a compelling rationale to the actions to save General Motors and Chrysler, just as there was one to pour money into banks and other financial institutions. But the composite signal was perverse: bigger and older are better. The largest banks in the country now have a bigger market share than they did prior to the recession, and these aren’t necessarily the primary sources of financing for new and young businesses. The zeitgeist was expressed quite succinctly in the BusinessWeek story: “It’s easier and quicker to audit smaller businesses.” So there you go — ease trumps dynamism.

New companies and the jobs and innovations they generate are not silver-bullet solutions. Yet economic recovery surely won’t happen, or be as strong, without them. Entrepreneurship in the U.S. has been remarkably resilient for about 30 years, with a surprisingly steady level and rate of firm formation. While encouraging the formation and growth of more startups is clearly something that would boost economic growth, it’s not entirely clear how we might go about doing that. What is crystal clear, however, is that we could very well succeed in killing entrepreneurship if we don’t pay attention to what goes on in Washington.

Brain Gain: Why We Should Grant Visas to Immigrant Entrepreneurs

Posted on by The Progressive Policy Institute

A recent post highlighted the importance of new and young companies to job creation in the U.S., implicitly raising an important question for policy makers: How can we increase the number of startups? Assuming it can be done, such an increase would not solve all of the economic challenges facing this country, but it would certainly help. New companies not only create millions of jobs across all sectors of the economy — they also introduce product and process innovations, boosting overall productivity.

Saying startups are important is one thing, of course; actually designing policies to increase their number is something else entirely. Before making any recommendations, for example, we need to know more about the universe of startups. Are they more prominent in some sectors than others? Does the impact of new companies differ across sectors or geographic regions? Should policy focus on encouraging more new firms, or on enhancing the growth of those already in existence? How would any such policies affect established companies, large and small?

Policymaking around entrepreneurship is evidently not clear-cut as there is still quite a bit we do not understand regarding startups. In the coming weeks we will try to explore these questions and illuminate the world of startups for policymakers. We’ll start with the lowest-hanging fruit of all, though one that may seem like poison to some in Washington: immigration.

It’s commonly accepted that the United States is a nation of immigrants, settled and populated by those fleeing persecution, seeking commercial opportunities in a new land or looking for a fresh start. We have always recognized the important contributions of immigrants to the U.S. economy, from entrepreneurs like Samuel Slater (textile mills) to Andrew Carnegie (steel) to Andy Bechtolsheim (Sun Microsystems) to the laborers and workers who built this country with their hands.

Recently, researchers have begun to paint a broader picture of the economic role of immigrant entrepreneurs. For example, Vivek Wadhwa and his research team have found that, from 1995 to 2006, fully one-quarter of new technology and engineering companies in the U.S. were founded by immigrants. In Silicon Valley, the figure was one-half. These firms constitute only a sliver of all companies, yet contribute an outstanding number of jobs and innovations to the economy.

It makes sense, then, that if we are seeking to increase the number of new companies started each year in the U.S., we might look to immigrants. It turns out that Sens. John Kerry (D-MA) and Richard Lugar (R-IN) are thinking precisely along these lines, introducing the StartUp Visa Act (PDF) in the Senate. This bill would grant a two-year visa to immigrant entrepreneurs who are able to raise $250,000 from an American investor and can create at least five jobs in two years. Without question, such a visa is a good idea and this legislation hopefully paves the way for future actions that would reduce the pecuniary threshold and focus more on job creation.

Quite naturally, however, the promotion of immigrant entrepreneurs arouses suspicion among those on the right who harbor nativist views, and those on the left who perceive progressive immigration policies as a threat to American labor. Such views take the precisely wrong perspective: immigration, as we have seen, is a core American value. Immigrant entrepreneurs, moreover, come to the U.S. to make jobs for Americans, not take them.

Further, many of those who promote immigration as a way to boost economic growth narrowly focus on “high-skilled” entrepreneurs, those who might start technology companies. Clearly, as Wadhwa’s research indicates, such companies are important to American innovation. But we exclude non-technology entrepreneurs at our peril — every new company, including those founded by immigrants, represents pursuit of the American dream. By closing our borders to immigrants in general or welcoming only those with certain skills, we leave out many who will start new firms in other industries. If not in the United States, they will go elsewhere to start their companies and create jobs.

Entrepreneurs are implicit in Emma Lazarus’ poem: “Give me your tired, your poor/Your huddled masses yearning to breathe free.” Entrepreneurs start from nothing and work endlessly to build their companies, expressing their individual freedom through commerce. Why should we want to exclude them from the home of entrepreneurial capitalism?

A Nation of Startups

Posted on by The Progressive Policy Institute

A distinct sense of unease permeates the traditional spirit of American optimism. The unemployment rate appears stuck at 9.7 percent, and many project that it will fall to around only eight percent by 2012 and to perhaps five percent by the middle of the decade. Disquiet over jobs is joined by a vague fear that the U.S. has lost its edge in innovation: our companies are losing ground to emerging market competitors and our students are falling behind their peers in other countries. In a recent post, Michael Mandel put these two concerns together, saying our jobs crisis is simultaneously an innovation crisis.

In response, a common impulse in Washington has been to call on the federal government to somehow solve both problems together, whether by creating “green” jobs, directing more money into research and development, or, most distressingly, provoking a trade war with China. Yet the real solution to both crises — the way to create more jobs and innovation — is right in front of us: startups. As New York Times columnist Thomas Friedman wrote recently: “Good-paying jobs don’t come from bailouts. They come from startups.”

Americans start new companies at one of the highest rates in the world, a pace that has been consistent for nearly 30 years. This steady stream of new companies was responsible for nearly all net job creation over that period of time, and many of those startups introduced new innovations into the economy, whether personal computers (Apple), productivity-enhancing software (Microsoft), 24-hour news (CNN), biotechnology (Genentech) or web browsers (Netscape).

The empirical evidence on the importance of startups is compelling, but not everyone is buying it. Responding to Friedman, for example, Dean Baker wrote:

Friedman’s conclusion about the special importance of new firms is utter nonsense. The claim that most net new jobs came from new firms conceals the fact that existing firms added tens of millions of jobs in this 25-year-period. Of course existing firms also lost tens of millions of jobs. We can say that the net job creation for existing firms was zero, but if we did not have an environment that was conducive for the job adders to grow (how many jobs did Microsoft, Apple, and Intel create after their first 5 years of existence?), then existing firms would have lost tens of millions more jobs.

There are basically two ways to look at job creation in the economy: gross and net. Large existing companies hire thousands of people each year, but they also see thousands of people leave. Gross job inflows and outflows in the American economy are enormous, an indicator of the ongoing reallocation of resources that drives economic growth. At the end of the day, however, if we want to keep pace with an expanding labor force (new entrants) and a changing economy (the rise and fall of sectors and companies), what matters is net job creation. It would be little consolation if we had 100 people looking for jobs, and large company ABC hired those 100 people but also fired 100 different people.

Many people prefer the (ostensible) comfort of big, established companies to the unpredictability of startups. Sure enough, while new companies create thousands of jobs each year, they also destroy thousands of jobs, whether through their effect on existing firms or through failure. (Roughly a third of new firms close in their first two years.) But these firms are important, too, in that they provide one of the few sources for big companies to draw on in adding jobs: in many cases a big company can only add net jobs by acquiring a new firm.

In addition to jobs, startups are an important source of innovation for the economy, responsible for a disproportionate share of breakthroughs. Big companies inevitably become locked into a cycle of quarterly earnings and long-term investments, leaving little room to pursue fringe ideas. Startups have the freedom to explore ideas at the frontier and succeed (or fail) in commercializing them.

This is not to say that large, established companies are unimportant. Far from it — the U.S. economy derives important strength from the symbiosis between startups and big firms. But if policy drifts too far in protecting big companies (whether through bailouts or certain types of regulation), it could suppress the number of startups. Just as importantly, should policymakers choose to focus on promoting entrepreneurship, it’s not clear that we can pick and choose certain sectors. The high-technology companies mentioned above garner much of the attention, but we see plenty of new firms emerge from seemingly mundane sectors such as retail and restaurants. We should reserve judgment on the types of startups we wish to see: every new company represents a source of renewal for the economy.

None of this means that startups represent the saving grace of the American economy; there is no silver bullet solution, to be sure. But, just as plainly, economic recovery will not happen without them. To begin creating our economic future, we need to start more new companies.

Photo credit: https://www.flickr.com/photos/philgyford/ / CC BY-NC-ND 2.0

Champion Enterprise, Not Paternalism

Posted on by The Progressive Policy Institute

The following piece was written for a conference on progressive governance being held this week in London by the Policy Network, an international think tank dedicated to promoting progressive policies:

For many on the left, the near-collapse of America’s financial system during the winter of 2008-2009 was irrefutable proof of the failure of free market ideas. The new consensus — let’s call it the anti-Washington consensus — was solemnized by business and political elites in Davos last month. Fittingly enough, French President Nicolas Sarkozy delivered the eulogy for neoliberalism.

The Anglo-American model is dead. Long live state capitalism!

Not so fast. In America at least, popular attitudes have not lurched in a more interventionist or social democratic direction. If anything, there’s been a backlash against the emergency measures the Obama administration has undertaken to unlock credit, bail out big banks holding worthless securities, reduce home foreclosures, and keep big U.S. auto companies afloat.

That has perplexed and frustrated Democrats, who believe the government should get more credit for again saving capitalism from the capitalists, just as it did in Franklin Roosevelt’s day. But Wall Street’s fall from grace doesn’t automatically translate into rising public receptivity to a more active state. Anti-business and anti-government attitudes can and do co-exist easily in the American mind.

President Obama maintains, quite plausibly, that Washington’s decisive intervention kept the economy from tumbling into the abyss. But unprecedented public deficits, the government’s effective takeover of large finance and auto companies, and, yes, Obama’s push for comprehensive health care reform, also seem to have resurrected old fears about “big government.”

One likely reason is the sheer, pharaonic scale of government spending to rescue the economy: nearly $4 trillion when you add the Federal Reserve’s efforts to pump liquidity into financial markets, aid for failing banks, last year’s $787 billion “stimulus” plan, and another $100 billion jobs bill for this year. And many in middle America are barking mad that political elites have used tax dollars to shield economic elites from the consequences of their own greed and ineptitude. This is especially true of the independent voters who helped Obama to win a solid majority in 2008, but whose defection over the past year has fueled Republican victories in elections in Virginia, New Jersey, and, most shockingly, the liberal bastion of Massachusetts.

Meanwhile, the U.S. economy is growing again, by a gaudy 5.7 percent of GDP in the last quarter of 2009. There’s been little crowing at the White House, however, not when many small businesses still can’t get credit, people continue to lose their homes, and unemployment remains stuck in double digits.

For Obama and the Democrats, the central economic challenge is not to sell some new model of state-managed capitalism to a public already worried about government spending and overreach. It’s to rebuild the American economy’s capacities for brisk innovation and job creation. That will require striking a careful balance between new regulation and entrepreneurial risk-taking.

With Wall Street again reaping huge profits (and dishing out fat bonuses), some sort of financial regulation likely will pass soon. The key tasks here are reducing moral hazard by ensuring that no financial institution becomes too big or interconnected to fail, raising capital requirements to curb excessively leveraged speculation, and creating transparency in the trading of exotic financial products like derivatives.

But what the country needs even more is a progressive opportunity agenda that emphasizes technological innovation, small business creation, American competitiveness, fiscal discipline, better schools, and middle-class jobs. Such an agenda would include the following elements:

An aggressive infrastructure initiative. Washington must reverse decades of neglect and double or triple spending aimed at modernizing America’s aging and inadequate public infrastructure. Even that, however, won’t be nearly enough, which is why progressives are calling for a National Infrastructure Bank to leverage private investment in high-speed rail, intelligent transportation systems, a smart electricity grid, and next-generation broadband.

A big boost for clean and efficient energy. The United States needs to put a price on carbon, which would raise billions to invest in developing clean fuels and technologies. Unfortunately, Obama’s “cap and trade” proposal is languishing in Congress, a victim of Republican obscurantism on climate change.

More exports. Obama wants to double U.S. exports, but the White House has not pushed Congress hard to pass the U.S.-Korea trade pact. Nor has it confronted China and other Asian nations whose currency manipulations keep U.S. (and European) goods at a competitive disadvantaged.

Fiscal restraint. America’s heavy borrowing from abroad weakens the dollar and deepens our reliance on foreign creditors. To maintain the nation’s fiscal integrity and independence, Obama must walk a fine line between winding down our enormous public deficits and debts and continuing to pump up domestic demand. The key is to reduce the unsustainable growth of public health care costs, which is why Obama is right not to give up on health care reform this year.

An entrepreneurial climate. Over the last three decades, firms less than five years old have accounted for nearly all net job creation in the United States. U.S. progressives should embrace policies that foster innovation and entrepreneurship: more public spending on research, a light-handed approach to regulating and taxing new enterprises, fiscal discipline to keep capital costs low, dramatic improvements in education and preferences for skilled immigrants.

In the ideological hothouse of Washington, it’s natural for Democrats to argue that the financial crisis has discredited market fundamentalism. But the antidote isn’t more government, it’s a progressive model for innovation-led growth that champions individual enterprise and middle class aspiration.

Translating Growth into Jobs

Posted on by The Progressive Policy Institute

The U.S. economy ended 2009 with a bang, growing at a torrid pace of 5.7 percent in the final quarter of the year. That’s an impressive number at any time, but the Obama administration isn’t popping corks because, with at least 10 percent of Americans out of work, the nation’s mood is still in recession.

Many economists attribute the expansion to a one-time surge in business purchases of goods and equipment. Take away this “inventory bounce,” and growth was only around 2.2 percent, the same as the third quarter. And they worry that growth will sag when the government runs out of stimulus money this year.

In normal times, economic growth eventually translates into more jobs. But these are not normal times, and with the midterm election looming on the horizon, President Obama wants to goose the pace of recovery. His new budget for 2010 includes $100 billion to stimulate job creation.

In his State of the Union address, the president outlined a bundle of sensible if modest steps to induce community banks to lend to small business, speed up business investment in new plant and equipment, and encourage U.S. companies to create jobs at home instead of shifting operations overseas. All this could help on the margins, but in reality there is little that this or any president can do to plug the jobs gap.

According to Brookings Institute economist Gary Burtless, we need more than eight million more jobs to bring the unemployment rate down to 4.5 percent, or close to what economists define as “full employment.” Given the scale of the challenge, and the risk of a “double dip recession” as federal spending ebbs, some liberals are clamoring for another big stimulus package.

But the White House also has to keep an eye on America’s unprecedented run-up of debt. That’s why the president has called for freezing domestic spending in 2011 and endorsed a bipartisan commission to tackle entitlement reform.

Unlike his critics, Obama has to balance competing national priorities, not simply pick one at the expense of another. Given the economy’s hopeful trajectory, his decision to tweak job creation rather than massively expand government spending is the right one, and it deserves progressives’ support.