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Barriers to Entry and Job Creation

As the economy continues to stagnate, President Obama is attempting to reverse the trend by announcing his new American Jobs Act. The bill essentially calls for more fiscal stimulus in the form of both tax cuts and greater spending. Unfortunately, the positive effects of fiscal stimulus are dubious at best and not likely to make any difference at all. Contra Obama’s plan, Kauffman Foundation scholar Brink Lindsey zeros in on the type of public policy that can lead to renewed and much needed job creation:

For public policy to be effective in responding to this grim situation, it needs to be based on a clear understanding of where jobs come from. And on that question, research from the Kauffman Foundation leaves no doubt: New firms are the main engine of job creation in this country. Specifically, from 1977 to 2005, there were only seven years in which existing firms created more jobs than they destroyed. The bottom line is simple: without startups, there would be no net job creation in the United States.

Additional Kauffman Foundation research reveals that this engine of new jobs began sputtering before the Great Recession. Census data show that the number of new employer businesses created annually began falling after 2006, dropping 27% by 2009. Meanwhile, the average number of employees per new firm has been trending gradually downward since 1998. And the pace of job growth at new firms during their first five years has been slowing since 1994.

The timing of the deteriorating employment picture suggests that the problem is structural as well as cyclical. And structural problems call for structural solutions. Specifically, the ultimate answer to restoring prosperity and vigorous job growth lies in policy reforms that create a more favorable environment for the creation and growth of new businesses. Barriers to entrepreneurship need to be identified and systematically dismantled.

This conclusion is further supported by my own research into the growth challenges confronting not only the U.S. but all advanced economies operating at the technological frontier. My findings regarding what I call “frontier economics” can be summarized as follows: The available sources of growth, and the policy requirements of growth, change over time with a country’s advancing economic development. In particular, as countries get richer they become ever more heavily dependent on home-grown innovation – as opposed to simply expanding existing activities or borrowing good ideas from abroad – to keep the growth machine humming. And since new firms play an absolutely vital role in the innovation process, that means that removing barriers to entrepreneurship becomes increasingly important to maintaining economic dynamism and prosperity.

Lindsey also lays out the major components of a Kauffman legislative proposal, The Startup Act, which provides policy reforms that would help break down barriers to entrepreneurship and increase job creation:

  • an entrepreneur visa along the lines of the revised Kerry-Lugar Startup Visa Act
  • green cards for foreign students when they receive so-called STEM degrees – degrees in science, technology, engineering, and mathematics – from U.S. universities
  • exemption from capital gains taxation for investments in startups held at least five years
  • 100% exclusion from corporate income tax for qualified small businesses on their first year of taxable profit, followed by 50% exclusion in the subsequent two years
  • allow shareholders of companies with market valuation under $1 billion to opt out of Sarbanes Oxley requirements
  • higher fees for faster, better service at the Patent and Trademark Office to clear the backlog at PTO
  • mandate that all federal research grants to universities be conditioned on universities’ affording their faculty members the ability to choose their own licensing agents rather than having to rely, as they do at present, on their own university’s technology licensing office
  • institute a requirement that all major regulatory rules (those with estimated costs of at least $100 million) sunset automatically after ten years
  • subject all proposed and existing major regulatory rules to a uniform cost-benefit analysis
  • institute monitoring of business climate in states and localities along the lines of what the World Bank’s Doing Business reports do for different countries
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