June 2011: Think small to put Americans back to work

A tip of the sun-visor to the late, great New York newspaper columnist Jimmy Cannon for borrowing his signature phrase: nobody asked me, but…

What can, or should, government do to respond to the challenge of persistent high levels of unemployment in the United States? Some 14 million are unemployed and another large group that is underemployed.

So what can be done? The somewhat counter-intuitive answer is to think small.

Small employers generate most new net jobs and start-ups—businesses less than five years old— are the true job creators, as the Wall Street Journal noted late last year in “Startups Key to Job Growth.

A study by Small Business Administration economist Ying Lowrey estimated that “between 1997 and 2008 new entrepreneurial businesses created 3.5 million new jobs a year. One million of those were for paid employees; the remaining 2.5 million were the jobs entrepreneurs created for themselves.”

You would never know that from the focus in Washington (and at the state level); policy makers seem most concerned about catering to Big Business. While these firms can create lots of jobs (think of McDonald’s plans to hire 50,000 this year), at the same they are also laying off lots of workers. The net: large corporations do not move the employment needle.

Big Business does, however, employ Washington lobbyists and donates heavily to the campaigns of incumbents, both Democrats and Republicans. So it’s not surprising that government policies favor bigness and that presidential candidates look for photo ops at Boeing and Caterpillar production facilities.

That needs to change. Here are four ways to encourage more start-ups (and the jobs they create):

  • State and local governments should make it easier to start a business by fast-tracking the paperwork and permits a new enterprise needs to open its doors. Anthony Randazzo, director of economic research at Reason Foundation, argues: “Local leaders should work to limit red tape, simplify the regulatory process, and do everything possible to create a hospitable licensing climate for business.”
  • State and local business taxes and fees should be kept as low as possible. Early-stage companies should be funding growth, not government. Communities that want to attract start-ups should also make sure commercial property taxes are reasonable.
  • Encourage investors to put money into (always) risky start-ups through lower marginal tax rates on long-term capital gains at both the state and federal level. Harvard Business School professor Josh Lerner (in his Boston Globe op-ed “Creating small business jobs“) noted that numerous academic studies showed that low marginal tax rates on capital gains was “one of the most critical contributors to the entrepreneurial environment.”
  • Encourage loans to early-stage businesses and small firms through federal guarantees or relaxed loan-to-capital ratios for the Small Business Administration (as recently proposed by former President Bill Clinton).

While these steps alone won’t restore employment to pre-Great Recession levels, by spurring entrepreneurial activity they should help in generating jobs. It’s time to think small.

Copyright © 2011 Jefferson Flanders
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