The Comeback (8 page)

The news these days is filled with stories about how small business (defined by the federal government as firms having fewer than five hundred employees) is more responsible for driving job creation compared to larger businesses, and this is indisputably true. According to the U.S. Small Business Administration (SBA), small businesses account for a full 50 percent of total U.S. employment. Moreover, small businesses account for more than two-thirds of net new job creation.

I know firsthand the importance of small business in employment and job creation: 80 percent of the members of the Consumer Electronics Association are small businesses, and the International CES is similarly dominated by small businesses. But yet, company size is not the full story of job creation.

A 2010 study by the prestigious National Bureau of Economic Research concluded that only certain types of small business are the primary job creators:

There’s been a long, sometimes heated, debate on the role of firm size in employment growth . . . The widespread and repeated claim . . . is that most new jobs are created by small businesses . . . However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation.
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Similarly, another 2010 study from the Kauffman Foundation “shows that without startups, there would be no net job growth in the U.S. economy. This fact is true on average, but also is true for all but seven years for which the United States has data, going back to 1977.” The report concludes:

All other ages of firms, including companies in their first full years of existence up to firms established two centuries ago, are net job destroyers . . . in terms of the life cycle of job growth, policymakers should appreciate the astoundingly large effect of job creation in the first year of a firm’s life.
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The evidence of the job creation power of start-ups is right in front of our eyes and those of our policy makers. The implication is that government should be doing all it can to incentivize start-ups, as opposed to spending billions on subsidies and bailouts for existing large firms that, in the end, will not lead to one net American job. As summarized recently by Harvard Business School Professor Bill George:

Many of the great job creators of the past 25 years are companies that were barely visible in 1980 or even nonexistent: Target, Home Depot, Starbucks and Amazon in the retail field; Apple, Intel, Microsoft, Dell, Google, Oracle and Cisco Systems in information technology; and Genentech, Amgen, Stryker and Medtronic in medical technology. All of them were founded by entrepreneurs and are run by innovative leaders. Their ingenuity created the jobs boom in those years and enabled them to dominate global markets for their products.
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Moreover, the direct employment generated by companies like this doesn’t measure their full impact. For example, Apple directly employs thousands of Americans. In addition, it indirectly creates job opportunities for many more, with hundreds of thousands of unique iPhone, iPod, and iPad, applications created outside Apple. More, large U.S. companies spend an average of $3 billion on services from small companies, according to a 2010 study by the Business Roundtable.

So the more complete story of job creation is that large companies, smaller businesses, and business start-ups are each an important generator of jobs, and innovative start-ups in particular are the most powerful generators. These start-ups are built by entrepreneurs who have a better idea, the courage to take calculated risks, the ability to build a great team, and the leadership to build a great company. Entrepreneurs, even those who may fail, even many times, are a rare breed and a national treasure. For our economic future, our national policies must encourage and even celebrate entrepreneurship and innovation.

But tragically, business leaders in this country are all too often demonized by politicians and the media, who also proclaim that the government can create jobs. This mind-set, along with government actions inconsistent with business creation, are hurting our entrepreneurial lead in the world.

This isn’t just my opinion. In September 2010, the Small Business Association (SBA) published a major study that examined thirty-one factors affecting entrepreneurship in seventy-one countries around the globe.
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It found that the U.S. ranked third highest (behind Denmark and Canada). Although the SBA said that America’s performance remained “strong,” it issued a warning:

The United States’ apparent weakness in the tech sector and its lack of cultural support for entrepreneurship, coupled with lack of high-growth business, can be traced to a number of sources. Chief among these are the changing political environment and international volatility, the bursting of the tech sector bubble of the 1990s, the recent recession, and the improving performance of other countries.

Most alarmingly, the SBA found that the reality of America’s place “as a land of opportunity and as the Mecca for individuals wanting to do something new and different seems to be somewhat challenged by the facts.” In particular, the report found:

Cultural support for entrepreneurship and the American youth’s perception of entrepreneurship as a viable career choice seem to be limited. Firms’ performance in terms of growth and employment generation is not as strong, and the tech sector—the beacon of recent U.S. entrepreneurial success—is seen to have a lower score than the sample averages.

Similarly, a new book examining the Israeli economic miracle found that it has the world’s highest density of technology-driven start-ups. Further, Israeli start-ups captured more venture capital investment per capita than any other country: “2.5 times the U.S., 30 times Europe, 80 times India, and 300 times China.”
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The authors specifically attribute this performance to an Israeli culture that fosters entrepreneurship and innovation.

Earlier, in
chapter 3
, I expressed my firm belief that the factors responsible for American exceptionalism are the reason that the U.S. has been the world leader in innovation. It follows that our national policies should seek to preserve and strengthen those factors, and many specific policies would necessarily follow from such a strategy. My personal preferred guidelines for specific policies include the following:

Stop penalizing investments in start-ups.
Some twenty years ago, virtually all private venture capital funding was directed into U.S.-based companies, but now more than half of such funding flows to foreign firms. What changed? Our federal government enacted policies making it less favorable for investment, while other countries encouraged investments. Our corporate tax rates became the second highest among developed countries, diminishing the returns to investors. The Sarbanes-Oxley law imposed new costs on business. Exiting investments became more difficult as going public became less desirable. Sarbanes-Oxley imposes relatively large costs on small public companies. More, public companies are catnip for plaintiffs’ lawyers seeing quick and lucrative returns after any sudden change in share price. To encourage new investment, we need to modify Sarbanes-Oxley, restore integrity and rationality in our legal system, and lower corporate tax rates.

Direct any public funding of start-ups by private investors, not by government bureaucrats.
Government employees generally are not at all qualified to make risky business investment decisions. Moreover, as shown in the failed 2009 stimulus package, government decisions invariably direct spending based on political impact criteria. I do not advocate any government spending of this type, but if politicians require taxpayer funding of start-ups, all specific investment decisions should be made by private venture capitalists with proven track records who would be required to share in the investment, risks, and rewards of their decisions. Government at most might prescribe targeted technologies. Interestingly, Josh Lerner, another Harvard business professor, argues that even government programs to stimulate bank lending are not relevant to start-ups, because entrepreneurial ventures cannot afford the financial burden of paying interest on loans.

Take easy unionization off the entrepreneurial table.
As risk takers, entrepreneurs must have the ability to make fast decisions about what their companies do and how they do it. Unions inherently slow down and often inhibit fast action. This is exacerbated by proposals such as “card check” that allow sudden unionization without confidential balloting and that allow government arbitrators to set working conditions as well as work rules that drive entrepreneurs to seek more business-friendly host countries and take potential jobs with them. The Obama Administration’s policies requiring unionized or “prevailing wage” government contractors add costs and reduce business incentives for struggling entrepreneurs. Closing off large government contracts to entrepreneurs would have had dire consequences in most of the wars the U.S. has fought.

Regrettably, until unions recognize that workers’ interests, as with the nation’s interests, lie with greater innovation and entrepreneurship, they represent a formidable barrier to those goals.

Let any company fail, whether large, small, or entrepreneurial.
At its best, the free enterprise system is impartially rational in allocating investment, rewarding smart innovation, and promoting economic growth and job creation. Unfortunately, when political calculations intrude, outcomes are usually disastrous. The most recent major examples are the financial bailouts of GM and Chrysler, which not only wasted billions in taxpayer funds but were primarily motivated by an unprecedented gift to the pro-administration unions which suddenly were lifted ahead of the line of private creditors.

Billions of dollars in debt, Ford is further burdened by competing against Chrysler and GM, especially since the government wiped out their massive debts. This means Ford must
pay several hundred million dollars in annual interest on its debt, while GM and Chrysler have little reason to invest.

Despite this, Ford stands as one of the most innovative and transformational companies of our era. It has shifted from a car company to a technology company. With a Ford F-150, a small business owner working construction can use an onboard computer, track tools, maintain supplies, and build efficiently.

Ford is one company that has not only innovated; it has also captured America’s sense of fairness. Many Americans, disgusted at the car bailouts but wanting to buy an American company car, have turned to Ford and are thrilled by what they see.

For this reason, we have eagerly invited Ford CEO Alan Mulally to give the keynote address at International CES three times. Before Ford, Mulally headed Boeing, and many scoffed when a non-car executive was chosen to lead Ford. A board’s selection of a CEO is its most important task, and the Ford Board proved innovative by thinking outside the Detroit box. Mulally is not only an affable and articulate leader, but his vision for Ford, his refusal to seek a bailout, and his shift of Ford to a technology company have proved to be a winning strategy. By the summer 2010, Ford revenues were up 30 percent from the same period a year ago.
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Another less-noticed consequence of the GM and Chrysler bailout was the unprecedented executive branch intervention into the process of bankruptcy and creditor rights. It may seem inconsequential, but those who lent Chrysler and General Motors billions of dollars, secured by a claim on the U.S. assets, were thrown overboard in favor of unions who essentially took ownership of these companies thanks to the Obama Administration’s intervention. Nothing in the law gave the unions a more senior claim, but the White House intervention rushed through a bankruptcy reorganization, which gave the union rights and ownership over bondholders that had no principled basis in law and instead reeked of political payback for union support.

There is seldom a good reason for government preventing a business failure, and the default policy should be to let the free market work its will.

Make economics, business, and entrepreneurism studies compulsory in school curricula.
At one time, reading, writing, and arithmetic marked the education of our populace. Over time, we added valuable requirements in subjects like history and geography. But over the last several decades, the education pendulum has swung toward subjects that have a tenuous relationship to good education and citizenship. As long as taxpayers are funding education at any level, we must educate our future generations about the true nature of their economic futures. They need to learn that private business, fact-based investing, innovation, and entrepreneurism will determine their own standards of living and the economic and political health of our country. Illiteracy in basic economics and entrepreneurism is a certain recipe for national failure.

Ensure that business tax rates are transparent and predictable.
Uncertainty paralyzes decision-making in every realm of human activity. In our current political environment, business tax rates are being driven by ideological, not economically rational, considerations. As a result, entrepreneurs, their potential investors, and their potential customers all hesitate
to make commitments. Although I hate to say so, even assured and measurable increases in marginal tax rates can be preferable compare to total uncertainty. It is another penalty that we suffer from when politics and ideology are directing our national policies.

Change tax laws to favor investment over debt.
Our nation has been hurt as existing businesses employing millions of Americans have been bought and decimated by leveraged investment fund firms. These firms borrow heavily to purchase the going concerns, taking advantage of favorable income-tax-deductibility treatment of debt, and so turn a quick profit by firing workers, siphoning cash from the company, and letting it go under or trying to resell it quickly. A shift away from the tax advantage for debt would end many of these corporate dismemberments and job killers, and potentially promote additional investment for growth. If tax laws cannot be changed to favor investment, they should at minimum be neutral between them.