Despite the political rancor in Washington, there is a growing consensus that the U.S. economy cannot have a sustained recovery and grow rapidly over the longer run unless and until our entrepreneurial dynamism returns.
Historically, it has been firms less than five years old that have accounted for virtually all net job growth in this country. But America’s entrepreneurial engine is sputtering — the number of startups is down since the recession, as is the number of jobs created per startup. The economic repercussions will be severe and lasting if we don’t try to reverse this alarming trend.
Washington can certainly help change the tide–for example, by passing the bipartisan legislation the President asked for in his State of the Union to reduce taxes and regulation for startups and companies seeking to go public. But this is an election year, and we can’t count on quick action on even this sensible idea.
That doesn’t mean we’re out of ammunition. Ask most entrepreneurs about the policies that affect them most, and they’ll tell you it’s those made by states and localities. Sometimes they’re good ones, like when states offer one-stop shops, online and off, to register new businesses and obtain necessary (but limited) approvals after that.
Sometimes, though, bad policies can inhibit entrepreneurship. Take the case of a funeral home owner in Minnesota. He wanted to expand his business, which provides quality funeral services to low-income families, by opening up a second funeral home and hiring more employees. Unfortunately, his expansion plan hit a big road bump when he learned that state law would require him to build an expensive embalming room that he will never (and is not required to) use.
Such rules can make or break a small business. At a time when the country is searching for solutions to our chronic unemployment woes, states should be doing all they can to make it easier, not harder, for firms to start, hire employees, and grow.
The Kauffman Foundation and the National Governors Association have been studying what states can do to promote entrepreneurial growth — alternatives to offering beggar-thy-neighbor tax breaks and subsidies that “chase” firms from other states that don’t stay put for very long anyway. Following are a few suggestions:
First, states can further streamline their business registration procedures. The United States is now ranked 13th in the world in the ease of opening a new business and 72nd in the ease of young companies filing taxes. We can (and use to) do much better. The federal government can help here by stimulating a race to the top by funding a domestic Doing Business survey that would rank the states in these functions.
In this connection, states should consider copying Vermont, which last year introduced the nation’s digital incorporation law. This law allows companies to not only file all their incorporation documents online, but to conduct their business through digital means, such as social networks, wikis, and so on. Nevada is considering a similar step, and given the Internet revolution, it’s about time other states take the digital plunge.
Second, states can reverse the tide that now requires 20 percent of American workers to have a license before they can provide a service, up from just 5 percent in the 1950s. Two areas for special attention are medicine and law, where low-cost specialist providers do not need three or four years of expensive schooling to help consumers. Well-trained paralegals can handle routine legal problems (wills, no-contest divorces, many auto accidents and the like), and nurse practitioners, can provide quality care for many routine medical issues, at lower cost, and with greater efficiency, while letting more highly trained lawyers and doctors concentrate on the more complicated problems for which their training is required. Removing these legal obstacles will pave the way for more firms to enter these lines of routine business.
Third, states should ensure that the placement offices at their universities and community colleges expand their services to better meet the contemporary economy and their students’ interests. Rather than simply scheduling job interviews with potential employers at the end of students’ college terms, they should also offer real-time training, mentoring and networking to aspiring entrepreneurs on their campuses, students and faculty alike. The University of Miami has done this with great success through its LaunchPad program, which offers an alternative to students who may not want to work for a big company; or in too many cases, can’t find traditional employment due to these tough economic times. MIT’s Venture Mentor Service is another great example that has been replicated across many communities.
Fourth, speaking of state universities, there are two other steps that state governments can take to promote entrepreneurship and innovation. One is to encourage or require state universities to give greater freedom to faculty to license their inventions without having to go through campus bureaucracies (while giving their universities their rightful share of any royalties). Additionally, supporting commercialization education of faculty and students and other methods of speeding science to market would provide a better return on investment for taxpayer dollars. Faster commercialization helps consumers, universities, inventors, and ultimately, the economy.
More broadly, given the importance of an educated workforce for all enterprises, states should encourage innovative approaches to delivering higher education. Why not authorize “charter universities” along with “charter K-12” schools that would have greater freedoms and fewer rules to abide by in order to serve working adults or those in transition between jobs who do not have the luxury to go back to college full-time for four years.
After three years of anemic economic recovery, Americans rightfully want faster response from governments. States can help in that effort by fostering new business creation and growth that has been and will continue to be linchpin of our economy.
Robert E. Litan is vice president of research and policy at the Kauffman Foundation.