The real jobs machine: Entrepreneurs
By Robert J. Samuelson
Monday, October 4, 2010
If you're interested in job creation -- and who isn't these days? -- you should
talk to someone like Morris Panner. In 1999, Panner and a few others started a
small Boston software company called OpenAir. By 2008, they sold it for $31
million. The firm had then grown to about 50 workers. It turns out that
entrepreneurship (essentially, the founding of new companies) is crucial to job
creation. But as Panner's experience suggests, success is often a slog.
What's frustrating and perplexing about the present unemployment is that the
U.S. economy has long been a phenomenal jobs machine. Here's the record: 83
million jobs added from 1960 to 2007 with only six years of declines (1961,
1975, 1982, 1991, 2002 and 2003). Conventional analysis blames today's poor
performance (jobs are 7.6 million below their pre-recession peak) on weak
demand. Because people aren't buying, businesses aren't hiring. Though true,
this omits the vital role of entrepreneurship.
In any given year, employment may reflect the ups and downs of the business
cycle. But over longer periods, almost all job growth comes from new
businesses. The reason: high failure rates among existing firms. Even
successful firms succumb to threats: new competition, products or technologies;
mature markets; family feuds and the deaths of founders; shifting consumer
tastes; poor management and unprofitability. A company founded today has an 80
percent chance of disappearing over the next quarter-century, report Dane
Stangler and Paul Kedrosky of the Kauffman Foundation.
True, some blue-chip firms -- the Exxons and Procter & Gambles -- endure.
Fourth-fifths of the "Fortune 500" were founded before 1970, note Stangler and
Kedrosky. But they are exceptions, and many brand names have died: Pan Am (once
the premier international airline), Digital Equipment (once the second-largest
computer maker) and Circuit City (once a leading consumer electronics chain).
The debate over whether small or big firms create more jobs is misleading. The
real distinction is between new and old.
American workers are roughly split between firms with fewer or more than 500
employees. In healthy times, older companies of all sizes do create lots of
jobs. But they also lose jobs, as some businesses shrink or vanish. On balance,
job creation and destruction cancel each other. All the net job increases occur
among start-ups, finds a study of the 1992-2005 period by economists John
Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of
the Census Bureau. Because most start-ups are necessarily small, this gives a
statistical edge to tinier firms in job creation. But, the study says, the
effect entirely reflects the impact of new businesses.
To be sure, entrepreneurship has a downside: booms and busts. Remember the
dot-com "bubble." But more damaging, says Panner, are widespread popular
misconceptions about what entrepreneurship is and isn't.
Start with the Blockbuster Myth: Success involves creating huge enterprises a
la Google that transform how we live. In reality, "most ventures don't change
the world," says Panner. They're unknown companies providing highly specialized
goods and services, plus restaurants, auto repair shops and many everyday
businesses. There are more than 500,000 start-ups annually, report Haltiwanger,
Jarmin and Miranda. The number must be large to make an impact on the 155
million-person labor force.
Second is the Inspiration Myth: Most start-ups spring from some epiphany
suggesting a new product or technology. Wrong. Gee-whiz moments are few.
Companies continually change plans. OpenAir ditched its original idea, which
drew scant customers. "You can't do anything until you meet someone's needs,"
says Panner. Discovering what works is exhausting, frustrating and chancy.
Failure rates are high; half of new firms die in five years.
And, finally, the Incentive Myth: It's necessary to keep tax rates low, so
entrepreneurs can reap huge rewards for their time, sweat and money. Well, this
may be true, but it misses a parallel truth: government disincentives to
entrepreneurship. Panner, a registered Democrat, criticizes complex accounting,
employment, and health-care regulations imposed by federal and state agencies
that consume scarce investment funds and time. The fragmented system of
business oversight imposes a bureaucratic bias, perhaps unintended, on
start-ups. Any one rule or tax may seem justifiable, but the collective effect
can be crushing.
It's all about risk-taking. The good news is that the entrepreneurial instinct
seems deeply ingrained in the nation's economic culture. Americans like to
create; they're ambitious; many want to be "their own bosses"; many crave fame
and fortune. (Panner is already involved with a new start-up, TownFlier. It has
five employees.) The bad news is that venture capital for start-ups is scarce,
and political leaders seem largely oblivious to burdensome government policies.
This needs to be addressed. Entrepreneurship won't instantly cure America's
jobs' deficit, but without it, there will be no strong recovery.
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