SOLUTIONS: Revitalizing American entrepreneurship

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By Jeffrey M. Jones

Every day we're reminded of just how bad this recession is. Unemployment remains high, efforts to stem foreclosures are failing, and according to a recent survey, our love lives are suffering — "nearly three in 10 Americans (29 percent) say the recession has 'added stress to,' 'strained,' or even 'ruined' their marriage or relationship."

It's doubtful the health care overhaul bumbling its way through Congress will improve the economy. Washington is distracted by visions of "Obamacare" at a time when our focus should be on revitalizing business.

One remedy we can count on is entrepreneurship. Research by the Kauffman Foundation and others makes a clear case for the positive impact entrepreneurs have on the economy.

Using U.S. Census Bureau data, researchers found that average yearly employment from start-ups account for 3 percent of total employment from 1980 to 2005. Without the introduction of new businesses, employment growth would have been negative during the period studied. As unemployment nears 10 percent, the value of entrepreneurship in providing employment is more relevant than ever.

Not only do start-ups share considerable praise for alleviating unemployment, but they also are, on average, more productive than their established counterparts. Economist Joseph Schumpeter outlined the concept of "creative destruction," where existing firms that fail to innovate, cut costs and become more efficient are replaced by new firms that increase productivity and drive long-term economic growth.

Entrepreneurs thrive in an environment where failure is tolerated. As Milton Friedman pointed out, "what we have is not a profit system; it's a profit and loss system. The loss part is just as important as the profit part. An entrepreneur might have a really good idea, it may work. But remember, you're gambling. That's what makes it exciting, and that's what makes it important. What rules out the mistakes is the possibility of making a loss."

The forces of the marketplace that drive companies to compete and individuals to create are enhanced, not dampened, during recessions. According to the study "The Economic Future Just Happened," "well over half of the companies on the 2009 Fortune 500 list began during a recession or bear market." Economic downturns are fertile times for start-ups. Why?

Specifically, high-skilled, unemployed people are willing to take a risk on a start-up company since there are few opportunities available. Recessions highlight inefficiencies in existing businesses and provide start-ups with a skilled labor pool seeking employment.

Entrepreneurship, if prioritized, can help end this recession. But in addition to our focus going astray, current government interventions work against the spirit and effort of entrepreneurs.

Last month, the minimum wage was increased to $7.25 (a 40 percent increase over the wage rate just three years ago) and will disproportionately affect small businesses. Simultaneously, support for big business is increasing. The cap-and-trade bill, instead of relying on permit auctions that would give entrepreneurs a chance to compete, grandfathers in established businesses. And the government bailouts of General Motors and Chrysler turn creative destruction into an uncreative scheme of subsidization, preventing the market from efficiently allocating resources.