- The Washington Times - Sunday, August 9, 2009

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.

It’s unrealistic to expect a reversal of these policies, despite their negative impact on entrepreneurship. Still there are innovative ideas for promoting entrepreneurship that stimulates growth.

It may come as a surprise, but some of the most exciting work in entrepreneurship is happening abroad. In an increasingly globalized world where ideas are not restricted by borders and free trade is more ubiquitous, this makes sense.

Recently, the Hoover Institution co-sponsored a conference titled “The How and Why of Promoting Entrepreneurship Abroad.” The event brought together diplomats, economists, foreign-born entrepreneurs and venture capitalists to discuss the opportunities and barriers for starting businesses around the world. Several proposals were identified.

First, in countries with minimal entrepreneurialism — where oligarchic regimes resist widespread reform — Special Economic Zones (SEZs) are a viable option. A different set of rules, institutions, and intellectual and physical property rights are created to encourage new businesses geared toward export-production and driven by market forces. An ecosystem built for trade benefits entrepreneurs.

Second, where no legal framework for contracts, transactions, etc. exists, business languishes. Internet proliferation may address this barrier. Web-site owners have a vested interest in maintaining order on their sites and consequently create their own institutions that promote property rights and contract laws. Cell phones and laptops may do more for legal reform in developing nations than ever imagined.

Third, a unique model for promoting entrepreneurship in Italy has great potential for replication. The Partnership for Growth, spearheaded by the U.S. Embassy in Rome, features four major initiatives designed to: expand capital markets, strengthen intellectual property laws, connect entrepreneurs with academics whose profitable ideas and innovations currently remain undeveloped, and provide future entrepreneurs with internships in the U.S. where they learn to emulate successful entrepreneurs.

Fourth, immigrants found a disproportionate share of start-ups in the United States. Under current laws, however, high-skilled immigrants are forced to return home if unemployed and are prevented from starting enterprises in the U.S. This reverse brain drain hurts American interests and global welfare since many immigrants return to countries lacking political and economic environments conducive to entrepreneurialism. Foreign-born nationals should be free to promote entrepreneurship both here and abroad.

The key lessons about what works, what doesn’t, what helps and what hinders entrepreneurship around the world are equally true in the U.S. The four proposals reflect foundational principles inherent to our nation’s continued success in fostering markets, creating unprecedented prosperity and stimulating innovation.

Special economic zones get at the imperative of establishing secure property rights. Internet proliferation demonstrates the necessity of rule of law. The Partnership for Growth highlights the impact of accountable institutions. And immigration reform acknowledges the significance of individualresponsibility and liberty.

In the end, as keynote speaker and president of Oracle Charles E. Phillips noted, “the first principle in government involvement in innovation should be to adopt the Hippocratic oath — do no harm.” Set the ground rules and then let individuals create … ideas, products, firms, jobs and prosperity.

Jeffrey M. Jones is an assistant director and a research fellow at the Hoover Institution at Stanford University.

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