The Guardian Unlimited, September 24, 2012
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Those watching the Republican convention or listening to campaign pitches by Governor Romney or Representative Ryan could hardly have missed the endless glorification of entrepreneurs. The entrepreneur holds center place in modern Republican folklore.
No reasonable person can question the importance of entrepreneurs in our economy. We need them to create new businesses and jobs. Of course we also need schoolteachers, firefighters, auto mechanics and custodians. The question is do we necessarily need more entrepreneurs, and if so, what policies should we pursue to persuade more people to start businesses.
There is more than the usual amount of silliness around discussions of entrepreneurs and small businesses and it infects both political parties. While it is easy to point to the Apples, the Googles and other recent upstarts that have grown into large successful companies, the vast majority of new businesses fail within their first decade of existence. At the most immediate level, more entrepreneurs means more failures. It is not obvious that this is good either for the economy or for the would-be entrepreneurs.
If we make it easier for people to become entrepreneurs then we should expect many more failures. The failure rate of the people who are induced by new government policies to become entrepreneurs will almost certainly be even higher than the average for the current group of entrepreneurs. This could mean that we will be looking at a 10-year failure rate of 90 percent or higher among the people who are persuaded to start a business with our new more entrepreneurial friendly policies. This is not a good story for either the newly created entrepreneurs or the economy.
Starting with the former, the entrepreneur glorifiers tell us about people pursuing their dreams. Those starting new businesses often exhaust their savings, take out a second mortgage on a house, borrow to the limit on credit cards and hit up family and friends for the money needed to get their business off the ground. Many leave stable well-paying jobs with promising career paths. They then work 70, 80, or even 100 hour weeks. Sometimes they can go years with a day of vacation or other leave, neglecting their friends, family, and health in the process.
When the end result is a thriving company that provides a good product or service, this is perhaps all worthwhile. But when the end result is bankrupt company, which will much more frequently be the case, the equation doesn’t look so good. Our entrepreneur may find him or herself in a situation where they are unemployed with no savings, and possibly frayed relations with friends and family.
Those who think we should have more entrepreneurs want to see more people end up in this spot. That isn’t their intention, but it is an inevitable result of more people starting new businesses. Starting a business may be many people’s dream, but not every dream should be pursued. (How many boys grow up dreaming of being an NFL quarterback?) The reality is that many people are not very good at business and will fail no matter how hard they try.
Even if additional entrepreneurship may prove to be bad news for the failures, won’t it help the economy? The glorifiers of entrepreneurship tell us that we need new businesses to create jobs and fuel productivity growth. According to one widely cited study by the Kauffman Foundation nearly all the job growth over the last three decades came from new businesses, with the firms in existence as of 1977 having virtually no net gain in employment.
This argument involves some unusually sloppy reasoning. Suppose we accept the study’s conclusion, does it follow we need more new firms? What if we discovered that all the new jobs in the last three decades were in firms that were located west of the Mississippi? It doesn’t follow that we would get more jobs in the future by taxing the firms located east of the Mississippi to subsidize those that are west of the river.
In effect this is what the boosters of entrepreneurism would have us do. They would like to have subsidies of various forms, whether it involves lower tax rates, subsidized credit, or reduced regulatory oversight in order to make it easier for people to start new companies.
While these policies may at first appear to be free lunches all of them implicitly impose costs elsewhere. In the case of lower taxes, other businesses or individuals will have to make up for the reduced revenue. Lower cost credit for new businesses, means higher cost credit for others. And reduced regulatory scrutiny, for example in the Jumpstart Our Businesses bill, will make it easier for businesses to prey on ill-informed investors. By imposing higher costs on existing businesses and individuals, these measures will slow economic growth and job creation.
When the capital obtained by ill-conceived business ventures is then wasted it has the same impact on the economy as if the government spent the same money on some hare-brained bureaucratic scheme. Anyhow who remembers the Internet boom of the late 90s should understand how start-ups can waste money and resources.
In short, it’s great that we have people who want to take the risks to become entrepreneurs. It is also great that we have people who are willing to work as teachers and custodians. The notion that more entrepreneurship is necessarily better does not pass the laugh test. The people pushing this line have not bothered to do the necessary homework to make a credible argument.