The real jobs machine: Entrepreneurs
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.