Jay Reding.com

Getting To A Real Stimulus

Carl J. Schramm has a great piece on why the real focus on stimulating the economy should be on growing the entrepreneurial class:

Only private enterprise — in particular high-growth start-ups — will create the jobs and the wealth to right America’s listing economy. That is, if we let them.

What our economy most needs is another outbreak of entrepreneurial energy. It is waiting to happen all around us. As people face layoffs, many take with them wonderful ideas for entirely new products and services. Layoffs are tough, but they need not spell doom. The average age of those who found high-tech companies in this country is 39. In fact, twice as many founders are older than 50 as are younger than 25. The end of one career can be the beginning of another.

Some people getting pink slips might have ideas that could become entire new industries. Indeed, some of America’s largest and most successful firms were started in recessions or bear markets or both — including General Electric (founded in the wake of the Panic of 1873), IBM (started in the last year of the recession that followed the Panic of 1893), United Technologies (same year as the 1929 crash), Microsoft (1975 depth of “stagflation”) and Guess (1981, worst post-World War II recession to date).

He’s absolutely right—in a normal recession, the way to rebuild is through what Joseph Schumpeter called the process of “creative destruction”. Basically, the old system that had failed is replaced at the grass roots with a new system—new businesses, new ways of doing things, new technologies. Those new businesses form the basis for not only an economic recovery, but a stronger economy.

That is, so long as government doesn’t try to prop up the old, unsustainable system.

Schramm is right: what we so desperately need now is not more bailouts, but more creative destruction. The seeds for our economic renewal are being planted all around us. The future is not with General Motors, it’s with Tesla Motors and Aptera Motors. There are a million garage inventors out there who right now are creating advances that will fundamentally change our world.

34 years ago on this date, a group of these inventors met in Menlo Park, California. This was deep in another recession. They were visionaries and dreamers who didn’t have the backing of government research programs or big corporations. They were the Homebrew Computer Club, and if that meeting had never happened, your iPod, iPhone, and probably even your PC would likely never had existed.

Now, imagine an alternate reality in which the government, concerned about the very real environmental impact of all these people working with heavy metals and dangerous components, decided to heavily regulate or even ban their use. The only way to build a computer would be to get a government license and go through an elaborate set of “safeguards” to prevent any potentially hazardous materials from being introduced into the environment. There would, of course, be major fines for violating these rules. If a young Steve Wozniak’s first Apple I prototype fizzled, it would cost him $25,000 to properly dispose of it.

Would Wozniak and Jobs have gone on to found Apple? Would the Mac I’m using to write this post have existed? Almost certainly not. Our world would have no iPods, no iPhones, and the Internet would remain a military communications network accessible only be a handful of tightly controlled machines. The microcomputer revolution would have been strangled in its crib.

The hypothetical government regulations weren’t all that unreasonable—early computers were filled with all sorts of dangerous contaminants, from lead to PCBs. One could have made a perfectly reasonable case for doing exactly what the government did in that hypothetical—and people do much the same all the time.

Yet the results would have been a much weaker economy and a much less prosperous world. Without the Homebrew Computer Club, there would have been no Apple Computers—and Apple employs tens of thousands of Americans today.

That is why we need entrepreneurs in this country. That is why a top-down program will never work. When government picks winners and losers, they will inevitably pick some of them wrong. In fact, they are quite likely to get all of them wrong. The “winners” in a top-down system will be the firms with the most political clout. Such a system rewards the ones with the most lobbyists, not the best ideas.

Right now businesses are scaling back. It’s not just Obama’s promise to increase the highest marginal tax rates, it’s also his promise to raise the cap on FICA and reduce the phase-outs on crucial deductions. Add to that an increasing state and local tax burden, and the very class of people most likely to give us those future jobs are hurting and expecting to hurt even more.

A real stimulus would be to get government as far out of the way as possible. That means government should promote innovation from the bottom up rather than the top down. We need more tax credits for American small businesses—the employers of half of the American workforce. We need fewer painful regulations that that end up hurting entire industries. We need to ensure that people like those visionaries who met in Menlo Park 34 years ago have a chance to bring their dreams to fruition.

Scramm goes further with even more substantive ideas for beating this recession: a payroll tax holiday, exempting new business owners from capital gains, cross-state purchasing of health plans, and other very strong and very achievable ideas for rebuilding this economy. These are ideas that should take precedence over yet another top-down bailout of industries that have already failed.

Creative destruction is really just creative reconstruction. America needs to look forward, not try to prop up a system that just isn’t working. Government is the friend of big business, and efforts to regulate benefit those with the biggest lobbyists who can influence the rules and grease the right palms. If we want a better future, it will come not from the top down, but from the bottom up. Schramm is right: entrepreneurs are the key to getting out of this mess. If we’re not going to give them the opportunity to succeed, then we are potentially losing the chance for the next Apple, Microsoft, or even General Electric to transform our future for the better.

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