article

01.23.11

Obama's Entrepreneur Problem

When the president tapped GE’s Jeffrey Immelt as jobs czar, he again showed a flawed bias for big companies over start-ups. Doug Schoen shows where the jobs are – and how to encourage them.

When the president tapped GE's Jeffrey Immelt as jobs czar, he again showed a flawed bias for big companies over start-ups. Doug Schoen shows where the jobs are—and how to encourage them.

President Obama's appointment Friday of General Electric CEO Jeffrey Immelt to head his new Council on Jobs and Competitiveness signals that he understands his re-election hinges on one issue: jobs and the economy. But just as importantly, it indicates a misplaced belief of where those jobs will come from.

In tapping Immelt as his "chief outside economic advisor," according to the New York Times, with a focus on reducing regulation and red tape, Obama seems poised to focus on competitiveness and economic growth in his big State of the Union speech tomorrow. With unemployment still well above 9 percent, that's a wise decision. According to a recent AP-GfK poll, 75 percent of American's rated the economy as "poor", in keeping with other surveys, and more than half disapproved of the president's performance on this issue.

Given this economic reality and political perception, however, Immelt, strikingly, is the wrong man for the job. Yes, GE is arguably America's greatest company, an industrial giant whose aegis runs from technology to aviation to finance, and whose stock has been on a roll, near a 52-week high thanks to profits that surged 51 percent from a year ago.

But how did Immelt and his team accomplish that? By large measure, jobs— specifically, eliminating them in this country. Since 2001, GE has shed at least 25,000 jobs domestically— and created an equal number or more overseas— while shuttering 29 plants in the U.S. over the last couple of years.  It's also worth noting that GE's financial arm received a multi-billion-dollar liquidity injection from the Federal Reserve during the 2008 financial meltdown.

My point isn't necessarily to single out Immelt. His actions are actually quite typical of corporate America right now, which is experiencing record profits as a result of cost (i.e. job) slashing. The larger problem could be see through President Obama's recent olive branches to big-company CEOs and at last week's state dinner for Chinese President Hu Jintao, attended Wall Street heavyweights like Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JP Morgan Chase—this White House clearly views a path to job creation and a stronger recovery through large companies.

Research, however, demonstrates that a big business focus is misguided—during downturns, it's start-ups, five years or younger, that generate the bulk of new jobs. Yet Democrats, and to be fair, Republicans, both speak in general terms about job creation without the bold policy actions that would encourage entrepreneurship to get the economy moving again.  

Indeed, the Republicans reaction to Immelt's appointment was both unconstructive and intemperate. Rather than argue for his own jobs plan, Senate Majority Leader Mitch McConnell, simply bashed Obama for the deficit and health care reform.  

How refreshing it would have been if Obama, or McConnell, instead cited Schramm's Law, a thesis developed by Kauffman Foundation President Carl Schramm that holds that "the single most important contributor to a nation's economic growth is the number of startups that grow to a billion dollars in revenue within 20 years." Specifically, Schramm says we need about 100 new, billion-dollar companies per year to establish an average growth rate of 3.3% or better—America's historic average growth rate.

Kauffman research shows that new firms—not necessarily small firms—have been responsible for almost all new job creation since 1980; young start-ups such as Microsoft, Genentech and CNN, now cornerstones of our society, were founded during recessions or bear markets.  In virtually every recession, it is the entrepreneurs that play the most important role in job creation—they pursue new business ideas, undertake risk, invest their own capital, and create new firms. Yet there is no strategy from either side of the aisle that details how to encourage such entrepreneurship, despite a proven toolbox.

So how can we foment start-ups? The most important policy solution would be providing incentives to entrepreneurs and small businesses, either via tax credits (such as encouraging high net worth individuals to invest in start-ups) or tax reductions (eliminating taxes on entrepreneurs during their first six months or a year, or a payroll tax holiday for new businesses).  In lockstep, the government could foster new companies by removing red tape and overly burdensome regulation, and easing patent rules that crowd out potential entrepreneurs and innovators.   At a minimum, a one-stop website could explains how to start a business in every state, providing entrepreneurs with all necessary paperwork and all relevant information on taxes, regulatory and business license issues.  

The government can also target its spending muscle more precisely, through more research grants—or through national and state-sponsored investment funds— for new and small businesses that develop new technologies, and increased investments in military research and development, which will help us maintain our military superiority in addition to creating private sector jobs.

But start-ups alone aren't enough. New companies need policies that encourage them to grow toward Schramm's billion-dollar target. Again, a lot of the reforms are structural. Reforming Sarbanes-Oxley, which cripples the ability for young companies to go public—and thus raise capital, versus dissolve prematurely, sell-out or merge—is also essential. Right now, this law imposes an estimate $4.36 billion hidden tax on public companies overall courtesy of onerous compliance, the kind of costs and headaches small companies can't handle. Before Sarbanes-Oxley, it took successful start-ups five years to go public; now, it's twelve.

Growing companies require a skilled workforce. The long-term perennials— science and math education in public schools, better training in the sciences and engineering and better rewards for strong teachers—are given. From a short-term policy perspective, however, we can tap In addition to improving the skills of our workers herie at home, we must promote more open-minded immigration policies to encourage the world's best and brightest to study, work, and start businesses here.  Over 40 percent of the growth of the Silicon Valley in the 1990s came at the hands of foreign-born entrepreneurs, and 5 percent of successful high-tech start-ups are founded or co-founded by immigrants.  To attract foreign talent, we need to reform our immigration policy and loosen our visa restrictions, granting citizenship for foreign students graduating from American universities and other immigrants who want to start new companies and create jobs.  These individuals provide unique skills, talents and abilities that go well-beyond what may be available in the labor market.   

And then there's tax policy, for these entrepreneurial companies, starting with an expansion of the federal research and development tax credit. Overall, we need to simplify and flatten our illogical tax code, starting with our complicated corporate tax, and its onerous 35 percent rate.  President Obama's Presidential Economic Recovery Advisory Board has brought this argument back to the forefront of our nation's discourse, saying in August that the current corporate tax has "deleterious economic consequences" and prompts investment "for tax reasons rather than for reasons of economic efficiency." 

The U.S. is the only major economy besides Japan and the U.K. that taxes multinational companies on worldwide income rather than on profits made at home, and although numerous deductions mean most companies pay far less than the statutory rate, the actual rate they pay still exceeds the rate of most other big countries (the EU averages 23.2 percent), notwithstanding the temporary investment breaks our government is currently offering.   

If our economy simply grows an extra half a percentage point this year, 3.5 percent instead of the projected 3 percent, the U.S. economy would add $518 billion in growth instead of $444 billion in 2011.  We can achieve this by focusing on real-world solutions that go beyond the less-than-constructive rhetoric and political posturing that is currently dominating Washington.

Douglas Schoen is a political strategist and author of the upcoming book Mad as Hell: How the Tea Party Movement is Fundamentally Remaking Our Two-Party System to be published by Harper, an imprint of HarperCollins on September 14. Schoen has worked on numerous campaigns, including those of Bill Clinton, Hillary Clinton, Michael Bloomberg, Evan Bayh, Tony Blair, and Ed Koch.