The best climate for entrepreneurs: Part II

December 15, 2011

The Autumn 2011 edition of City Journal includes three articles on the subject of businesses “fleeing senseless regulations and confiscatory taxes.”  The authors are making the case for their preferred urban policies, and they single out one state in particular, but the points raised are relevant in the broader context of regional and national economic development.

In Unleash the Entreprenuers, Edward Glaeser argues that “Bad policies are holding back the ultimate job creators.”

Such policies ignore a simple but vital truth: job growth comes from entrepreneurs—and public spending projects are as likely to crowd out entrepreneurship as to encourage it. By putting a bit more cash in consumers’ pockets, the tax cuts in the stimulus package may have induced a bit more car- and home-buying, but the next Steve Jobs is not being held back by too little domestic consumer spending. Tax credits for home buyers and the infamous program Cash for Clunkers encourage spending on old industries, not the development of the new products that are likelier to bring America jobs and prosperity.

Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy. The people who make creative leaps to solve that problem are entrepreneurs. If we want to bring America’s jobs back, our governments—federal, state, and local—need to tear down barriers to entrepreneurship, create a fertile field for start-up businesses, and unleash the risk-taking innovators who have always been at the heart of our economic growth.

In The Long Stall, Wendell Cox contends that “California’s jobs engine broke down well before the financial crisis.”

Economists usually see business start-ups as the most important long-term source of job growth, and California has long had a reputation for nurturing new companies—most famously, in Silicon Valley. As Chart 1 shows, however, this dynamism utterly vanished in the 2000s. From 1992 to 2000, California saw a net gain of 776,500 jobs from start-ups and closures; that is, the state added that many more jobs from start-ups than it lost to closures. But during the first eight years of the new millennium, California had a net loss of 262,200 jobs from start-ups and closures. The difference between the two periods is an astounding 1 million net jobs.

In Cali to business:  Get Out!, Steven Malanga points out that not only has California lost a net 124,000 jobs to relocation since 1994, but even its vibrant early-stage ecosystem creates most of its jobs out-of-state.

California isn’t creating jobs in other ways, either. It generated just 285,000 more jobs from new businesses than it lost to business failures, placing 29th in the country (first-place Florida gained 2.4 million net jobs). What’s particularly disturbing… is that nearly none of those net jobs were created between 2000 and 2008, meaning that start-ups haven’t contributed to California employment for more than a decade

California’s defenders argue that the state continues to incubate cutting-edge companies in places like Silicon Valley, where investment remains vigorous, thanks in part to the area’s muscular venture-capital industry. And it’s true that California entrepreneurs and early-stage firms still get one-third of all venture funding nationwide. Unfortunately, if those firms actually succeed and start creating jobs, California has difficulty cashing in. In 2007, California-based Google built a new generation of server farms not in its home state but in Oregon, employing 200 people. The following year, one of California’s most successful tech companies, Intel, opened a $3 billion production facility in Phoenix, Arizona. Earlier this year, eBay, based in San Jose, said that it would add some 1,000 back-office jobs in Austin, Texas, over the next decade.

Malanga goes on to identify four areas in which the state has sprayed “startupicide” on the economy: “suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns, if not downright hostile to them.”  More on that in Part III – tomorrow.

 

UPDATE 12/31/11:  The best climate for entrepreneurs,  Part I and Part III

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