Americans are in an angry mood not only because of rising inequality but because the economy has grown so slowly since the 2008 recession, at about 2 percent per year. Democrats tend to blame the aftermath of the financial crisis, Republicans the Obama administration.
But perhaps the most disturbing news comes from Northwestern University professor Robert Gordon in his new book, “The Rise and Fall of American Growth.” Gordon’s well-researched analysis shows that despite all the gee-whiz talk you may hear in places like Silicon Valley, the pace of innovation, the main driver of growth, has been falling since the 1950s. He sees nothing on the horizon to change that dismal trajectory.
One trend supporting Gordon’s pessimism is the 30-year decline in the “startup fraction,” or the share of all firms accounted for by young firms with at least one employee. Startups are important because they disproportionately account for the kinds of breakthrough innovations that drive economic growth: the telephone, the airplane, the automobile, computers and much software, air conditioning and Internet search, to name just a few.
The startup decline is not just a national problem, but a challenge we face in Wichita.
Our startup fraction was 12 percent in the late 1970s, below the national average of 15 percent. By 2011, we still remained below average: at 6 percent versus 8 percent for the nation.
In a new book I have just co-authored with the Kauffman Foundation’s Dane Stangler and former White House economic official Bo Cutter, “The Good Economy,” we make a cautious case for a national turnaround in startups, and hence growth as well.
Rapid advances being made in multiple related technologies – computing power, the “Internet of Things,” broadband speeds, cloud computing, mobile applications, artificial intelligence, robotics and nanotechnology – should generate new combinations of products and services that should greatly enhance growth, while lowering the barriers to forming and growing new businesses.
Moreover, as millennials move into their 30s, they reach the prime age group when research shows entrepreneurs are most likely to be successful.
Nonetheless, in case we’re wrong, two federal policy changes would promote more startups.
One would be to greatly increase the number of green cards for immigrant entrepreneurs. Comprehensive immigration reform is a political nonstarter for now, but concentrating on startup visas makes sense because immigrants historically have started businesses at higher rates than those born here, and they have founded a much greater share of successful tech startups (25 percent) than their share of the population (13 percent).
In addition, whatever one thinks about scaling back federal regulation – and I believe it should be done prudently – rules should be adjusted not only for the size of business, but also phased in for new business, as suggested in recent Kauffman Foundation publications.
It would be nice to hear more specifics like these from the presidential candidates about what they would do reignite startups.
Robert Litan of Wichita is an adjunct senior fellow at the Council on Foreign Relations and a former vice president at the Kauffman Foundation.