Several of you have sent me the June 20, 2011 cover article from Time magazine on what they consider to bel the five myths about the economy.
The part of this article most relevant to all of us is this one:
Myth No. 5: Entrepreneurs are the foundation of the economy
Entrepreneurship is still one of America’s great strengths, right? Wrong. Rates of new-business creation have been contracting since the 1980s. Funny enough, that’s just when the financial sector began to get a lot bigger. The two trends are not disconnected. A study by the Kauffman Foundation found an inverse correlation between the two. The explanation could be tied to the fact that the financial sector has sucked up so much talent that might have otherwise done something useful in Silicon Valley or in other entrepreneurial hubs. The credit crunch has exacerbated the problem. Lending is still constrained, and the old methods of self-funding a business — maxing out credit cards or taking a home-equity loan — are no longer as viable.
Let’s dissect this paragraph to see what is really going on.
We need to start with the first line — “Rates of new-business creation have been contracting since the 1980s”. I contacted a few people I know who follow such statistics. It seems that there is some truth in the statistics they cite. A couple of long-term studies do show decline in net start-up rates. But the data does not suggest a steady long-term decline as the article in Time suggests. Rates have been in turmoil over this time period, with two periods of significant decline — one around 2000 when the dot.com bubble created an inflated number of start-ups which was followed by the dot.com bust — and another decline in start-ups began when the current recession began.
So whose fault is this decline? The evil financial sector’s, if believe Time’s interpretation. “The explanation could be tied to the fact that the financial sector has sucked up so much talent that might have otherwise done something useful in Silicon Valley or in other entrepreneurial hubs.”
However, before we go blaming those evil doers on Wall Street let’s remember one thing — correlation is not causation. The financial sector was riding high — due to some serious rent seeking behaviour on their part I might add. So they had money to spend for talent. But assuming that this is the same talent who would start businesses and create jobs is a bit of a stretch. Having taught in business schools on and off for about 30 years I can tell you that those students who have aptitude for the financial world are very different than those who tend to be drawn into entrepreneurship. It is not the one for one career choice substitution the article suggests.
There is another part of this quote that is even more annoying. It is clear that Time is buying into a myth of their own. The have bought the Scott Shane Myth that the only entrepreneurs who matter are those pursuing high growth, high potential ventures. Thought we had killed that myth off a while ago… . Guess some myths are hard to dispel.
And, oh yes, while we are blaming the financial sector for all that is wrong with the economy, let’s not only accuse them of starving babies and elderly, but of starving entrepreneurs of the credit they need. “Lending is still constrained, and the old methods of self-funding a business — maxing out credit cards or taking a home-equity loan — are no longer as viable.”
Wow. This quote is wrong on so many levels. Actually the largest source of financing has always been the entrepreneur’s own money and any funding they are able to raise from friends and family members. This accounts for about 85-90% of all funding. Very few entrepreneurs max out credit cards successfully to start a venture. While this makes for great theatre for journalists, it just does not happen that often and when it is used by an aspiring entrepreneur it is rarely successful.
And what about bootstrapping? Heck, even Silicon Valley has finally caught on to how creative one can be when starting a venture with little capital.
The surveys by NFIB and others clearly show that credit availability is not the problem. It is demand in the economy. If you want to find blame for that, let’s not start with the financial sector sucking out talent and credit, but let’s start with the giant sucking sound coming from a government that taxes too much and spends twice as much as they tax.
But let’s get back to the premise behind myth number five. Yes, start-up rates are down right now. However, it is wrong to conclude from this statistic that entrepreneurship is a useless tool for economic recovery.
Just the opposite. Since small business has led job growth coming out of almost every past recession it is time to redouble our efforts to spur new venture creation.
How do we do this?
- Cut taxes and create a simple tax system that does the one thing it is intended for — raising the money needed to fund the basic functions of government. Tax systems should not be a tool for social, economic, cultural or political engineering and manipulation.
- Cut red tape. We still regulate business with a broad brush that punishes small firms for the sins of a few very large companies.
- Celebrate economic success that is achieved through hard work and perseverance. Stop demonizing those who create wealth through the risk taking made possible by free enterprise. Make them the heroes that they are.
- Protect property rights. Stop the abuse of eminent domain. Stop the use of taxation for redistributing wealth. Stop basing policy on the assumption that government lets us have money and property out of the generosity of their hearts — they work for us, not the other way around. Property in this country is ours, not the government’s.
- Educate. Educate our children about economics, liberty, and free enterprise. Educate high school kids about entrepreneurship as a noble and viable career path. Educate adults on the tools and knowledge they need to successfully launch and grow businesses.
This economy is not in need of recovery. It is in need of rebuilding. We have had decades of misguided public policy that has slowly bled the entrepreneurial spirit and incentives for entrepreneurial risk taking out of our country.
It is a time for action. It is a time to commit to a long-term plan to rekindle the entrepreneurial embers that are fading in this country. Our best hope for the return of sustainable prosperity is to reignite the entrepreneurial fire in America.
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