Can Washington Wake Up?

Washington needs to wake up to our stalling economic growth.

Two professionals working together on documents

New business formation and job creation have declined significantly in recent years.

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That an extension of benefits for the long-term unemployed – currently stalled in the Senate – is even still on the table is bleak testimony to how rusty is the American jobs machine. Tea party members in the House are right that the president's policies have had little or no effect, but they are hardly bristling with ideas themselves. They only know how to say "No." More creative thinking is necessary to stop the rot when the unemployment rate continues at 13 percent (counting people who have given up looking or are underemployed), and, on top of that, we have wage stagnation.

Wage growth has indeed been slow to bounce back. Bloomberg Businessweek reported recently that American men who work fulltime year-round earned less in real terms in 2012 than they did in 1973 – median earnings of about 4 percent less, adjusted for inflation. Women earned less than they did in 2001, and real median household income was lower in 2012 than in 1989. In other words, as The Economist put it, even those with work are getting "a smaller morsel of a smaller slice of a slow-growing pie."

This nation should not have to experience, month after month, more discouraged unemployed Americans leaving the workforce than finding jobs. John Dearie and Courtney Geduldig, authors of "Where the Jobs Are: Entrepreneurship and the Soul of the American Economy," pointed out in The Wall Street Journal last month that November was the 43rd month in a row in which that was the case. Some four and a half years after the Great Recession ended, nearly 24 million working-age Americans remain jobless or are working part-time involuntarily or have left the workforce completely.

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Dearie and Geduldig have described a historic crisis. It will not be eased by political invective nor by short-term palliatives. What is the best policy? The answer is new business formation. In writing an analysis for the Manhattan Institute, they cited research based on Census Bureau data by scholars at the Ewing Marion Kauffman Foundation that demonstrates that all net new job creation in 23 of the past 30 years "came from businesses less than one year old – true ‘startups.' New businesses, according to the research, create an average of 3 million new jobs annually, while existing firms of any age, type or size shed a net average of about 1 million jobs each year as some businesses fail and others automate, incorporate other technology, become more efficient or otherwise reduce head count."

But, they noted, new business formation and job creation have declined significantly in recent years. "In the year ending March of 2012, new businesses created 2.7 million new jobs, down 43 percent from the 4.7 million new jobs created by new businesses in 1999."

Why is this happening? In researching their book, Dearie and Geduldig took to the road to find out, and heard remarkably similar reactions from entrepreneurs across the country: There simply aren't "enough people with the skills we need." Our immigration policies, which keep highly skilled foreign brainpower out, "are insane." Securing financing, which has "always been a major challenge for entrepreneurs," has become even tougher since the 2008 financial crisis. Over-regulation is constraining start-ups. Tax complexity and uncertainty can wreak havoc on cash flow and "amount to mortal threats to new businesses." There is too much economic uncertainty emanating from Washington.

Too often in these negative days, every stumble by a new business is media fodder. There is little understanding among either the media or policymakers of start-ups' fragility and what it takes to get going; a third fail by their second year, and half by their fifth. We need policies that focus on nurturing new businesses, the authors argue, for without them we cannot create the jobs millions of out-of-work and underemployed Americans need.

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One approach they suggest is to provide startups with "substantial tax and regulatory relief during their critical first five years." They also think a five-year federal tax credit of up to $10,000 per year for new graduates in science, technology, engineering and math (STEM) fields would be a good bet. And we need to make sure that K-12 and college curricula are up to the task of equipping American students with 21st-century skills.