Unemployment is at an unacceptable 9.5%, and surely all of us have family and friends that are looking for jobs. The Bush and Obama administrations have made plenty of massive top down investments in our struggling economy via TARP, the automotive industry, the stimulus plan, and the most recent “jobs” bill to name a few, but those are proving not good enough to create enough new jobs and bring us out of our unemployment rut. And employment will eventually be what assures we are a healthy nation again. The key to true economic growth and our escape from the super recession is not from the top down, but the bottom up. Okay, I know that is easy to say, but let’s talk about how it can actually get done.
According to the U.S. Census Bureau’s BDS, about 20% of new jobs in a given year are created by startups with one to four employees, compared to 1.3% of new jobs from startups with 250-499 employees. Since 1980, startups have accounted for about 3% of yearly employment compared to 1.8% average employment growth. This means that without startups job growth in America would be net negative. Inc Magazine has also contributed a great article on the importance of investing in entrepreneurship and provided 16 ideas on how to do it.
I’m all aboard this entrepreneurship train . I’m convinced it’s going to take those people that love to cook and have stellar business plans to take the bold move of starting their own restaurants. It’s going to take those people that have great ideas for new online services but need the time to quit their job, hire a couple of people to help them, and focus to make their product a reality. It’s going to take family shops get a quarter million dollar loan to get the piece of equipment that will allow them to quadruple their output. It’s going to take individuals that have great ideas to have confidence in themselves and go out and do it. And they need support. What kind of support? Money.
Community banks need incentive to loan to people that have some, but not all, of the money they need to make their ideas reality. If someone has a good idea, they’re probably willing to take a risk, but money isn’t easy right now. People have ideas, and I believe that if they know they can get a federal match on their capital, or a lower interest rate on their loan from community banks, backed and insured for specific entrepreneurial purposes by the federal government, then we’ll be able to grow our way out of our current economic situation. I don’t necessarily think this is the end all be all to solving unemployment, but I definitely think the government can get a better bang for it’s buck than the $787 billion stimulus and not have to put the “created… or saved” qualifier at the end of its claims on the positive impact of the stimulus.
Some of you may think I’m crazy, and point to something like this article, which says that half of all new businesses close within four years and seventy percent close within ten. But I would point you to this Business Week article, which highlights a study that describes why many startups close. Specifically, it sites a study where only 5.3% of businesses studied failed do to bankruptcy during any one decade. It also notes that 70% of businesses are either profitable or break even over a lifetime, which leads to the idea that fewer businesses close due to losing money than simply moving on. And don’t forget my initial statistics describing just how much instant growth comes from young, small companies.
You may think that it just wouldn’t make that much of a difference. I disagree. If we currently have 14.6 million people unemployed at 9.5%, that means we have about 153 million people that work or want to work. Since three percent of employment is made up of startups on average, that’s 4.61 million people. So to double our startups, we’d reduce unemployment to about 6.5%. We can assume that people will leave jobs to take advantage of a startup opportunity, but considering five people are after every job that comes available, they can be replaced.
“But it will cost too much! We can’t loan money to every yahoo that wants to mow lawns for a living!” Wrong. The average startup costs about $10,000. To be conservative, let’s just say that the government will front the entire $10,000 every time, even though the idea is for government to match in order to ensure a sense of responsibility for the startup to succeed. At our doubled rate for startups, to spend an average of $10,000 per startup for all startups for two years, it would cost the government $184 billion, less than a quarter of the stimulus investment.
This is obviously a huge investment. But it’s a bottom up bet on the American will, and it will have an immediate effect. For control purposes, local entities could facilitate the match application process, local bank branches can be responsible for loan applications, and the program could start with a beta test, say of 6 months and $25 billion. After reviewing the early startups at six months, a supplementary decision could be made on the rest.
Well… What are we waiting for? You tell me.