The Startup Act: A Proposal to Jumpstart the American Economy

It's time to re-start America by jump-starting our startup engines of growth. We have no time to waste.
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The US government has tried trillions of dollars of fiscal and monetary stimulus, and yet our economy remains stuck in low gear. The officially measured unemployment rate hovers around or above 9 percent, but millions more are so discouraged by the poor job market that they have stopped looking for work, while many others want to work longer hours but can't.

Much more conventional stimulus doesn't appear to be in the cards. The Fed has essentially said it has done all it can do, especially given the recent uptick in the inflation numbers. The Obama Administration has floated the idea of extending or even expanding the social security tax cut of 2010 for another year, but in light of the huge federal deficit there doesn't seem to be much enthusiasm for the idea on Capitol Hill. Before he announced he was leaving his post as the President's top economic adviser, Austan Goolsbee said it was now the private sector's turn to boost the economy, implying there is little more that the government could or would do.

Given the continuing turmoil abroad -- in Europe and the Middle East -- and with consumer and business confidence weak, it's hard to be optimistic that private businesses, now sitting on roughly $2 trillion in cash, will suddenly get the urge to begin hiring more workers (although they have been spending a lot on new equipment). Is there any way out of this mess?

The Kauffman Foundation believes there is, and it lies in recognizing the force that propelled the US economy for at least three decades until the financial crisis plunged us (and others) into the Great Recession and the subsequent weak recovery. That force is new firms or startups. Research supported by our Foundation has documented that companies less than five years old accounted for virtually all net new jobs over this thirty year period. Furthermore, new companies have been disproportionately responsible for many of the breakthrough innovations that characterize modern life today -- the automobile, the airplane, computers, air conditioning, Internet search, genetic therapies, to name a few -- that have accounted for enormous improvements in living standards.

The recession has taken a toll, however, on potential high-growth new companies. As a recent Kauffman study has documented, the annual numbers of newly formed companies that hire other workers, which were already falling before the recession, have continued dropping. While sharply lower computer and telecommunications costs, perhaps best illustrated by the rise of "cloud computing," may be reducing the need for workers by many startups, the falling numbers also likely reflect a disturbing slowdown in the formation of potential scale companies.

Simply put, then, if we want both a stronger recovery in the short run and a higher sustained rate of growth in the long run, then the United States must begin to produce more scale startups. By our calculation, if the US economy could somehow consistently generate 30-60 new companies whose annual revenues eventually scale to at least $1 billion, we could enjoy permanently a one percentage point increase in our growth rate.

How can we do this, or even something short of it, especially in the coming environment of budget austerity, at all levels of government? Many ideas have been floated or considered among elected officials and experts from both political parties. It's now time to put them together and enact a targeted, but comprehensive Startup Act to get our economy moving again.

Such a bill should encourage the building of more scale firms, lower the cost of capital for financing them, accelerate the development of new commercially relevant ideas, and remove barriers to expansion for new and existing firms alike. Here are some highlights.

Let's import a lot more skilled workers, beginning with those who want to come here and found companies. Let's change our tax code to facilitate the financing of small business, with a permanent capital gains exemption on investments in startups held for at least five years and a significant cut in corporate tax rates for new companies in the first three years they have taxable income. To make it easier for growing private companies to go public, let's give their shareholders (who can best judge the benefits and costs of financial auditing mandates) and those of other public companies with a market cap of $1 billion or less the choice whether to comply with the onerous requirements of the Sarbanes-Oxley Act.

To get more new ideas into the marketplace faster, let's give the Patent and Trademark Office the tools it needs -- primarily differential fees for faster service, but with special breaks for small business and individual inventors -- to cut down the enormous and growing backlog of patent applications. Furthermore, let's create a competitive market in technology licensing by enabling faculty inventors more freedom to license their federally funded innovations, without having to be hostage to their own universities' licensing offices. And let's finally truly reform federal regulation by sun-setting all major rules after 10 years, requiring all new major rules to pass a benefit-cost test, and by collecting sufficient data on regulation at the state and local level to permit private sector organizations to rate these jurisdictions on their business-friendly climates.

It's time to re-start America by jump-starting our startup engines of growth. We have no time to waste.

Carl Schramm is President of the Kauffman Foundation, where Robert Litan is Vice President for Research and Policy.

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