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The White House didn’t invite the firms that will create new jobs to its “job summit” — dominated by the CEOs of big firms, Ivy League economists, and union officials — because they weren’t available. Many of them don’t even exist yet.
Our economic gospel says that small businesses create most jobs, although size doesn’t matter as much as age. In a new study on job creation, the Kauffman Foundation found that “from 1980–2005, nearly all net job creation in the United States occurred in firms less than five years old.”
The ultimate source of jobs is the vast, chaotic entrepreneurial churn that has always characterized the American economy at its best. No recovery is sustainable without it, yet the White House remains fixated on the gewgaws of new government programs and quick gimmicks.
As the Kauffman study notes, firms with fewer than 20 employees account for 89 percent of all firms but less than 20 percent of employment. Firms with more than 500 workers account for only 0.3 percent of all firms but half of employment, and firms with 10,000 workers account for roughly a quarter of employment.
It’s newness that really drives the job market. First, there are the startup firms. Without startups, according to Kauffman, “net job creation for the American economy would be negative in all but a handful of years.” But startups often go bust. About a third close down in their second year, half by year five.
Those young firms that survive are key. If startups are taken out of the picture, two-thirds of the 12 million new jobs in 2007 were created by firms five years old or younger. For firms older than five years, job creation drops off considerably — except for the oldest and biggest firms.
The Kauffman study posits a symbiotic relationship between those well-established firms and the younger ones. As the new firms succeed, the older firms ape their innovations or acquire them. And on it goes, an endless process of creation and destruction that — as long as entrepreneurial spirits run high — nets out as new jobs.
It’s the state of this churn that should matter to policymakers more than the health of any specific industry or firm, yet it’s been ignored in the ongoing bailouts and the inaptly named $787 billion “stimulus.”
Most of the spending in the stimulus ($280 billion out of $499 billion — the rest was for tax credits) went to payments to states and localities. According to Governing magazine, states devoted 63 percent of the funds to Medicaid and 13 percent to their general-fund budgets. In other words, much of the stimulus acted to preserve the programmatic status quo in the states, not foster new job creation.
And the stimulus has precluded major new policies favorable to the churn. Entrepreneurs must hire workers and acquire capital, and they benefit from anything that makes it cheaper and easier to do so. A cut in the payroll tax would have provided tax relief to individuals at the same time that it removed a drag to hiring. But it’s expensive and basically out of the question after Pres. Barack Obama’s $787 billion budget-buster.
Worse, every business owner or would-be business owner in the country has the uncertainty of the health-care bill, card-check legislation, and cap-and-trade hanging over him. All would increase taxes and the cost of labor and of doing business. Then there’s the imminent repeal of the Bush tax cuts and yet more tax hikes looming as Washington wades hip-deep in red ink.
Every recession ends and jobs inevitably return, but there’s a daunting path ahead. David Smick, author of The World Is Curved, notes that if the unemployment rate is to drop to 5 percent during the next five years, we’ll need to create 250,000 new net jobs a month. The average has been 90,000 a month since 1989, and in 2006 — at the height of the credit bubble — we were creating only 230,000 a month.
We’ll never get there without a truly vibrant churn.