Editor’s note: “This is my first column addressed to President Obama,” writes Vivek Wadhaw. “I hope he or one of his lieutenants reads this.” Wadhaw is now a fellow with the Labor and Worklife Program at Harvard Law School and executive in residence/adjunct professor at the Pratt School of Engineering at Duke University. He is a serial entrepreneur, including the founding of Cary-based Relativity Technologies. A portion of this article is reprinted with permission of BusinessWeek Online.
DURHAM, N.C. – The government is spending hundreds of billions of taxpayer money to bail out companies like General Motors, AIG, and Citibank that are deemed too big to fail. Economists argue that these huge handouts are required to ensure the financial meltdown doesn’t get any worse—and they may well be right. But these same economists would be hard-pressed to argue that favoring behemoths over startups and existing small businesses benefits the economy over the long term in any significant way. That’s because massive, mature companies, particularly those that are struggling, don’t create new jobs. Instead it is new businesses that fuel this country’s employment growth. They’re the key to our economic recovery.
Consider these stats: From 1980 to 2008, startups, defined in this case as companies less than five years old, accounted for all net job growth in the U.S., according to the Kauffman Foundation’s Business Dynamics Statistics, a series of reports that rely on newly released data from the Census Bureau. The reports show that average annual net employment growth rate for startups was about 3 percent a year while the growth of the rest of the U.S. private sector for the same period was about 1.8 percent. So, without these startups, the U.S. net employment growth rate would actually be negative.
In other words, if President Barack Obama wants to foster a recovery, a good way to do so through the private sector is to focus on creating and supporting new companies. The current approach of pouring money into decrepit, poorly managed companies is actually a way to reverse job and productivity growth in the U.S.
for the rest of Wadhaw’s column.
