Job Creation By New Business

Matthew Yglesias on the Kauffman Foundation and "entreprueneurship":

I’m heading off to Kansas City for a couple of days for a Kauffman Foundation conference for economic policy bloggers. As usual, posting will continue. I went to a version of this event two years ago, and I have to say that at the time I didn’t really get what Kauffman was all about—it’s a foundation for “entrepreneurship” which just kind of sounded like BS to me.
But I’ve come to appreciate that this is actually a really important idea in a way that often gets missed. The key thing comes in the form of the political claptrap you tend to hear about how small businesses create thirty billion percent of all new jobs. What actually happens is that growth in both employment and GDP is driven not so much by small firms as by rapidly expanding firms. This is something American political culture tends to get very badly wrong despite a lot of nominal worship of the ideal of entrepreneurship. Whenever politicians are feeling themselves in a “pro-business” growth oriented mood, what they tend to do is look around and talk to a bunch of rich businessmen. But if the United States succeeds over the next 30 years it won’t be thanks to the executives of the firms of that are important today. It’ll be thanks to the firms you’ve never heard of. This, not GE’s exploitation of tax loopholes, is the real problem with the idea of brining Jeffrey Immelt on board for a “jobs council.” In 1981, Microsoft and Apple and Cisco and Wal-Mart (see Krugman) weren’t important companies and yet those are the companies that have been driving such improvements in living standards as we’ve managed to enjoy.

It is a good point that we tend to study how to win the last war, and likewise, what made already successful businesses successful.  In the same way, Democrats look to the New Deal and Republicans look to the Reagan Revolution to try to figure out how to succeed politically, even though circumstances are much different in 2011 than they were in 1933 or in 1981.  We can't just repeat the same steps Ronald Reagan took to improve the economy.  He was cutting the top marginal tax rate from 70%, not 35%.  Debt as a percentage of GDP was much lower in 1980 than it is now.