It's Job Generation, Stupid

What Bill Clinton had better learn about how jobs, wealth, and individual prosperity are created in America.

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A couple of smart kids fool around in a garage. Among the gadgets they produce is a makeshift personal computer for hackers. The market turns out to be bigger than they expected. Suddenly, the kids are in business. They have suppliers, customers, employees, even investors. The company grows. More people are hired. More opportunities open up. Life gets crazy. The company can't fill jobs fast enough. Local economies boom. The demand for all kinds of services -- dry cleaners, architects, grocery stores, travel agencies, lawyers and doctors, acupuncturists, psychics, you name it -- skyrockets. The company goes public. People get rich. Investors count their returns and look around for other hot start-ups to back. Employees yearn for the old days and go off to start new businesses of their own. The company itself begins spinning off businesses. So do the suppliers and customers and other companies that feed off the growth of the original business. Tens of thousands of jobs are created. Tax revenues soar. Schools, police and fire departments, road repairs, Head Start programs, homeless shelters -- everything gets funded. The system works.

This is the great American job machine, the fount of our dreams, the source of our prosperity, the envy of the world. We at Inc. think of it as the Apple Tree, but we could just as well cite Federal Express or Microsoft. Before them, moreover, there were Fairchild Semiconductor and IBM, not to mention National Cash Register, McCormick Reaper, and the Union Pacific Railroad. The truth is, every successful business produces its own tree, and so do some unsuccessful ones. We're talking about a fundamental process here, the process by which our economy has been created and is constantly being reborn, with the growth of one business spawning numerous others in a kind of multiplier effect, leading to the continual generation of wealth and jobs. That process is the essence of capitalism as we know it -- so much so that we often take it for granted. The danger is that we will also think of it as indestructible. That would be a sad mistake.

Not that the start-up phenomenon itself is in much jeopardy. Some people, to be sure, argue that government policies have a direct effect on the start-up rate, through taxation, regulation, credit availability, interest rates, and the like. By that reasoning, more companies would be launched if banking regulations were eased, say, or long-term-capital-gains taxes were reduced. The evidence is slim at best. People start businesses for a multitude of reasons. Getting rich is only one of them. Even people who are motivated by dreams of wealth seldom have specific notions of just how rich they want to be. They tend to get most upset about things like capital-gains-tax rates after they've made their bundle, not before.

As for seed capital, there's never enough. Never has been, never will be. By and large, that's a good thing. Any seasoned observer of entrepreneurship will tell you that more new businesses are screwed up by having too much money than by having too little. Unlike established companies, undercapitalized start-ups can't buy solutions to their problems. They are forced to overcome obstacles through creativity and ingenuity. In the process, the people in the company educate themselves about the business, the market, and -- most important -- their customers. From such learning experiences successful businesses are born.

It is at a later stage of the company-building process that government policies begin to have a significant effect. That point comes after the founders have figured out what their business is, after they've developed a track record, after their venture has become a company rather than an experiment. They no longer spend their time reacting to crises. They have choices. Among the decisions they make are how to grow, how fast to grow, and maybe whether or not to grow at all.

And then, suddenly, factors such as taxation and regulation become very important indeed. A company doesn't have to increase the size of its work force to survive or even to grow. Adding jobs is a business decision. Fast-growing small companies do not create jobs because they want to reduce the unemployment rate or provide opportunities to people they don't know. On the contrary, the best-managed companies generally try to grow as much as they can with as few people as possible.

The point is that jobs are a by-product of business growth, not a goal. They are a means to an end. A high rate of job generation is not an inevitable result of the Apple Tree phenomenon. It happens only if the price is right.

Given all the benefits of high employment, you'd think that policymakers would do everything they could to ensure the price is always right. You'd think they would work tirelessly to hold down the cost of employing people, thereby creating incentives for companies to grow by adding jobs. But, as we all know, policymakers tend to get distracted and wind up neglecting the job-generation process. If you put yourself in their shoes for a minute, it's easy to understand why.

The Apple Tree, after all, is part of a larger economy, one that has its dark side. It's not exactly the peaceable kingdom we'd like to imagine. It's messy. It's chaotic. It's unfair. It's a world where bad things happen to good people, and good things happen to bad people. Where employees are sometimes used, abused, and exploited. Where creditors occasionally get burned, and customers cheated. Where toxic waste gets dumped in vacant lots and public waterways. Where accidents happen, and the innocent get hurt. Where decent, hardworking Americans can lose their livelihoods through no fault of their own and be forced to scrape by, while others become obscenely rich and shower themselves with expensive toys.

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.

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