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.
It is, in short, a world that produces inequities and victims: people who deserve better, people who have suffered real injustices, people whose fate would strike any decent person as unfair. Small wonder that we have seen the steady growth of legislation designed to protect the victims -- from child-labor laws, to minimum-wage laws, to antidiscrimination laws, to family-leave and hazardous-waste laws. Small wonder, too, that there is constant pressure to even out the results, to raise taxes on those who get rich off the process, to make the winners pay a greater share of society's ever-rising tab.
Unfortunately, there are increasing signs that we may have gone too far. In trying to reduce the inequities and help the victims, we may have undermined the most important social program we've got going: the generation of jobs. Jobs, after all, provide for each of us what no government can legislatively confer: self-respect, dignity, economic self-sufficiency, and the wherewithal to contribute to a community and to build a life.
Which is why it's sad that, for the first time, we have begun to hear about companies that are keeping down the number of people they employ so as to remain outside the purview of the Family Leave Act and other mandated benefits programs. Other companies have scaled back their recruitment efforts to protect themselves against specious but expensive antidiscrimination suits. Still others have stopped hiring in anticipation of continued increases in the cost of health insurance, workers' compensation insurance, unemployment insurance, and whatever new insurance the folks in Washington may yet dream up. Then there is the explosion of litigation against companies by former employees determined to prove they lost their jobs through no fault of their own. And all this while Congress gets set to pass what may be the biggest tax hike ever in hopes of bringing the deficit under control.
And we wonder why the economy is not producing more new jobs.
The problem is not that businesspeople have become stingier or more meanspirited. The problem is that, little by little, we have added to the costs and increased the risks of employing people. Every entitlement, every protection, every mandated benefit represents an additional expense to a company -- whether in the form of insurance premiums, taxes, legal fees, time away from the business, more paperwork, additional supervision, whatever. The more employees you have, the greater the expense and the higher the risk. To the extent that employees do actually benefit, moreover, the company gets no credit, no boost in morale, since employees perceive (correctly) that the changes have been imposed from the outside. So the company pays yet receives nothing in return.
What all that adds up to is a powerful incentive for companies to grow without adding employees, or not to grow at all. Meanwhile, the Clinton administration sends clear signals that it intends to continue the trend, maybe even accelerate it, at the same time that it vows to raise taxes on people who take the risks and succeed. To make matters worse, moreover, the administration remains determined to spend some portion of those tax dollars on infrastructure projects that may keep a few people employed for a while but are unlikely to lead to the formation of any viable new businesses. In effect, it will be further undermining the job-generation process in order to produce a trivial number of ridiculously expensive short-term, low-wage public-works jobs.
It's a dangerous game to be playing. It is particularly dangerous in a period when other factors are conspiring to hold employment down -- when companies are struggling to stay lean and flexible in the face of intense competition, when there is growing frustration with the declining quality of entry-level workers, when more and more worn-out entrepreneurs are deciding they just don't want to manage anymore. What we don't need on top of all that is an administration so intent on putting people first that it doesn't realize it is helping to put them out of work.
And yet it is perhaps worth pointing out that the greatest danger posed by the administration's policies is to President Clinton himself. The world of the Apple Tree has weathered worse calamities than a storm of bad legislation and inept government policy-making. Sooner or later, the season will change, the laws will be amended and the rules revised, and the economy will start generating jobs again. In the long run Clinton's anti-employment policies may even produce some benefits. Productivity is almost certain to rise. There will be enormous pressure on companies to introduce long-overdue management reforms that will increase cooperation and efficiency in the workplace.
But meanwhile, if the administration doesn't alter its course and start focusing, laserlike, on job generation, we are probably in for a few more years of continued sluggishness in the economy, annoyingly high unemployment, and persistent sputtering of the great American job machine. And one other thing. Come 1997, Bill Clinton himself will be out looking for work.* * *