Reynolds: Language for Clinton's -- or Newt's -- political speech: New and small firms play a vital role in the growth and adaptation of the economy, helping the United States maintain a competitive international posture. In the process, these firms provide career opportunities for many. When all businesses have a fair chance to succeed or fail, we will know that our economy is maximizing its potential for change and growth. The federal government should ensure that new and small firms are not prevented, by unfair practices or inappropriate regulations, from demonstrating their value in the marketplace.
Four sentences, but a beginning.
Davis: If I ever run for office, I'll hire Paul Reynolds as my speechwriter.
Gendron: As far as I know, no one has yet invented a more efficient means of moving assets from unproductive to more productive parts of the economy than the start-up. So it makes sense that during times of rapid economic change, you want to foster an environment that's conducive to people's launching new businesses. Ben Harrison and Paul Reynolds seem to disagree over this point.
Can policy encourage new-business formation? Should it? If so, how? If not, why not?
Reynolds: The overwhelming factor that encourages new business formations is the perception that there is a market to be served.
The most governments can expect to do is either encourage firm formation once others decide to start a new business or try to eliminate inappropriate barriers.
Two barriers present in the United States that are not present in other advanced economies are the methods of providing health and retirement benefits. Start-ups may have a better chance to succeed if federal and state governments take more responsibility for citizens' retirement and health care. This reform would allow fledgling companies to attend to running a business instead of dealing with social-welfare issues.
Harrison: George, you suggest that Paul and I disagree on whether "during times of rapid economic change, you want to foster an environment that is conducive to people's launching new businesses." No, we don't disagree. I have no problem with market incentives for new-firm formation. Let private business start up as many new companies as it wants.
My concern is with using public policy to subsidize this behavior, especially given the high rate of expected failure among start-ups, which means that you have to support the creation of a dozen businesses to retain just one. The opportunity costs of the tax breaks, subsidies, and so on are too high.
Davis: Policy should encourage the allocation of capital and human resources toward their most productive uses. If that involves channeling greater resources toward start-ups, so be it. If it involves channeling greater resources toward large existing firms, so be it.
Gendron: Clearly, there is great concern about job security in today's economy, especially as large companies downsize.
Acs: We are starting to envision the economy as one in which we are in a permanent process of restructuring. In both technology and strategy, we rely less on permanent structure and more on newly created structures.
Harrison: Amen to Zoltan Acs, on continuous, if uneven, change.
Reynolds: Downsizing is overemphasized. This focus reflects a preoccupation with the largest corporations and no understanding of the important role played by the medium-size firms.
Gendron: If downsizing is not the right issue on which to focus, then what is?
Reynolds: Well, what seems to have changed is the increase in turbulence -- births and deaths -- among firms. This change is perhaps more critical than shifts in the size or structure of firms. High turnover among firms and jobs can cause real dislocation and readjustment problems for the individuals involved. Further, it makes it difficult for individuals and families to count on firms as a stable source of health and retirement benefits.
Davis: I'm not aware of any evidence that supports Paul Reynolds's claim that turbulence -- higher rates of job creation and destruction -- has increased over time.
I'm skeptical about the usefulness of turbulence measures based on the turnover of firms and establishments for four reasons. First, the meaning of "firm" is ambiguous. Is a sole proprietor with no employees a firm? What if family members are the only employees? What if the firm is wholly owned by another firm? What if the firm is partly or mostly owned by a franchisor? Second, measuring firm birth and death is hard to do in a reliable, consistent way. Younger and smaller enterprises, the very ones that turn over the most, experience so many changes in their lifetimes that trying to track them accurately is extremely difficult. Third, changes in tax and legal codes are likely to alter firm behavior in a way that renders firm-based measures of turbulence less valid. And finally, employment- or job-based turbulence measures are intrinsically more interesting than firm-based measures because they inform us about the share of the work force affected by turnover. This brings us back to the issue of employer size. It may be true that almost all firms have fewer than five employees, but so what? We care about these firms not because there are so many of them but because they provide employment for a nontrivial share of the work force.
