Startups and Entrepreneurship

Liberating Startups and Entrepreneurship to Enable Economic Growth

“To grow as fast in the future as we have in the past — and to generate the millions of well-paying jobs critical to widely shared prosperity — America will need to be more innovative and productive than ever. And that means having an economy that generates even more innovative, high-impact, fast-growing new businesses. For America, the 21st century will need to be the Startup Century. As we have seen, though, it has started as anything but that.”

— James Pethokoukis

Entrepreneurship, which the late economist Joseph Schumpeter referred to as “creative destruction,” is the engine that powers the American economy. Entrepreneurs, who drive the cycle of competition, change, and adaptation, are the catalysts of creative destruction and America’s economic growth. Their risk-taking spurs innovation; they challenge old ways of doing things, construct better alternatives, and force the market to adapt.

As James Pethokoukis notes however, innovation and entrepreneurship in America have been trending downward over the last thirty years. For example, the ratio of new firms to all firms has dropped from 15 percent in 1978 to 8 percent in 2011. This is not to claim that America’s entrepreneurial spirit has diminished; after all, innovators and risk-takers founded Google, Facebook, and Uber during this period. Instead, rules, regulations, and bureaucratic red tape hamper entrepreneurs; these range from occupational licensing standards, which constrain new small businesses, to national regulatory boards like the FCC, EPA, and CFPB (Consumer Financial Protection Bureau), which impose undue costs on what could be groundbreaking new ventures.

Entrepreneurship drove America’s record growth in the 20th century. Replicating that success in the 21st will require creating a business climate friendlier to innovation. Pethokoukis provides important policy suggestions. First, the federal government could grant investors a pass on capital gains taxes if they invest their proceeds in a business five years old or younger. The federal government could also provide tax breaks to new businesses, including as Pethokoukis suggests, a 5 percent tax rate for these firms. Sunset clauses and extra oversight for regulations could restore accountability and begin the process of removing unnecessary rules. Finally, the intellectual property system could be revised to limit advantages of market incumbents without harming the rights of investors.