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Start-Ups Are the Key to Ending This Historic Jobs Crisis

By John Dearie and Courtney Geduldig

Last month’s employment report from the Bureau of Labor Statistics is a grim reminder of the severity of America’s continuing jobs emergency. Only 169,000 jobs were created in August, and, for the 40th month in a row, more unemployed workers left the workforce discouraged than found jobs. More than four years after the end of the Great Recession, nearly 24 million Americans remain either unemployed, underemployed, or have left the workforce discouraged.

Clearly, Washington policymakers are in desperate need of new ideas to combat this historic jobs crisis.

Here’s one – why not listen to the actual job creators about what they need to launch more new businesses, expand those young firms, and create jobs, careers, and wealth for their fellow citizens?

America’s engine of job creation

Recent research conducted by the Census Bureau and the Ewing Marion Kauffman Foundation demonstrates that virtually all net new job creation over the past three decades has come from new businesses less than one year old – true “start-ups.” New businesses, according to the research, create an average of three million new jobs annually, while existing firms of any age, type, or size shed a net average of about one million jobs each year, as some businesses fail and as others incorporate technology and become more efficient. If the policy target is job creation, new business formation is the bull’s-eye.

But, alarmingly, after remaining remarkably consistent for decades, the number of new businesses launched each year – and the average number of new jobs created by each new firm – have declined significantly in recent years. In the year ending March of 2012, new businesses created 2.7 million new jobs, down 43 percent from the 4.7 million new jobs created by start-ups in 1999.

In other words, new businesses are America’s engine of job creation, and that engine has been breaking down in recent years.

Hurdles to success

To find out why, we conducted roundtables with entrepreneurs in 12 cities across the United States, asking them: “What’s in your way?” More than 200 entrepreneurs participated – from a web-based software company in Seattle to an industrial construction firm in Orlando, from a developer of bioscience technologies in Boston to a distributor of glow-in-the-dark fluorescent fish in Austin – all explaining in specific and vividly personal terms the issues, frustrations, and obstacles that are undermining their efforts to launch new businesses, expand existing young firms, and create jobs.

An astonishing take-away from our roundtables – and enormously significant from the standpoint of potential policy solutions – is that the problems and obstacles encountered by entrepreneurs across the country are remarkably consistent. Entrepreneurs from Austin to Boston and from Seattle to Orlando reported the same burdens, frustrations, and difficulties:

  • “We have the jobs, but not enough people with the skills we need.”

  • “Our immigration policies don’t effectively attract and retain the world’s best talent.”

  • “Access to start-up capital is even more difficult in the wake of the financial crisis.”

  • “Over-regulation is killing us.”

  • “Tax complexity and uncertainty is diverting too much of our time and attention away from our new businesses.”

  • “There’s too much economic uncertainty – and it’s Washington’s fault.”

Our summer on the road revealed several critical realities.

First, new businesses are extremely fragile – a third fail by their second year, half by their fifth. And yet, those new businesses that survive tend to grow and create jobs at very rapid rates.

Second, the policy needs and priorities of new businesses are unique. Start-ups are different from existing businesses. The challenges they confront are different and their ability to successfully navigate those challenges is more limited.

Third, policymakers in Washington do not sufficiently understand or appreciate the unique nature, importance, vulnerability, and needs of start-ups. Focused on the priorities of either large corporations or the small business community, policymakers too often overlook and neglect the economy’s true engine of job creation.

Finally, policy help for America’s job creators is urgently needed. Given the critical role they play in our nation’s economy as the principal source of innovation, growth, and job creation, America’s young businesses need and deserve a comprehensive and preferential policy framework designed to cultivate and nurture start-ups – an on-ramp to viability.

We know what needs to be done

Fortunately, we now know what needs to be done. Our remarkable summer on the road meeting and listening to America’s entrepreneurs revealed with unprecedented clarity the major obstacles undermining their ability to launch new businesses, grow those businesses, and create jobs.

With those obstacles in mind, we’ve put together a game-plan for unleashing the job-creating capacity of the entrepreneurial economy – based on what American entrepreneurs told us they need. That jobs agenda includes:

  • Cultivating new business formation, survival, and growth by providing start-ups substantial tax and regulatory relief during their critical first five years;

  • Ranking all 50 states as to their regulatory friendliness to start-ups, with the metrics and rankings published online for easy use by entrepreneurs;

  • Incentivizing badly needed workers with backgrounds in science, technology, engineering, and math (STEM) by awarding new graduates a $50,000 federal tax credit applied up to $10,000 per year during their initial five years of employment;

  • Launching an immediate dialogue between business and education leaders to ensure that K-12, college, and university curricula serve both the broad education needs of American students, as well as the skill needs of 21st century businesses;

  • Attracting and retaining the world’s best talent by eliminating the arbitrary and self-defeating cap on H-1B visas, awarding green cards to all foreign-born graduates of American colleges and universities meeting security requirements who earn degrees in STEM fields, and by creating a “Start-Up” visa for foreign-born entrepreneurs;

  • Incentivizing the formation and commitment “angel” capital – which accounts for more than 80 percent of outside “seed” funding of start-ups – by way of a 25 percent federal tax credit;

  • Restoring government-funded R&D to its historical high of 2 percent of GDP, and by restoring the commercial R&D tax credit to the most favorable in the world – and making the credit permanent, and,

  • Enacting gradual but significant debt and deficit reduction, achieving comprehensive tax reform, and accelerating the growth of exports by negotiating trade agreements with the world’s largest and fastest growing economies.

Twenty-four million Americans remain either unemployed or underemployed – more than four years after the end of the Great Recession. To end this historic jobs crisis, we must restore the great American jobs engine. We know now what needs to be done. The job creators have told us what they need. There’s no time to waste.

Let’s get to work!

John Dearie and Courtney Geduldig are co-authors of "Where the Jobs Are: Entrepreneurship and the Soul of the American Economy," recently published by Wiley & Sons.