Harvard Professor tells President Obama: To Create Small Business Jobs, Think Young

Not all small businesses create jobs. Obama needs to promote young startups.

Professor Josh Lerner of Harvard Business School has some advice for the Obama administration about jobs creation in his blog post Creating Small Business Jobs. His primary point is that while small businesses are often touted as job creators, not all small businesses are equally prolific. In fact, according to Lerner and others who have studied the issue, it is young businesses that are the real job growth engine, and these entrepreneurial startups are less likely to be helped by government’s traditional stimuli.

He proposes three principles for improving job growth by improving the environment for startups:

Take the decisions on who to fund out of political hands. One of the most common fates of government programs to stimulate high-technology ventures is that funds end up getting distributed in ways that have more to do with political calculations rather than the actual needs of society. Successful programs, by contrast, have clear, well-defined investment processes. They limit the danger of political influence by establishing independent bodies to oversee the programs. In many cases, they have further reduced capture problems by passing the funds onto intermediaries such as venture capital funds, who make the real investment decisions. By keeping individual awards relatively modest, they limit efforts to misdirect these funds.

Pay attention to market signals. The only sure way to ensure that extraneous considerations do not distort public efforts to boost innovative entrepreneurship is to look carefully at which firms private investors think are viable. By focusing on supporting firms that have raised matching funds (and eliminating those entities that use “fuzzy math’’ from consideration), public officials can boost innovative entrepreneurs far more successfully.

Create an environment that encourages entrepreneurship. Numerous academic studies show that one of the most critical contributors to the entrepreneurial environment is the presence of low marginal tax rates on long-term capital gains. Yet the new health care law seeks to fund reforms through higher capital gains taxes (among other sources), suggesting that the United States appears to be heading in an entrepreneurially unfriendly direction. Lawmakers need only to look at Japan — whose government spent tens billions in the 1990s and early 2000s to boost entrepreneurship without making the larger changes necessary to actually encourage growth — to see the costs of failure.

Lerner’s viewpoint seems well considered. What is your experience?

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