What Republicans need to understand about jobs: economic growth depends on new enterprises, not existing corporations

Ryan Streeter
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Any jobs agenda, such as congressional Republicans have formulated (pdf), should put small, new firms at the center of its priorities. That’s the conclusion of a very smart Weekly Standard piece this week by David Smick. He writes:

[O]ver in the dark corners, new small businesses are starting up. These firms create the vast majority of net new jobs. Picture a highly unpredictable, boiling cauldron of winners and losers engaged in fierce competition. That’s the definition of a vibrant, job-producing economy. Some of these new firms produce society-transforming technologies. But most provide everyday services, sometimes with specialized niche products ignored by corporate America. Most of these highly risky startups fail, but others spring to life to take their place. The net result is an expansion of the job base.

Smick says that the GOP should (1) focus more on the individual than corporate tax code, which would benefit the entrepreneurs who create new firms, and (2) “be wary of becoming the political face of corporate America. The same goes for those Republicans who lately have been defending Wall Street’s incompetent, too-big-to-fail bankers.”

He’s right to imply that there's nothing inherently conservative about defending large corporations and banks. And he's right to point out that the importance of new firm formation is overlooked by policymakers, given how important new firms are to net job creation in our economy.

We can make Smick’s point even more clearly by looking at Kauffman Foundation data on the issue:

• Firms between three and five years old make up less than one percent of all companies in America, and yet they create 10 percent of new jobs.
• The top performing one percent of all firms create 40 percent of new jobs, “averaging 88 jobs each annually, with most ending up with 20 to 249 employees.”

Corporate America, at the end of the day, does very little to create new net jobs. They expand, and they cut, expand, and cut, and so on. New, not just small, firms are essential to the American job creation story.

There are some immediate conclusions that spring to mind when one becomes aware of the importance of new firms:

1. Keep the focus on individual tax rates not just about small businesses (which Republicans talk a lot about), but new businesses. Many of these entrepreneurs, as small businesses, do not pay the corporate tax. They file as individuals. These are not “the rich.” They are the job creators, the innovators, the providers of services that large corporations overlook. Most of them are indeed small businesses, but their dynamism comes from being new. Their newness should be the focus on policymaking.
2. We need health care reform, not just repeal. Repealing ObamaCare just returns us to the status quo. That status quo was marked by skyrocketing (“job-killing,” to use a favorite Republican expression) health care costs. Replacing the bad health care law with one that creates a universal credit, allows purchasing across state lines, and the like, will go a long way to lift the burden that small businesses feel on the health care front.
3. Cost assessments and congressional review of regulations are a good idea. The House Republicans’ plan includes this provision. It can be tightened and strengthened. Any new regulation with an estimated cost impact over a specified level should be submitted to congressional review and be shot down.

In the end, when we talk about “economic growth,” whether we know it or not, we are actually talking about creating more new firms. So it would be wise for our public debate and policy options to reflect that reality.