Growthology

Job Creation Strategy: Statistics?

The Kauffman Foundation's E.J. Reedy on how improved data collection can enhance job creation:

As the government and other nonprofits implement more local programs to spur job creation or small business development, data are desperately needed to track local trends in business outcomes and conditions. It’s because of this that politicians tend to be more interested in supporting programs that can help provide independent, meaningful, and timely data on job creation in their regions. The statistical community should recognize this and strengthen their collections before politicians become alienated consumers of private data.

Read more of this insightful piece here.

State of the Union Word Cloud

 

And, according to the New York Times, President Obama used "innovation" 9 times (compared to two in 2009), and "government" 18 times (compared to seven in 2009).

3.2 percent ain't good enough

The advance number for Q1 growth was released today: 3.2 percent (this link is to a WSJ summary of economist opinions).  Three-point-two would be good in normal times, but it's not enough to catch-up to where the U.S. economy "should" be. 

I'm skeptical this is a solid recovery. I'm skeptical there won't be a double dip. Why?  Because interest rates are very low and have to rise sometime soon, because federal spending stimuli are fading, because I believe in a place called California, and because so much of the durable consumption seems driven by cut-rate deals (Toyota in Q1 offered zero-percent financing for the first time in history). Thin ice.

This would be a good time to reread Mankiw's argument that this is a Unit Root recession, not a Trend Stationary recession. A rebound to normalcy would be nice, but we all know better than to believe the housing bubble defined normalcy. It's time to shelve fantasies that a stimulus, any stimulus, can or should get America back to artificial prosperity.

Who Declared War on Entrepreneurs?

Nick Schulz over at the Enterprise Blog draws our attention to an apparent crackdown by the IRS on the flexible employment arrangements used by many independent contractors and small businesses. It's not clear what impact this will have but, anecdotally at least, there have been reports that many new and young businesses in this recession have been turning more and more to freelancers and contractors. And we've seen the average size of new companies shrink over the past few years by about two employees--as noted in the story above, this likely indicates increasing use of such flexible arrangements.

Put this together with the anti-angel provisions in the Dodd bill (which I think may have been slightly diluted recently), and it seems as if someone has declared a war on startups. Which is, in other words, a war on job creation and economic growth.

More on Friedman

Here is another, albeit similar, take on one particular response to Thomas Friedman's Easter column celebrating startup companies. By the way, while you visit the PPI website, be sure to read Michael Mandel's policy memo on why the jobs crisis may well be an innovation crisis. 

Fiscal policy is "out of control" ... so what?

Ken Rogoff, a Harvard professor, and one of the few economists who can claim to be prescient (this January 2008 NBER paper with Carmen Reinhart anticipated the economic fallout from the financial crisis in the U.S.), now warns that fiscal policy is out of control ... here, there, and everywhere.

Speaking in Tokyo, he actually used the phrase "out of control" to describe Japanese fiscal policy (debt to GDP is over 200% there), but also focused on Greece, the EU, and the U.S.  The difficulty to curb fiscal stimulus during a recession means that monetary policy is likely to tighten first, and last week's Fed announcement pretty much fits in exactly with the Rogoff prediction.  Actually, the political economy of fiscal versus monetary policy is something taught in economics classrooms for decades. Rogoff now predicts:

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said....

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”

It's interesting to note the 2008 NBER paper said:

A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response. (emphasis added)

What are the consequences? 

The first consequence is that the U.S. recovery will be more difficult than it needs to be, followed by a systemic shock. It is impossible to anticipate what the U.S. economy will look or feel like in 2020 after that shock occurs.

The second consequence is global. For growth optimists like Dane, Bob, and me (and our readers, right?), it is very difficult to reconcile the gloomy short-term outlook with all of the historical evidence showing long-term acceleration in economic growth. (I'm reminded of the TED talk Alex Tabarrok gave a year ago). The reconciliation is, of course, growth is heterogenous among countries, states, and cities (people, too, for that matter). Japan and Greece seem determined if not destined to be fiscal train wrecks. America seems to be falling into the same trap, and not just because of next year's projected deficit, but because of the inability to institutionally even think about entitlement realities. So, yes, growth will happen, but it won't surge in nations with fiscal hangovers. Growth leadership starts with fiscal restraint, so we can look at this list of public debt by country to see who has the advantage. Names that stick out: China, Russia, Estonia, Chile, Australia, among others. 

Does America eally want to pass the baton of global leadership? Of course not. Such batons are never passed. They're dropped.

UPDATE: Jim Hamilton makes the case that the Fed discount rate increase is not a signal of tighter monetary policy.  I don't disagree, per above, but I doubt Jim would disagree with the claim that monetary policy is much more likely to tighten before fiscal policy (I give 50-1 odds). And I can guarantee that Jim would prefer to see real fiscal discipline, because he's been writing about that for years.

Waging Politics Through Graphics

For those of you who haven't seen it, this is a recently released graphic being pushed by the Obama Administration to illustrate the recession it inherited and the impact of the stimulus:

 Source.

Although it doesn't quite embody the "golden age" of data visualization that Paul Kedrosky likes to say we're living in, it is a very clever graphic--a "brilliant image" says Ryan Avent. That said, it's not without problems--Drew Conway provides a nice angle.

Has the Great Recession Ended?

This is the question of the moment for many economists and analysts and policymakers, although the relevance of the answer will vary widely across the country. Will someone who has been unemployed for seven months or longer (which is now the average duration) celebrate when the National Bureau of Economic Research (NBER) officially dates the end of the recession?

In a recent research note, William Hester of Hussman Funds examines the four primary indicators tracked by the NBER Business Cycle Dating Committee: Industrial Production, Real Manufacturing and Trade Sales, Real Personal Income Less Transfer Payments, and Nonfarm Payrolls. Many readers won't be surprised to learn that the first two indicators have bounced back nicely, in line with prior recoveries:

Source: William Hester, Hussman Funds 

The Manufacturing and Trade chart is similar, although with not quite the same "V" shape as Industrial Production. Personal Income has risen in the last several months, but so far is merely flat-lining rather than rising. But as you can guess, it's the employment situation that will continue to weigh on the economy:

Source: William Hester, Hussman Funds 

Yikes. Hester points out that the trend of NonFarm Payrolls thus far tracks quite closely the "jobless recovery" that followed the 2001 recession. That recession was said to be over in November 2001, but employment didn't recover for about two years and the bear market persisted for another year. As Hester notes, "it would go against precedent for [NBER] to declare the end of a recession with the mixed signals that are currently in place."

So what do you think? Is the Great Recession over? If it is, does it matter? Don Peck has a very disheartening piece in the newest Atlantic predicting a "long shadow" that will stretch across the economy for several years to come and will even produce a "slow motion social catastrophe," wrecking marriages, cities, and quality of life for whole swathes of the United States.

It's a perpetual temptation for every generation to declare its time to be historic, for everyone to perceive themselves as living through some sort of inflection point. Such time-centrist sentiment often proves unfounded, but occasionally the signals are so overpowering that you can't help wondering: is this the moment when everything changed?

The Value of Bernanke's Reconfirmation

Federal Reserve Chairman Ben Bernanke is up for a reconfirmation vote in the Senate tomorrow. He will likely be confirmed, and that's good news.

A perceived surge in populism is roiling both the Democratic and Republican parties, and a strange combination of all the political tension somehow fell on Ben Bernanke. And it was bipartisan. Politicians got the message that voters were angry: angry at Wall Street, angry at Washington policies, angry at elites wherever they may be. So Ben Bernanke, the calm-voiced Princeton professor and author of macro textbooks, became the fall guy for all those who really contributed to the subprime mortgage-induced recession. There's been a drumbeat of attacks on his stewardship of the central bank. But a funny thing happened on the way to guillotine. A majority of Senators seem to have decided to reconfirm.

In our view, Chairman Bernanke has been creative when others were dogmatic. He was decisive when others were silent. For that reason alone he should be praised, as Time magazine has done, certainly not condemned.

Second, what too many fail to understand is that for millions of Americans the U.S. recession is not over. There is no certain destiny for a recovery, strong or weak, in the coming year. And the biggest danger remains the fragility of the global financial system. The Chairman has demonstrated that he understands that danger. We need him now as much as we needed him in September 2008 when things looked much darker.

The third value in reconfirming Bernanke has hardly been noticed, but here it is. In a city drowning in partisan rancor, the bipartisan victory of the chairman reconfirmation will emerge as an invaluable island of sanity, and perhaps point the way toward more bipartisan, constructive action ahead. Let’s hope.

SIGNED

Robert Litan and Tim Kane

Field of Dreams is an Awesome Baseball Movie, not an Economic Development Strategy

By some estimates, the United States currently has vacant office space running into the hundreds of millions of square feet: law offices, Fortune 500 companies, cookie-cutter glass boxes constructed on sandpiles of debt, etc. And, as discussed previously, commercial real estate (CRE) could very well be the next economic shoe to drop, dragging down whatever economic recovery is materializing. 

At the same time, it's increasingly clear to more and more people that recovery and expansion simply won't happen without entrepreneurs: new companies that bring innovations to market. Entrepreneurs are not the silver bullet solution, yet growth will not occur without them. 

So let's see: how could we possibly address a looming CRE problem as well as encouraging incipient and potential entrepreneurs? Got it! Construct completely new science parks! Ignore both problems and travel a well-trod path that, if not inspired by Field of Dreams, at least follows the same blueprint: Build it and they will come. 

Oh, wait, hold on a second, I'm being told that this idea is already being pursued--it seems that Congress has taken time from its time-consuming BCS debates to pass legislation that will ostensibly "spur innovation [and] economic with development" by building science parks. And wouldn't you know it, the bill miraculously finds empirical support from the Association of University Research Parks. This is a page right out of the NVCA's playbook.

Not that science parks are necessarily bad, but evidence on their effectiveness appears mixed and, in any case, the concept would seem to contradict, you know, the entire history of innovation.

The bill's title is "The Building a Stronger America Act," which should not be confused with Build a Stronger America, an entrepreneurs' movement that seeks, inter alia, to expand the popular notions of entrepreneurship and innovation beyond science parks and venture capital, beyond the idea of walling off our "innovators" from the huddled masses of ordinary humans.

One of the absolute best pieces to read on how innovation happens is J. Rogers Hollingsworth's chapter on "High Cognitive Complexity." Synthesis, not separation, is the key.

Update: Kedrosky has written a wonderfully scathing post focused on the CRE part of this issue.

Breaking Through Barriers to Innovation

The search is on for ideas that will stimulate short- and long-term economic growth in the United States without further adding to the budget deficit. Here's a no-brainer: allow university researchers with innovations that are ready to be commercialized to shop around to different technology licensing offices. 

That's the idea advanced by Kauffman Foundation vice-presidents Lesa Mitchell and Bob Litan in the forthcoming issue of the newly revamped Harvard Business Review. This issue features the top "Breakthrough Ideas for 2010" and, happily, this idea comes in at number 6!

Currently, if you are a professor with a new technology or innovation, you typically must work through your own university's technology licensing office (TLO). This is inefficient for a variety of reasons. For one thing, not all TLOs are created equal: some have greater skill than others, while a handful excel. Several decades ago, federal funding of academic research was dramatically skewed toward those universities that engaged in the most commercialization: patents, licenses, spinoffs, etc. In the last twenty or thirty years, the distribution line of federal funding has flattened considerably, with a greater number of schools receiving money than before. This is not to say that the distribution is equal, but it's much less skewed than before.

Here's the kicker: the distribution of innovation output--patents, licenses, startups--has not changed. It's still skewed toward a handful of schools despite the huge increase in the number of universities receiving federal R&D money. We are not reaping the benefits of innovations that are presumably emerging from all that research and development. 

While some TLOs are more competent than others, moreover, it's also likely that such competence varies by area: one TLO may excel at commercializing life science discoveries while another may have a comparative advantage in computer science. Opening up the market for discoveries and commercialization should help iron out the inefficiencies and barriers that exist.

Kudos to Lesa and Bob for a fantastic article and for advancing a top Breakthrough Idea of 2010.

Credit Supply and Demand: What to Make of the NFIB Survey?

A recent survey by the National Federation of Independent Businesses (NFIB) has garnered some attention for suggesting that demand for credit among small businesses is the problem, rather than a restricted supply due to tighter lending standards. The implication is that, contrary to President Obama's recent proposals to expand the flow of credit to small businesses (and our own discussion here on Growthology), the credit pipeline is secure if only businesses would access it. With consumer demand still rather sluggish, small businesses may see little reason to pursue new credit. 

Clearly, many businesses face difficulties in obtaining credit from banks; indeed, the weight of anecdotal evidence seems to support the notion that this is a supply problem, as do other surveys pointing to a spike in the number of companies reporting difficulty getting loans. I spoke with Ann Meyer of the Chicago Tribune last week who noted that not one company she has encountered in Chicago reports an easy time of getting credit. The Kauffman Foundation's recent work in Detroit seconds this perspective. 

And, indeed, the October Federal Reserve Senior Loan Officer Survey did find that "domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households." Supply of credit, in other words, continued to be an issue.

But that's not the whole story. The Fed survey also indicated that the percentage of banks tightening standards has fallen over the last year--the supply pipeline is easing. In fact, the percentage of banks reporting tighter standards for loans to small businesses is at 2007 levels. Demand, moreover, "for most major categories of loans at domestic banks reportedly continued to weaken," albeit at a somewhat slower pace.

The question of credit, particularly to small businesses, is a thorny issue. Supply and demand both seem to be at work here, with the preponderance either way likely to vary by region. Meyer, in fact, pointed out that a problem with the NFIB survey is that it is skewed toward non-urban regions and businesses and thus doesn't represent the business conditions in places like Chicago. This seems like a fair point and echoes other criticisms of the NFIB. Two further issues require brief mention.

One is the apparently ballooning problem in commercial real estate with, by some estimates, half a billion dollars in bad loans preparing to come due and eat up banks' balance sheets. What does this have to do with credit for small companies? As the Atlanta Fed recently pointed out, the banks holding a large chunk of these CRE loans also happen to be the same banks that lend to small companies. 

Second, any discussion of credit for "small" businesses inevitably elides over an essential corner of the economic universe: new and young companies. True, these are often coterminous with small business, but it doesn't mean the interests of a five-employee startup will coincide with the interests of a five-employee, 25-year-old company, particularly in different industries. Credit problems pertaining to "small" businesses won't necessarily apply to new and young firms, especially since a primary source of financing for the latter category is the proverbial trio of family, friends, and fools, as well as personal credit cards. True, using one's credit card or home equity line isn't exactly easier than it was two or three years ago, but this means an easing of credit availability aimed at "small" businesses may not have (much of) an effect on the fortunes of new and young companies, which are the real sources of job creation in the American economy.

Would a Jobs Credit Work? A Response to Pozen

(Bob Litan)

Main Street is impatient with the pace of the recovery. Yes, the stock market has rebounded smartly from its March lows; and yes, government statisticians tell us that total output of goods and services actually increased at an annual rate of 3.5% in the third quarter, most likely marking an official end to the Great Recession. But on Main Street, unemployment has now passed 10%, and many more Americans are discouraged from looking for work, or engaged in part-time jobs unable to upgrade into full-time work.

No wonder then that policy makers in both political parties are frantically searching for ways to reverse the monthly job losses and start putting more Americans back to work. One idea that has attracted a lot of attention is a temporary tax credit or a partial or total suspension of the payroll tax to encourage employers to begin hiring again.

Robert Pozen, a thoughtful and experienced financial expert, recently provided some useful analysis of this idea, and came up with a highly targeted job creation proposal designed to provide the largest bang for the policy bucks (to minimize the impact on the uncomfortably large federal deficit). The notion is to provide a 15% tax credit, up to $100,000 per employee, for employers making net additions to their payrolls, but require that half of the new workers come from the ranks of the previously unemployed.

However, this proposal would limit the credit only for already established employers – those in business prior to some cutoff date (Pozen suggests September 30th of this year). The rationale for excluding all new firms from eligibility is to prevent existing firms from breaking themselves up or forming new subsidiaries or affiliates simply in order to qualify for the credit.

What sounds like a minor detail – the eligibility cutoff – would actually be a big mistake--for it reflects a fundamental misreading of which firms are most likely to hire new workers and sustain the recovery after the stimulus measures wind down and are eventually withdrawn.

A new Kauffman Foundation study documents that over the past three decades, until this recession, new firms (those one to five years old) have been responsible for much or all of the net new jobs created in our economy. Remarkably, even in the teeth of the recession, through 2008, the number of new business starts, as measured by another Kauffman study, has actually increased modestly. What we don’t know is whether the constraints on business credit or other impediments will deter these new firms, as well as those recently created, from continuing the historical pattern by being the prime source of net job creation now and in the years ahead. What do know, though, is that excluding new firms from receiving any job tax credit will certainly break that historical pattern – hardly the outcome anyone wants.

Fortunately, there is much more straightforward way to prevent the kind of gaming that Pozen worries about: in calculating the employment benchmark for determining whether a firm has added to its payrolls, the tax authorities should include all subsidiaries and affiliates in which a firm has an equity interest above a certain threshold (such as 10% of  an entity’s equity).

Meanwhile, policy makers should continue to look for other ways to boost the formation and growth of new companies, which are not only likely to be source of new jobs but of the next wave of new products and services that will restore optimism about our economic future.

Some examples: Establish a “job creator’s” visa for immigrants who launch new companies and hire workers; fix bank capital requirements so that they are less likely to discourage business lending in economic downturns (by making the requirements less pro-cyclical); allow shareholders to determine whether their companies should adhere to all or a portion of the requirements of the Sarbanes Oxley Act that make it more expensive for high growth companies to go public and thus expand on their rather than to sell out; and encouraging the development of a truly free market in the licensing of technologies developed by our universities using federal research funds, which would accelerate the commercialization of innovations that will reshape our future. (The House Financial Services Committee recently voted to extend the exemption of small companies from Sarbanes-Oxley's section 404(b). The measure still needs to pass the full House and Senate and does not affect the requirement that these companies comply with section 404(a).)

Agree or disagree, as you may, with some of these specifics. But the source of America’s remarkable job growth, our new firms, is not in dispute. As we all seek to dig our way out of our current economic hole, we cannot leave our entrepreneurs out of the solution, because they are the solution.

--Bob Litan

Where Have All the Loans Gone?

Last week the Obama Administration announced the expansion of a few Small Business Administration (SBA) loan programs, raising the cap on 7(a) loans, increasing the size of "microloans," and offering more aid, via TARP, to community banks. Questions will persist about the efficacy of SBA loan programs for new and small companies, as well as the effect of TARP restrictions on community banks, but two things are immediately clear. 

First, business loans have plummeted during this recession (via Econompic):

Worse, they show absolutely no upward trend in recent months:

(Source: John Mauldin.)

Any expansion of capital for businesses, even from the SBA, should theoretically help in some way. Credit is the oxygen line of new firms and they have been courting asphyxiation in this recession. 

Second, new and young businesses are the primary source of net job creation in the United States, yet this fact of economic life has for the most part been lost on policymakers (and media) obsessed with restarting the hiring process at large, established companies. Any recognition, therefore, of the importance of new firms and their access to capital can only be a good thing.

These steps aren't a silver bullet, mind you, and officials in Washington and every state capital continue to cast around for anything that will address (or appear to address) the dire employment situation this country faces. Nonetheless, President Obama's announcement is a step in the right direction and it comes on the heels of the creation within the Department of Commerce of a new Office of Innovation and Entrepreneurship. New firms are the drivers of job creation, and now Washington is finally turning to them.

"Micromortgages": A Better Approach to Economic Development Through Entrepreneurship?

Guest post by Charles Johnson

Our foundation president, Carl J. Schramm, has criticized Yunus's approach to microfinance, most recently in his essay for the Claremont Review of Books. In comparing the Nobel Prizes awarded for economics and peace in 2007, Dr. Schramm argued in the Wall Street Journal that microfinance might not be the panacea for world poverty that aid development agencies, like the State Department, have suggested that it is. With co-author, Dr. Amar Bhidé, Schramm writes,

Mr. Yunus's ameliorative entrepreneurship however is very different from the transformative entrepreneurship that Mr. Phelps argues has been central to modern capitalism. Indeed, most of the ventures funded by microloans in Bangladesh are activities that were marginalized by modern entrepreneurs: They don't involve any economies of scale or scope or the use of new technologies capable of producing significant advances in overall productivity and incomes. 

 Economic development does wonders for peace, but what does microfinanced entrepreneurship really do for economic development? Can turning more beggars into basket weavers make Bangladesh less of a, well, basket case? A few small port cities or petro-states aside, there is no historical precedent for sustained improvements in living standards without broad-based modernization and widespread improvements in productivity brought about by the dynamic entrepreneurship that Mr. Phelps celebrates.

It seems, though, that microfinance, far from being the panacea, may simply encourage consumption at the expense of long term economic growth. As a welfare program, microfinance isn't necessarily bad, as it most likely going to keep people from starving, but it lacks the kind of true impetus to drive true growth. True, Yunus’s model may be preferable to the massive government to government loans and spending of the Bengladeshi government, but that isn’t really saying much, even if the money is put directly into the hands of individuals.

A most recent article, titled,”A $9 Trillion Question: Did the World Get Muhammad Yunus Wrong?,” in Foreign Policy makes a similar point: how can the estimated $17 billion in loans actually help elevate the living standards of the $4 billion in poverty and why has it been so lackluster at generating real results?

Peter Schaefer writes,

Moreover, most of the existing microfinance credit is subsidized. Very little comes from private, profit-seeking capital markets (as of 2004, just $2.7 billion, or about 60 cents per poor person per year). This is because development banks do not really require collateral for their microloans. They often use subsidized credit, as they generally aren't profit-seeking. But banks backed by private capital markets require collateral. This means that their loans are too expensive for most of the long-term needs of the poor.

For instance, the private Mexican microbank Compartamos charges 100 percent annualized interest -- which, to be fair, reflects the real risk of providing an unsecured loan. But such long-term interest rates cannot encourage capital investment in projects that need time to gestate. And though shorter-term loans with 25 or 50 percent annualized rates beat the street rate, such debt cannot be carried for any length of time. As a result, the pool of global capital is largely inaccessible to poor people. And the solutions proposed by Yunus and de Soto for formalizing the economy of the poor and thus lifting them from poverty prove only marginal.

In short, too much debt tends to sink individuals faster than it takes for them to make long-term financial decisions. The author suggests that “micromortgages” could actually help promote real long-term growth. He writes,

How would it work? Let's consider a poor individual living in a house without a title or even an address in Mexico. He hopes to formalize his house. So, he visits a local bank to apply to register his property. To the bank, he represents potential demand for credit -- the bank has incentive to research his claim, help him map his land, assess any improvements, and submit his information to the registry. The bank would do this in return for his loan business and a fee to cover costs. 

The bank would then submit the individual's information to the government, ready for entry into an official national digital registry. Were the application accepted for processing, he could take out a form of title insurance from the bank, which could then safely extend credit to the applicant. The modest application fee would be added to his loan principal, allowing him to immediately use the balance for, say, a long-term micromortgage to finance a business.

 Intuitively, tapping into the equity in your home makes sense. Many entrepreneurs in the U.S. have used home equity lines of credit to finance their businesses, why should the developing world be any different?  

Economics Bloggers Video

Here's a video of the Kauffman Econ Bloggers Forum:

Thanks to Matt Pozel and Matt Long for an awesome production effort.

States in Distress = Stimulus 2.0?

The Great Recession is ebbing, according to the latest GDP "growth" data. The U.S. economy shrank by a mere 1 percent during Q2. Maybe this is good news. It is if you believe in one particular economic model: that is, the pop culture macro model (PCMM).

As Paul Krugman says, even the barest rule-of-thumb is a kind of model. So for all the radio bla-blah bashing economists and their models, it sure seems the media is ready to declare this recession over. The pop culture model anticipates growth is normal and recessions are reliable cycles. Now that the cycle is slowing on the downside, the model says happy days of growth are bound to appear soon. I suppose we will keep calling this thing the "Great Recession" unless and until a double dip proves the pop model wrong. It will start looking like a "Little Depression" if some abnormality causes a renewed contraction in GDP any time before 2012.

And there already abnormalities, the crushing political and budgetary collapse in California for one. Oil prices poised for takeoff, for two. Global duress, for three. Add the context(s) of sluggish consumption which is likely to endure and the fragility of financial markets; the moment is ripe for another fall. And if you look at the numbers with eyes of Jim Hamilton, this is what you see:

had it not been for the positive contribution from falling imports and increasing government spending, the Q2 number would have been -4.3% instead of -1%. Should we be cheering the fact that falling imports were a key factor preventing GDP from declining even more? Falling U.S. imports can create problems for those countries trying to export to us and are a symptom of a very weak U.S. economy.

Now might be a good time to think seriously about what another stimulus would look like. The budgetary dilemma of the states could easily make the Little Depression self-fulfilling unless a smart anticipatory stimulus is readied. By that, I mean a plan which would be well-crafted for automatic operation. Many policy programs are automatic stabilizers on a small scale -- things like unemployment insurance and food stamps and even the progressive tax code.

What would be helpful is a macro automatic stabilizer.  A consensus would probably look like this:

• State grants: population-weighted disbursements from the U.S. federal government's general fund to each of the 50 states plus DC. The total amount would equal $100 billion for each year-over-year percentage point of negative growth revealed in the final report of 4th quarter of 2009. The same amount and rule would be used in the final report of the 2nd quarter of 2010.

• Payroll tax holiday: a 1-year tax holiday for 50 percent of all payroll taxes for calendar year 2010. Total cost = $400 billion.

• Labor regulation holiday: a 2-year hiatus for the federal minimum wage, Davis-Bacon rules, and other limitations on labor market flexibility.  State laws would still hold. This would allow diversity of the 50 states to find optimal policies to create jobs, rather than cartelize rents.

• Corporate tax cut: immediate 5-point reduction in federal corporate tax rates.

• Job-Creators Visa: open immigration to high-skill migrants, especially graduates of U.S. universities.

• Federal spending and Hiring freeze. The deficit problem cannot help but worsen during a recession. But on the spending side, bureaucratic sprawl can at least be frozen.

And a word of caution. History is likely to record the first stimulus as a failure, mainly because it was a highly partisan effort. It carried the weight of over a decade of pent-up Democratic frustrations, perhaps deservedly so. But it was hardly optimal for its purpose. The President should not want to own this recession, but he soon will if his bipartisan promises remain unfulfilled.

That's Why We Need More Entrepreneurs

Scott Shane recently joined the New York Times as a blogger for the site's new You're the Boss blog and in his most recent post used a series of charts to show that the United States is actually becoming less entrepreneurial than we would like to pretend.

Professor Shane, a professor of entrepreneurship, has been an outspoken skeptic of entrepreneurial capitalism, casting doubt on the extent and benefits of entrepreneurship. His latest line of research concerns genetics and entrepreneurship, identifying "the influence of genetic factors on the variation across people in opportunity recognition." This, Professor Shane purports to demonstrate, is heritable and independent of environment, as are occupational choices in general, such as teacher or manager or self-employment. (For a critique of opportunity recognition, see this recent paper: Download Creative Discovery Innovations June 2009.)

Notwithstanding potential sampling errors, the heritability of personality traits is a breeding ground for questionable claims. As the eminent Samuel Bowles has pointed out, "data from modern economies suggest that personality influences individual success, but the effects are quite modest." Moreover, "the correlations between parental and offspring measures of personality are strikingly low." The world periodically endures genetic determinism fads, and they rarely end well. 

Plus, if entrepreneurship is solely determined by genetic inheritance, why even have professors of entrepreneurship? 

In his latest post, however, Professor Shane is onto something: whether measured by the number of new employer firms started each year or the number of new establishments, the rate of entrepreneurship has fallen over the past two or three decades. Shane uses Census data that the Kauffman Foundation has helped fund, and I published charts on the falling establishment entry rate in a recent paper. And the share of Americans working in giant firms (those with more than 10,000 employees) has slowly but steadily risen in the past decade.

But there are a few points Shane fails to make. As one of his commenters notes, there has been a rebound in new firm and establishment creation since 2002. One of the datasets only runs through 2005 and when new Census data are released in August, we should know whether or not this rising establishment formation trend continued. With regard to new firm creation (nb, employer firms, not self-employed consultants or personal services), Shane's data run only up to 2007. But the Kauffman Index of Entrepreneurial Activity showed a slight uptick in new firm creation 2008. It will also be interesting to break all of this down by industry.

So what does this mean? We've actually seen a steady increase in the number of new firms started over the past few years. Shane's point is that while absolute numbers may increase, they fail to keep pace with population growth and so the rate, firm starts per capita, actually falls. That's right. But this only highlights the crucial need for more new firms, for more entrepreneurs. As we've noted before, using that same Census data, looking back over the past thirty years, if we had taken startups out of any given year, net job creation for the overall economy would have been negative in most years. No new firms, no new jobs. No one can escape, moreover, the great lesson of economic history that entrepreneurs are disproportionately responsible for radical innovations.

But the message is much broader than this: the real source of economic growth lurking in here is firm growth. This signals market success, generates jobs, and brings with it increasing returns to ideas. So even if the rate of entrepreneurship fluctuates on an annual or decennial basis, this doesn't mean that there aren't entrepreneurial firms growing to scale during that time. This, in fact, is precisely the pattern we would expect to see: a high rate of new firm creation followed by a period of falling entrepreneurship as firms fail, consolidate, and grow. This will (or should, provided barriers to entry are kept low) be followed by yet another period of high rates of entrepreneurial activity.

Finding Other Earths; Keeping Perspective

Everyone is so gloomy about the economy!  Of course, I am incredibly sympathetic to those who are jobless, who have lost life savings, and see policymakers making things worse instead of better.

So is there any room to be optimistic about the future? 

Yes.

Today of all days we should be wildly happy. Today, NASA launches a mission into space that I have been dreaming about since I was a wee toddler. 10:49 P.M. from right here in Florida (where I am travelling at the moment). It is called Kepler, and this new satellite will have the biggest camera ever sent into space.  Its mission is to find Earth-like planets around other stars. These are places that odds are have oceans of water, puffy white clouds, and (with some luck) little green men that we can go to war with and scapegoat all our problems on. Quoting the InformationWeek story:

Kepler will search for planets that orbit stars and are partly covered with water, a vital ingredient for life. If all goes as planned, it will spend more than three years with 100,000 stars in its sights. ... The Kepler mission is scheduled for liftoff from Cape Canaveral Air Force Station in Florida Friday at 10:49 p.m., EST. Nine boosters will power the Delta II rocket, which will send Kepler 115 miles above the Earth in less than 10 minutes. In just over an hour, the spacecraft will separate from the rocket and begin orbiting the sun.

"We will monitor a wide range of stars, from small cool ones -- where planets must circle closely to stay warm -- to stars bigger and hotter than the sun, where planets must stay well clear to avoid being roasted," William Borucki, principal investigator for the mission, said in a statement released Thursday. "Everything about the mission is optimized to find Earth-size planets with the potential for life, to help us answer the question: Are Earths bountiful or is our planet unique?"

NASA said that Kepler's powerful camera is the largest to ever fly in space. It has a 95-megapixel array of charge-coupled devices like those in digital cameras, and it will detect the faintest "winks" in starlight, Next year, Apple computer says it will include an identical camera in its mass-produced iPhone.

(Okay, I tacked on that last sentence about Apple, which is entirely made-up.  Still, don't you see it happening in a few years? Technology! iPhone!  You have to willfully not see the reasons for optimism in your face.)

Now I spent my formative years as a young Air Force officer, anticipating that career when I was a cadet as a cold warrior during a cold war. Our ambition was to fight and win a nuclear war. So you can imagine that this pesky global recession just doesn't seem such a bother, relatively speaking. Naturally, the way to win a nuclear war is to never have it, which is exactly what we did. So now I am a happily married man with non-radioactive children. Not a bad ending.

Oh and another thing, The Watchmen movie is out today. Come on!  It's a great day!

As for happy endings ... "Nothing ends, Adrian." (that line better be in the final cut).

Happy weekend. Enjoy the sunshine on our little blue planet.

Entrepreneurship = Recovery; Getting Started On Your New Venture

Ironically increasing unemployment rates may end up with more entrepreneurship as laid off workers struggle to find jobs and on the margins create their own companies instead.

At Kauffman, we've taken to calling that phenomenon of entrepreneurship spurring recovery as E = R. 

For people looking to streamline the process of starting your own company, here are some links from the private sector and the non-profit sector. Enjoy!

Private Sector

LegalZoom is a legal document service developed by attorneys. Entrepreneurs looking to form a new business answer questions online and documents are be prepared and shipped within 48 hours. The company also offers to review answers on the forms. LegalZoom is available 24/7 to provide guidance.  It also offers help with registering IP. Its staff of legal experts includes retired judges and law school professors. Their website passes the FBI's stringent Internet Security Vulnerabilities Test. The company was been rated "A" by the Better Business Bureau and has been praised by NY Times, WSJ and other media.  

In terms of fees, the company claims to have a "lawyer-free" service which saves customers up to 85% off the rates an attorney would charge for the same procedure. Fees are upfront and "per project" (economy LLC pricing is $149)  
 
Nolo.com This company offers corporation and LLC services. Prices are per service package, starting at $99. All services have 3 steps for the client wanting to form a company. It starts with answering to a generic questionnaire. Nolo also offers excellent HR advice and services, such as a detailed page on “Hiring Your First Employee: 13 Things You Must Do.”

 
IncFile.com This firm a similar online order form for those seeking to form a business entity. Once the order is processed, IncFile drafts formation documents and forwards them to the appropriate state agency for filing. As soon as the business entity is formed by the state, filed documents are forwarded to the client. Services start at $49. 

Rocketlawyer.com offers incorporation services. The cost is $99.95, plus filing fees. As the above company, service starts with the client completing an online form and then rocketlawyer deals with the state filing process. The service includes other perks like an online account with a "minutes keeper" to keep the corporation in compliance 
 
Findlaw.com This company offers packages of forms by state. Purchasers fill them out themselves. Assistance is available, if needed. It partners with LegalZoom for other services. 

Microsoft Startup Center is a well-organized list of the tasks to consider in starting a business, with help, resources and of course, information on how Microsoft products and services can help. "The Rules" tab, for example,  has advice on selecting a business structure, getting licenses, understanding tax responsibilities and buying a bar code. User can download a free business plan template and free small business accounting software. 
 
The Company Corporation helps with business structure (corporation, LLC, etc.) 
 
BizFilings.com BizFilings makes business incorporation easier and faster. Rush incorporation services makes it possible to file a corporation or LLC in as little as 24 hours. The company is headquartered in Madison, Wisconsin with satellite operations around the country. Basic packages start at $115 + state taxes. 

AllBusiness.com This site sells legal forms. It's also a blog for entrepreneurs.

 
 

Non-Profit Sector
 
My Own Business Inc.  
This non-profit organization offers online a free course of instruction for small-business owners and aspiring entrepreneurs. 
 
Score.org 
SCORE "Counselors to America's Small Business" is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA). It's basically free counseling through its 389 chapters and 10,500 volunteers nationwide. Both working and retired executives and business owners donate time and expertise as business counselors. SCORE was founded in 1964. 
E-Vem The purpose of the e-VEM project is to provide a suitable electronic support for the future entrepreneur. It enables a one-stop-shop registering of a company into the Court Register and carrying out of other formalities. All procedures are available online or at physical entry points. The system has been operating since July 2005.