At the same time the CATO Institute was holding its program on the winners and losers in the banking industry, crediting as winners some of the worst actors in the financial crisis, the American Enterprise Institute for Public Research Policy held a book forum titled Better Capitalism: Reviving America's Entrepreneurial Engine. There's some question as to whether this can even be achieved, given the damage that has been done by the financial crisis, but several experts considered the question. One of them, Robert Litan, director of research at Bloomberg Government is one of the smartest observers of finance and economics anywhere. Litan has served as deputy assistant attorney general for civil antitrust enforcement at the Department of Justice and as associate director of Office of Management and Budget in the Clinton administration. In the second Clinton term he was a consultant to the Treasury Department on financial modernization and the Community Reinvestment Act. Litan has authored 25 books, co-authored 14 and co-authored over 200 articles. The other panelist was Carl Schramm of Syracuse University. The moderator was Kevin Hassett, who was one of the leading economic advisors, along with Mark Zandi, chief economist at Moody's Analytics who is advising Mitt Romney’s campaign.
Schramm and Litan served as CEO and vice president for research and policy, respectively, at the Kauffman Foundation, the largest private funder of studies in entrepreneurship. They have co-authored a book titled “Better Capitalism: Renewing the Entrepreneurial Strength of the American Economy.”
Litan stated that the United States needs "a much heavier dose of entrepreneurship," and he cited three fact: first, the number of annual startups has declined from 600,000 to 400,000; second, the five-year survival rate has declined from 50 percent to 45 percent; and third, there has been a secular decline in the number of new jobs created per startup, dating from the Internet bust of 2001. Litan believes that the last phenomenon is due not to the recession but to the advent of outsourcing and the cheapness of the cloud, so that workers tend to be rented rather than hired. The only way to get back to the halcyon days of 200,000 to 300,000 monthly job growth, he suggested, would entail a sustained entrepreneurial revolution. He added that the most significant inventions that have historically contributed to economic growth were invented by entrepreneurs, not by large companies.
Policy prescriptions to boost entrepreneurship include more visas for skilled immigrants; a better system of financing entrepreneurship, as through the Jumpstart Our Business Startups (JOBS) Act, but going even further; and much more successful academic entrepreneurship. A separate area for policy action would be regulatory reform, including strengthened requirements for cost/benefit analyses, 10-year sunsets for all existing rules, subject to cost/benefit analyses and reforms that should also apply at the state level. Bipartisan legislation containing these reforms has been introduced and is called "The Startup Act 2.0," introduced in May be Sens. Mark Warner, D-Va., Marco Rubio, R-Fla., Jerry Moran, R-Kan., and Joe Koons, D-Del., and there are four bipartisan sponsors on the House side, as well. Litan expressed hope that after the election, the legislation would pass. Litan concluded that energy independence, through the use of multiple sources of energy for cars and trucks, and the deficit also need to be addressed in order to enable vigorous entrepreneurship. Among the measures he suggested for addressing the deficit was a shift from public to private ownership of infrastructure, including broadband construction, which would improve the quality and availability of the Internet.
Schramm told of the work the Kauffman Foundation has done in producing 75 books on entrepreneurship, which has made data available for the first time that makes possible a better understanding of the process of entrepreneurship. He added that these data have been put to use by Romney and Paul Ryan in the current campaign. The panelists traced the study of capitalism to Adam Smith's thesis, later attacked by Karl Marx, with Joseph Schumpeter and Will Baumol as later voices. Schramm mentioned his involvement in a panel assembled to figure out how to energize innovation, and he lamented that there were several university presidents on the panel who were arguing that the way to do this is to dump truckloads of cash on the universities, regardless of what the data show. He observed that capitalism has historically been able to create the institutions it needs to advance, and he proposed that perhaps a new institution modeled on the old Bell Labs needs to be created within the private sector. He concluded that attention needs to be paid to how the fruits of entrepreneurship are distributed and to a search for ways to change the culture of the country to accommodate a much faster rate of growth, perhaps as high as 6 percent, rather than to accept that 3 percent to 4 percent is some sort of natural limit on growth.
After the presentations, Hassett asked the panelists to respond to the argument by Schumpeter that universities would turn against capitalism and would foster a shortsighted society that would ultimately undermine capitalism. Litan responded that Schumpeter had predicted that capitalism would be doomed due to domination by big companies, and that Schumpeter was thinking of the economy of the 1950s and 1960s, which was dominated by the “Generals”; therefore, the small entrepreneurs would be crowded out, and investors would increasingly look to short-term results over long-term stability. Litan said that this prediction was flatly wrong and missed Silicon Valley and the broadband revolution. It remains, though, that the economy is mired in a valley of risk aversion on the part of angel investors, banks, regulators and individuals. He called for a massive influx of immigrants, who account for 25 percent of startups and could spur entrepreneurship.
If I had had an opportunity to speak to Litan, there would have been several questions I would have raised:
1. During the hearings on the JOBS Act and during the subsequent debate over its implementation through a rule proposed by the Securities and Exchange Commission under pressure from Congress, some legislators raised concerns that the Act would weaken investor protection and set the stage for a new wave of scams, as state regulators report there has already been an uptick in securities fraud. How would Litan respond?
2. It seems anecdotally to this observer that the model for entrepreneurship has been for the entrepreneurs to fund startups on a shoestring and hand them off through a series of stages rather than commit funds to support the company to maturity. Thus the focus is on an early exit by means of an initial public offering, so that the shortsighted view Schumpeter predicted has prevailed. If this is true, does the JOBS Act address the right problem?
3. Finally, under the interventionist policies that have prevailed in Washington, would-be investors have incentives both to look to Washington for help and to fear that if they invest, Washington will do something to undermine the value of the investments. To this, Litan would probably respond that an injection of foreign energy would prompt private investors to move, but this would have to be considered highly speculative.
Update on Jamie Dimon
As usual, CNBC keeps viewers informed of the latest machinations of JPMorgan Chase CEO Jamie Dimon. The network reported that he hosted a lunch at JPMorgan’s headquarters for 75 CEOs to promote a response to the fiscal cliff and that the group will be running ads after the election to urge prompt action.
Another way to look at this is that Dimon is eager to present himself as a leader in formulating government policy, especially since the press seems equally interested in participating in this campaign, and this serves the purpose of changing the subject from the condition of JPMorgan, the "London Whale" and the question of whether the too big to fail banks should be broken up.
Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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