Fixing America's startup slowdown - From the Biden Forum

Published in the Biden Forum

In a few weeks, the American economy should have something to celebrate — nine years of uninterrupted economic expansion. Since June 2009, the stock market’s value has nearly tripled, the economy has grown nearly 40 percent, and both unemployment and inflation are at record lows. But these indicators belie a far more complex portrait of our present situation — one where the middle class keeps falling further behind, the working class is dying — literally dying — from gun violence and opioid addiction, and the rich are amassing a greater share of the nation’s wealth.

The present situation is untenable but not inevitable. The key to renewal is understanding what made the American economy great in the first place — entrepreneurship. Historically, we have been the world’s most entrepreneurial nation and, by virtue of that, its most innovative.

But that dynamism has receded in recent years as the number of new companies in America has declined. Since 1980, the share of startups less than a year old as a percent of all businesses has been cut in half. The point is, if we want to solve the problem of an economy that no longer works for the majority of people, we need to urgently address and reverse America’s startup stagnation.

One place we may want to begin is with the policy framework embedded in Race to the Top — the Obama-era initiative that succeeded in getting all 50 states to modernize K-12 education. Like the XPRIZE competition, which offers multimillion-dollar rewards to teams that come up with innovative solutions to humanity’s greatest problems, Race to the Top leveraged competition between states to drive action. To qualify, states not only had to develop a comprehensive plan to improve public education, they had to conform their laws and applicable regulations. The return on investment was extraordinary: For about what it costs the Navy to build a submarine, the government transformed how states manage the $620 billion they spend annually on educating our kids.

What worked for education could also work for boosting startup activity. In too many states, lawmakers and governors aren’t investing in entrepreneurship, and are focused instead on luring already big businesses like Amazon with subsidies and favorable tax treatment. It’s a losing proposition and a slap in the face to every small business owner struggling to compete with Amazon on a level playing field. Instead of playing the zero-sum game where one state wins at the expense of another, state and local politicians ought to focus on growing the economic pie by cultivating the next generation of startups.

That’s where the federal government can move the needle. To that end, Representative Seth Moulton (D-MA) is drafting legislation modeled on Race to the Top that would incentivize states to prioritize new business creation. It’s a smart approach when you consider that startups disproportionately contribute to job creation, community redevelopment, and economic mobility. The bill is not a mandate. It does not prescribe the solutions or impose a new government program. It simply articulates a bold vision — increasing startup formation — and asks local politicians to develop and implement plans in four core areas fundamental to startup formation: talent, access to capital, regulation, and tech infrastructure.

By design, different states will take different paths. Some will adapt their laws to overhaul occupational licensing standards that stifle talent. Some will limit the use of non-compete contracts that suppress wages and impair workers’ ability to start a new business or switch jobs. Others will focus on workforce education and retraining. A few will make it easier for publicly funded universities to transfer and scale research and technology developed with public money. The proposal also offers an opportunity for states to leverage existing programs, like the one established by the recent tax reform bill, that give favorable tax treatment to long-term private investment in distressed communities.

Ultimately, democracies depend on citizens believing that economic opportunity is obtainable. And it is, but it’s going to take more people starting businesses in more places. A nudge from Washington would certainly help.

Bradley Tusk