It's Time to Elevate Entrepreneurs

WASHINGTON-When President Obama delivers his State of the Union address next Wednesday evening, many Americans will be hoping he will offer help on the employment front. The president could usefully approach job creation by adopting measures to help entrepreneurs, the main drivers of innovation and job creation.

The employment situation is worrisome. Not only are over 15 million Americans unemployed, with the national unemployment rate at 10%, but the ratio of Americans of working age in the labor force - the employed plus those looking for work - is 64.6%, the lowest since 1985. Almost 40% of the unemployed have been out of work for six months or more.

The Labor Department's broadest measure of underused human resources-the unemployed plus the discouraged who have stopped looking for work (and so have dropped out of the labor force) and people working part-time because they cannot find full-time jobs-is 17.2%.

If job creation is the country's paramount economic objective, does it matter if the economy is populated by a few large, regulated firms, or by a broad base of entrepreneurial activity in smaller units? It matters, because entrepreneurship and innovation-the driving elements of economic growth-flourish best in smaller business units.

The key is innovation: introduction of new products and services that displace their predecessors because they yield greater output for any given application of labor and capital. Innovation is vital to sustained economic growth.

Entrepreneurs, determined individuals with new ideas, are most responsible for creating innovations. Not all new ideas are economic successes. Some lead to greater wealth and economic growth, and others fail. The beauty of our economic system is that it separates productive from unproductive ideas, allowing the former to flourish.

On January 19, Carl Schramm, president of the Ewing Marion Kauffman Foundation, which promotes entrepreneurship, gave his annual State of Entrepreneurship Address at Washington's National Press Club. (Full disclosure: the Kauffman Foundation has funded some of my past research.)

Mr. Schramm offered several ideas that President Obama could use to promote entrepreneurship and employment.

Fix our immigration policy. Many entrepreneurs want to hire workers with math, science, and technology skills, but not enough native-born Americans go into these fields. Yet, after we grant college and graduate degrees in these fields to foreigners, we often do not allow them to stay in America. Some education is provided at taxpayer expense, through research grants to universities from the Departments of Energy and Defense.

Hence, we now have the perverse situation where America educates many foreign graduates in math and science and sends them back home to compete against us. Alternatively, Mr. Schramm suggests, "We could start by offering instant citizenship to any of the thousands of bright young people from foreign countries who graduate from our universities."

Let me suggest that the United States could go even further and offer citizenship to foreign graduates who wish to come here from major science universities around the globe, such as China's Tsinghua University and India's Indian Institute of Technology.

Defang Sarbanes-Oxley. Evidence is mounting that the 2002 Sarbanes-Oxley legislation, accounting rules designed to protect shareholders from corporate abuses after the collapse of Enron and Tyco, discourages companies from expanding and going public. Furthermore, some new companies are choosing to locate in London and Tokyo rather than in the United States.

Mr. Schramm proposes that Congress allow shareholders to vote on whether Sarbanes-Oxley applies to their companies. Congress might not buy this, but the accounting requirements would be optional, and companies whose shareholders believed the costs of compliance would be greater than the benefits could choose not to comply. Some firms would be able to operate more nimbly without the SOX regulations.

Develop Commercialization of Academic Research. Mr. Schramm suggests that the government could encourage a free market in the licensing of innovations developed by professors, rather than having these licenses controlled by the university, as occurs now. This would enable the development of a vibrant market to commercialize research. This might require legislation to amend the Bayh-Dole Act, which gave universities ownership of rights to inventions developed through federal funding of research.

Similarly, the government could set up a system of commercialization fellowships to encourage post-doctoral scholars to work on promising ideas.

In addition to Mr. Schramm's proposals, there are drags on entrepreneurship from uncertainty over taxation and regulation.

Remove uncertainty over taxes. Most entrepreneurs file tax returns as individuals. Their highest tax rate is set to rise from 35% now to 40% on January 1, 2011, if Congress does nothing, and their lowest rate is scheduled to rise from 10% to 15%. Small business deductions for equipment would shrink. It's natural that some entrepreneurs will think twice about starting or expanding a business if they don't know what taxes they will face.

More business regulation is clearly on the congressional agenda. Even though Congress's present version of health "reform" may not survive the election of Scott Brown in Massachusetts, environmental and financial regulation are high on the lawmakers' to-do list, adding to uncertainty and to costs of doing business.

We have no way of knowing what auspicious innovations the future holds, and what small businesses will grow from mom-and-pop shops to global powerhouses. But President Obama should know that most innovations and many jobs will be generated by entrepreneurs, and we need more of them, not fewer.