What Would Bloggers Do For Recovery?

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Will solutions to the present economic crisis come from the wisdom of crowds or from the wisdom of experts? Not to belittle the serious philosophical differences among expert economists, but the consensus among them is often neglected in the media’s need for combative narratives. Perhaps the best growth ideas will come not from crowds nor from experts, but from a crowd of experts.

In late February, we convened a forum of economics bloggers and journalists at the Kauffman Foundation, which included a survey. Well-known bloggers like Matt Yglesias, Tyler Cowen, Robert X. Cringely, and Mark Thoma participated alongside distinguished economics journalists such as Amity Shlaes and David Warsh. The full results are published today at kauffman.org.

How to Fight the Recession?

When asked which type of government policy would be most effective at fighting the recession, two were clearly favored: a banking rescue and a fiscal stimulus plan. At the same time, a strong consensus also warned that both policies ran significant risks of causing long-term damage to the economy: moral hazard (in the case of the banking rescue) and higher interest rates and/or inflation in the future (because most believed that much of the economic stimulus would permanently increase the federal deficit).

The attendees also favored other policies, not yet adopted, to continue the fight against the recession: a payroll tax cut (with 75 percent support) and package of reforms aimed at removing barriers to entrepreneurship. Only one policy had zero votes against it: removing barriers to entrepreneurship.

Our survey then sought to identify the importance of “entrepreneurship” and “innovation” relative to seven other things frequently mentioned as good for the economy, namely “Free trade, Labor unions, Big business, Small business, Job creation, Manufacturing, and Economic growth.” Of all these, innovation was considered the most important to the economy’s health. Economic growth, Job creation, and Entrepreneurs rate as “very important” by more than 75 percent of respondents. The things considered least important were labor unions, manufacturing, and big business. Although the survey did not ask about bailouts for auto manufacturers, you can guess the sentiment. And when it comes to evaluating these things in terms of job creation, the results were almost identical. Notably, over half of the respondents think labor unions are unimportant for creating jobs.

Experts and voters increasingly recognize the importance of entrepreneurship, but so far policy-makers in Washington don’t quite get it. Check out the 119,000 word Recovery Act recently passed and signed into law, and you’ll find the word “entrepreneur” never appears once. The Obama Administration and the Fed have recently extended the Fed’s lending facility to purchase loans backed by the Small Business Administration, but easier debt financing for small firms is not the same as creating a growth environment for entrepreneurial firms. Only a small portion of new, small businesses grow into being the innovative forces that drive economic growth, like Microsoft, Intel, Apple, Google, and the wide range of successful bio-tech start-ups.

So what should Washington do to stimulate the entrepreneurial economy? The survey asked a number of questions to find out. Respondents feel that the biggest barriers that hinder would-be job creators are the loss of benefits like health care and pension if they leave their current employers, the risk of losing money, and the high levels of paperwork and bureaucracy. High taxes and legal complexity are two other barriers considered somewhat important. The barriers considered least important – with 50 percent or more responses of “not very important” and “unimportant” – are lawsuit risk and lost leisure time. Phrased differently, government red tape got the most votes (23 of 39) as one of the biggest barriers to startups. Only two other things receive votes from over 50 percent of respondents: the weak economy and the broken health care system.

When we asked, “What change would encourage more people to start a business here in America?” it allowed respondents to vote for positive policies rather than barriers to be removed. Keeping health benefits got votes from 25 of the 39 respondents. A close second is a call for lower and simpler taxes. This response stands out because it is rated higher than the other tax option of targeted tax breaks for entrepreneurs. Less important policies were mentoring, lowering lawsuit risks, and better business training.

Threatening the Sources of Innovation

Understanding innovation should help policy-makers focus on the right sectors in order to generate higher rates of economic growth. The main finding is that all of the potential sources of innovation identified are considered “very important” or “somewhat important” by almost the entire panel. However, small start-up firms stand significantly above the others, even venture-financed firms. Also, all three R&D institutions (government, university, and corporate) received relatively low marks, and government R&D had twice as many negative votes as the next worse source.

The survey also sought to identify which scenarios would be most damaging to innovation. Frankly, we anticipated bland scenarios, in contrast to the alarmism in mainstream media. The actual results were surprising. About 60 percent of respondents consider a continued credit freeze will be likely to cause a major slowdown in technological innovation, and another 30 percent think it will cause a minor slowdown. The other three scenarios – trade war, much higher unemployment, and depressed aggregate demand – were also considered serious threats as well.

The bottom line is that the consensus of economics bloggers is that the risks to growth from the current recession are serious. The good news is that some of the best ideas for growing the American economy are about unleashing entrepreneurs, not spending more tax dollars.

Tim Kane, Ph.D., is a Senior Fellow at the Kauffman Foundation and former software entrepreneur. Robert Litan, Ph.D., is the Vice President of Research and Policy at the Kauffman Foundation, and former White House official.
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