Editorial Board

Bring Back American Enterprise

Businesses need to get comfortable again with risk.

What would happen to these guys today?

Photographer: Tony Avelar/Bloomberg

America means business -- or used to. Time was, anyone with a good idea and some startup money could take a chance and open a business. That risk-taking spirit kept millions of middle-class Americans upwardly mobile, with jobs that let them buy homes, raise families, send the kids to college and retire comfortably. 

That's less true today. Americans are starting fewer businesses, even in Silicon Valley. Established companies aren't reinvesting profits, instead spending almost all their earnings on dividends and share buybacks. Unless your company looks like the next Uber, financing is also harder to find, whether from banks, venture capitalists or the markets.

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This fading of the U.S.'s risk-taking culture could help explain why it took six years for the economy to recoup the 7.6 million jobs it lost during the recession. Even now, the U.S. remains 3 million jobs short of full employment. More than is usually recognized, the middle-class squeeze reflects a slackening of entrepreneurial zeal.

A thriving economy is a turbulent economy, with lots of new businesses that start and fail -- or go on to be the next Apple or Google. Companies less than five years old and with fewer than 20 employees are especially important. They are the primary source of net new jobs, but they aren't the employment engine they once were:


As business bounces back, the picture will improve, but there's a longer-term problem. New firms accounted for as much as 16 percent of all companies in the late 1970s. By 2011, that share had declined to 8 percent. What's more, startups on average are creating fewer jobs. Last year, companies spent more than $900 billion to repurchase shares and pay dividends -- the highest on record.

Trouble is brewing when the U.S. economy experiences a 30-year decline in business dynamism (the rate at which jobs are created and destroyed as companies are born and die) alongside sluggish investment. It's a formula for less innovation, diminished competition and slower growth. 

How to energize this vital part of the economy? Here are some ideas.

State and local governments should take a hard look at their proliferating rules for occupational licensing. Public safety is unlikely to require that manicurists, for instance, receive 600 hours of training and show proficiency in English. More than 30 percent of U.S. workers now need a license to do their job; in 1970, it was just 10 percent. These rules make work for inspectors and stifle enterprise. Easing or eliminating them would encourage startups and increase competition.

Congress should grant more visas to skilled immigrant entrepreneurs. They are twice as likely to start companies as native-born Americans. The politics of immigration are thorny, to say the least, but visas for entrepreneurs who come to the U.S. with money to invest shouldn't be controversial.

Securities regulators could help new businesses raise money by issuing long-delayed rules to allow crowdfunding of up to $1 million a year -- much as they recently allowed lightly regulated mini-IPOs of up to $50 million a year for medium-sized companies. This would especially help young entrepreneurs with a lot of college debt.

Corporate boards should try to get the buyback addiction under control. Stock-based compensation plans make it too rewarding for CEOs to spend company cash on dividends and share repurchases. Shareholders benefit from such payouts, but a better balance can be struck. Corporate managers should not be rewarded for underinvesting in R&D, technology and employee training.

It's always possible that the U.S.'s business culture has turned against risk taking for good. But it's far more likely that misguided regulation, skewed managerial incentives, anti-immigration fever and the financial-crisis hangover are combining to depress business vitality. Cure those ills, and American enterprise will rise again. The middle class will rise right along with it.

    --Editors: Paula Dwyer, Clive Crook.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

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