New Businesses = New Jobs

Economist Thomas Cooley’s prescription for job creation is fostering an environment in which new businesses are more likely to be started:

What all of this makes clear is that policies designed to create new jobs in the economy should be directed at encouraging new firms. What policies are those? Perhaps the most important issue for new and young businesses is financing. Access to credit markets is critical. When credit markets seized up in 2008 it was a dire period for many small and nascent firms. Lending to small business has declined a lot in 2009 but there are conflicting reports about why. Many small businesses claim it is hard to get credit but many lenders claim the demand isn’t there.

The administration’s policies do seem to be focused on increasing the access to financing for small firms. At the same time, however, they have created some very large sources of uncertainty that impact small businesses and those who would finance them. By pursuing a huge policy agenda without much success they have created large-scale uncertainty about health care costs, cap-and-trade policies, corporate taxes, taxes on incomes over $250,000 and estate taxes. At the same time they have been very slow to get through regulatory reforms that would provide us with a more stable financial system in the future. All of this is a huge deterrent to job creation and to the smooth functioning of our normally fluid labor market.

Basically, he’s giving the same advice that I have for some time: heal the financial sector and create a stable regulatory and tax environment.

Sometimes it’s amazing to me that the most obvious things are sometimes those most in need of pointing out. Nobody starts a multi-million dollar business let alone a multi-billion dollar one. Although it is the businesses growing from start-ups with no revenue to a few millions in revenue to more that are most likely to create new jobs, those aren’t the ones that will be at the center of government policy. Established business are the ones with visibility, contacts, and lobbyists and they will inevitably be the primary beneficiaries of policy. Consider, for example, that of the trillions in subsidies that have gone to banks over the last two and a half years all but a pittance has been showered upon a handful of very, very large banks.

Big government promotes big businesses and big businesses primarily do business with each other. Don’t expect a jobs policy that actually creates jobs to be molded from that clay.

An effective jobs policy can’t be as direct as an industrial policy. It must rely on indirect means, creating an environment in which small businesses can be started and thrive and small banks are able to serve them.