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Society, entrepreneurs and economic growth

Post by Patrick O'Callahan on July 22, 2012 at 6:15 am with No Comments »
July 20, 2012 4:26 pm

Conservative Charles Krauthammer, in a piece we ran in today’s paper, says President Obama gives government far too much credit for individual achievement. In this piece, fellow Washington Post columnist Ezra Klein gives his take on the same issue:

By Ezra Klein
The Washington Post

Let’s try to extract the smart conversation from the contretemps over President Obama’s comments about the debt that entrepreneurs owe to society. There are two questions worth thinking about here:

1. What do entrepreneurs owe the society that created the conditions necessary for their success?

2. What level of public investment is consistent with the maximum amount of new firm formation?

The first conversation is interesting but ultimately unanswerable. After all, while entrepreneurs owe much to societies, societies also owe much to entrepreneurs. Untangling that web of obligation, gratitude and dependence is probably impossible.

The second conversation is more useful — and more relevant to the choice voters have in this election. Mitt Romney’s claim, broken down to its core components, is that the path to broad economic growth is to reduce public investment in order to further cut tax rates, and so his policy proposal is to slash public investment and cut taxes.

Obama’s claim is just the opposite: He thinks we have too little public investment to ensure broad economic growth, and so he would raise taxes on high-income Americans to protect public investment.

Note that when you phrase the question more calmly, we’re talking about a difference of degrees. Romney knows that entrepreneurs depend on the quality of infrastructure. Obama knows that there will be no new business formation if business owners aren’t rewarded for their success.

Romney is not proposing to zero out public spending. Obama is not proposing to raise marginal tax rates to 100 percent. Rather, if you look at the proposed revenue levels in the Republican and Obama budgets, the difference in revenues is about three-quarters of a percentage point of GDP.

A recent paper by the Kauffman Foundation — a nonprofit organization devoted to encouraging entrepreneurship — looked at some of these issues, and it began with a fact that should force both sides to moderate their rhetoric: We don’t really know what leads to the creation of more businesses.

In fact, firm creation is something of a mystery, as it’s been eerily stable over the past 50 years despite the radically different policies and economies we’ve had over that time.

There is a lot of variation with business cycles and a bit of long-term growth (which is presumably due, in part, to population growth), but that’s about it.

The 1990s, despite being a high-tax period, were, on average, better for new business formation than the 1980s. The 2000s were better than the 1990s, but this raises troubling questions for the whole focus on new business formation, as the economy in the 2000s featured a massive credit bubble and median-wage stagnation.

Either way, the Kauffman study concludes, “the period under study, the late 1970s to early 2000s, experienced a veritable explosion in efforts to promote and increase new-firm formation. The consistency discussed here suggests low sensitivity to short- and medium-term trends.”

That is to say, recent history suggests that neither Romney’s nor Obama’s policies will have a massive effect on entrepreneurship.

What their policies will affect is who benefits from the fruits of entrepreneurship. Romney would substantially increase the rewards that accrue to successful entrepreneurs by cutting marginal tax rates, and he would pay for that — and reduce the deficit — by substantially cutting programs that serve the poor, such as Medicaid.

Obama, conversely, would raise marginal tax rates on richer Americans and use the proceeds to pay for things such as health care for the poor.

It would be nice if this debate were about the kind of economy we’d like to have, as both sides largely agree that the objective is broadly shared growth, and so the question would be an empirical one.

But if you take Kauffman’s findings seriously, you have to say that this debate is more about the kind of society we should have. Romney thinks we should do more to reward the successful and less to help the poor, and Obama thinks we should raise taxes on the successful so we can improve the lot of the poor.

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