John Hood: Wake up economy with start ups

Published 6:54 pm Tuesday, December 16, 2014

RALEIGH — The U.S. economy continues to recover from the depths of the Great Recession, and North Carolina continues to recover at a faster rate than the national average. But few would describe the general trend as impressive by historical standards.

Consider just one statistic: average income per person. Since Barack Obama took office, it’s risen 1 percent after adjusting for inflation. Compared to the 11 percent increase in per-capita income during the same share of the Reagan presidency and 8 percent growth during the same share of the Clinton presidency, that’s underwhelming. No wonder most Americans still express disappointment about the recent past and pessimism about the near future.

Economists may not agree about much, but there is a growing consensus across the ideological spectrum that a decline in entrepreneurship may be one explanation for the economy’s lackluster performance. During the 1980s and 1990s, there were more new businesses created. Some succeeded. Many failed. The ones that succeeded, however, created an outsized share of new jobs — which, in turn, benefitted not only those filling the new jobs but also workers in other industries and consumers of the goods and services the new companies produced.

In a recent edition of the Journal of Economic Perspectives, several scholars examined the issue at length. There are probably multiple causes for the decline in entrepreneurship, including trends in international commerce and the aging of the workforce. Another is public policy. Starting a business is inherently a risky endeavor. To the extent that government actions increase the baseline risk — by setting up costly barriers to opening new firms, for example — fewer entrepreneurs will be willing to assume it.

In their paper for the journal, Harvard Business School professors William Kerr, Ramana Nanda, and Matthew Rhodes-Kropf recommended that policymakers pursue “a careful consideration of the broader regulatory framework, including labor laws and requirements with which new entrants need to comply, with a focus on how they affect incentives for entry. These efforts to structure a better playing field are admittedly less glamorous than announcing a new biotech cluster initiative, but they are far more likely to have sustained effects.”

Here in North Carolina, the General Assembly has made great strides over the past four years in reforming the regulatory process to remove artificial barriers to starting new enterprises. During the 2015 session and beyond, lawmakers should add to this record of success by rethinking the extent to which the state limits entry into new occupations and professions.

In its “Freedom in the 50 States” project, George Mason University’s Mercatus Center ranks the states on the extent and complexity of its licensing regulations. North Carolina ranks 39th on the measure. We license more occupations than the average state, and the rules we impose are often more onerous than those in other states that license the same occupations. We’d do well to emulate the licensing policies of highly ranked states such as Colorado and Idaho, which also happen to have relatively strong rates of business starts and economic growth.

Kerr, Nanda, and Rhodes-Kropf made a subtler but no less compelling point when they observed that “government should be cautious about industrial policies that seek to minimize business failures, as such policies may only be propping up firms that need to fail.”

Business starts and job creation occur when the economy is churning — when the pressures of competition and innovation reveal some companies and products to be inefficient or obsolete, opening the door to new ways for organizing people and resources to meet changing consumer demands.

In addition to licensing restrictions, other public policies that keep economies from churning include pro-union labor laws, government bailouts during recessions, and incentive grants that tend to favor large, incumbent firms over new companies with which they compete for land, labor, or capital.

I’m not arguing that North Carolina leaders should favor new firms over old ones, or that they ought to let themselves get dragged into the venture capital business through special tax credits or pension-fund schemes. They should remove impediments and otherwise stay out of the way.

Hood is chairman of the John Locke Foundation.