The Kauffman Solution

Ewing Marion Kauffman Foundation president Carl Schramm and vice president Robert Litan write in the Huffington Post how to solve the financial crisis through supporting entrepreneurship in startup ventures. As noted in the article’s title, they have in mind a change to the legal institutions that would potentially “jump-start” the American economy – at no cost to the already strained government budget. And they expect that these changes mean that “we could enjoy permanently a one percentage point increase in our growth rate.”

Their proposal is a “Startup Act” with the explicit purpose to

encourage the building of more scale firms, lower the cost of capital for financing them, accelerate the development of new commercially relevant ideas, and remove barriers to expansion for new and existing firms

Schramm and Litan assume (and probably rightly so) that there are plenty of entrepreneurial and innovative minds out there who would like nothing more than to start their own businesses, but are (for many reasons) held back. Even though they propose the regular “tweaking” of bureaucratic red tape in order to more smoothly provide permits and certificates to business owners and entrepreneurs, the main points are of another kind – and they are well taken. They identify the main problems for economic growth through entrepreneurship and propose the following solutions:

  • import a lot more skilled workers who wish to work and start companies in the US
  • change the tax code to include a permanent capital gains exemption on investments in startups
  • soften the onerous requirements of the Sarbanes-Oxley Act

The common denominator to the underlying problems that fundamentally hinder entrepreneurship should be clear. Rather than provide specially selected individuals, firms, or industries with subsidies and support, government can and should allow entrepreneurs to unobstructed see the market landscape for what it is – without added distortions or costs. Entrepreneurship is a profit-induced response to the existing market structure and expected future demands, and is therefore a core part of the market as well as key ingredient to economic growth. On the flip side, any legislation, regulation, or bureaucratic rules aimed at “fixing” specific (politically opportune) problems only makes the market less predictable and thereby subjects existing and hopeful entrepreneurs to increased uncertainty.

What Schramm and Litan are implying is that we need to realize that entrepreneurship is (and provides) a fundamental market function and that it therefore functions best on the market’s terms. Firms should not necessarily be completely unregulated, but added regime uncertainty only interferes with the entrepreneurial function and makes it more difficult for entrepreneurs to be successful.

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One Response to The Kauffman Solution

  1. Pingback: Startup Weekend to Columbia! « entrepreneurship@McQuinn

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