Public Policy, Economics and Entrepreneurship: March 2008 Archives

From James Pethokoukis at US News:

The Fed's brokering and backing of the JPMorgan-Bear Stearns deal may be just the start. Think about it: Uncle Sam might well be on the verge of doing one or more of the following: 1) refinancing a couple million mortgages and requiring lenders to write down the value of loans; 2) buying--via the Fed--billions in mortgage-backed securities; 3) creating a new government entity to nationalize troubled institutions.

Nationalizing part of the housing industry? Nationalizing health care? Sounds like we are marching down the trail to socialism. A scary outlook for our free market economy!

A new Tax Foundation Fiscal Fact shows that nearly half of U.S. states tax job providers at a higher rate than any other country in the developed world. Counting the federal rate alone, the U.S. has the world's highest corporate tax rate, but including average sub-national rates (federal plus state in the U.S.), Japan edges out the U.S. for the highest-tax location.

This study breaks the tax down by state, adding each state's corporate tax rate to the federal corporate tax rate. The results show that 24 states impose, when combined with the federal rate, a higher corporate tax rate than in any other nation. In fact:

- 24 states have a combined corporate tax rate higher than top-ranked Japan.
- 32 states have a combined corporate tax rate higher than third-ranked Germany.
- 46 states have a combined corporate tax rate higher than fourth-ranked Canada.
- All 50 states have a combined corporate tax rate higher than fifth-ranked France.

I have been working with a graduate student on a project that is looking into government programs to encourage angel investment that he is conducting for a national angel network group. He sent along an article published last fall in the Economist that said the following:

First of all, stop spreading money around trying to clone lots of Silicon Valleys....

However, there is an even more important factor than money: culture. Nokia's success was not the result of far-sighted planning or subsidy by the government of Finland. One Nokia executive confides: "The biggest boost to our firm was the deregulation that followed the second world war and the government's avoidance of protectionism." One of the most innovative things Nokia did was to spot that the handset could also be a fashion accessory. And coming from such a small and open market, it was forced to think globally.

Secondly, governments keen to promote innovation need to look out for market distortions and over-regulation that can be stripped away. Entrepreneurs can face an uphill battle legally, and not just culturally, in many countries.

As the headline of this story reads, "The best thing that governments can do to encourage innovation is get out of the way."

This is one graduate student who has been paying attention to his professor!

(Thanks to Jeff Williams for passing this along).

The cynicism of publications like the New Yorker toward free markets and free enterprise never ceases to amaze me. The New Yorker published an article this month by James Surowiecki titled "What Microloans Miss" that states the following:

This vogue has translated into a flood of real dollars: institutional and individual investments in microfinance more than doubled between 2004 and 2006, to $4.4 billion, and the total volume of loans made has risen to $25 billion, according to Deutsche Bank. Unfortunately, it has also translated into a flood of hype. There's no doubt that microfinance does a tremendous amount of good, yet there are also real limits to what it can accomplish. Microloans make poor borrowers better off. But, on their own, they often don't do much to make poor countries richer.

Oh really?

We know that to build entrepreneurial economies we need to build a culture that supports and encourages entrepreneurs. Microloan programs are reshaping the culture of several third world countries by supporting thousands of new entrepreneurs who are building grassroot capitalism among populations who knew only desperate poverty. The only income that many in these societies ever received were handouts -- be they from government agencies or NGOs. Microloans have given them a path to economic freedom.

It takes time to build wealth. And real wealth comes from free enterprise. Are microloans the answer to transform an economy? Of course not. But they are a critical step in building long term transformations. Microloan programs are not just jobs programs, or worse yet, mechanisms for the redistribution of wealth from one country to another. Instead, they are creating a cultural seedbed for economic freedom and independence.

The "richness" of a country is not just measured in GDP. Microloans are making societies richer by creating hope, independence, and pride among thousands of "micro" entrepreneurs. And over the long run this will surely create monetary wealth in the countries that benefit from these efforts.

Thanks to Andy Tabar for passing this article along.

Even though many have expressed frustration that we have not been able to move more quickly with regulatory reform to help small business, even the small steps taken so far are having an impact.

The SBA Office of Advocacy estimates that small businesses realized $2.6 billion in first-year cost savings and $285 million in annually recurring savings as a result of fiscal year 2007 efforts to help agencies comply with the Regulatory Flexibility Act (RFA). The law requires agencies to review the economic impacts of proposed regulations on small entities and consider less burdensome alternatives. The figures are reported in the 2007 edition of the Office of Advocacy’s annual Report on the Regulatory Flexibility Act.

Many home-based businesses are part of a life-style that can include home-schooling children. These "Mompreneurs" blend running a part-time home-based business with educating their children. The home-based business can be operated around the schooling schedule for the kids.

If a recent California state appellate court ruling holds up, those Mompreneurs might have to put their kids on a bus and ship them off to public school if they are not accredited teachers. From SignOnSanDiego.com:

"Parents do not have a constitutional right to home school their children," wrote Justice H. Walter Croskey in a Feb. 28 opinion signed by the two other members of the 2nd District Court of Appeal.

The ruling has rattled home-school families in San Diego County and throughout California. It is the subject of much speculation on the blogs, Web sites and networks that link thousands of home-schoolers statewide.

The purpose of a Constitution is to define what powers that government does have, not define or limit what rights citizens have under that government.

The Kauffman Foundation has issued a new report that reviews the most effective public policy to support entrepreneurial development. Their findings:

...[W]e find that the strongest consensus supports streamlining of local regulatory approvals and limits on progressive taxation at the state and local levels. Several other local policies also should facilitate entrepreneurial growth: congestion pricing to relieve traffic congestion; investments in local schools, amenities, and transportation infrastructure; and limited recognition by states of non-compete clauses in business contracts. There is as yet little evidence to support the targeted government support of research, particular industries, or firms.

Or in other words -- cut taxes and get government out of the way.

Hats off to the folks at Kauffman on this one. They have not always seen it this way, having favored a more socialistic approach to entrepreneurship policy (i.e., government picks and controls the winners through tax and other policies) in the past.

Here is a link to the complete report.

Here is a link to the summary.