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Jobs, Inequality and the Road to Economic Recovery

July 2, 2011

We’re hearing a lot from politicians of both parties that “Jobs” are the key to economic recovery and their own re-election.

Few politicians have ever created a job, even fewer has studied economics, so how exactly do they propose to create jobs.

The preferred policy for Democrats is stimulus spending.  Government creates jobs by redistributing revenue from taxes, duties and by printing money.  Green jobs can be created by subsidizing electric car manufacturers and solar energy development and it can be argued that our future will be secured by investing in public education and tuition grants and loans for college students.

Republicans are a little better when they call for fewer regulations and lower taxes.  Corporations in the United States are taxed at rates higher than other countries, and payroll taxes for Social Security, Medicare, and unemployment insurance dampen enthusiasm for hiring new employees.

The dilemma of the America of today vs. the America of 1960 is that successive presidential administrations have added welfare and entitlement programs, high regulatory standards, and additional taxes while operating largely as the United States operated when the primary concern of Americans was winning World War II.

The brief fifteen year period from 1945 to 1960 gave the American economy an enormous jolt that, in many ways, was seen as a “pay off” for winning World War II.  Few regulations impeded the startup of new businesses and Americans began to feel comfortable—as their parents did not—going into debt to purchase consumer goods.  A credit economy was born and the American economy boomed.

That was then.

Today the American government acts as if it is fresh from victory in World War II and presidents enjoy going to war with other countries—until the body bags and broken lives mount and the American public decides it has had enough of wars.  The current bout of imperial warfare from Afghanistan to Iraq to Libya has exhausted the American military and challenged the American economy to rebound from several economic shocks.  Today a high percentage of voters think the country is on the wrong track and both parties call for recovery through job creation.

That compels us to ask how those jobs will be created.

Let’s start with someone right out of college who can’t find a job, but he or she has an idea that may merit a business startup.  If they thought about that while they were in college they might have salted their studies with some practical courses in accounting, marketing, business law, Excel and QuickBooks and the history of American enterprise.  A minimum of four to six courses might have given them critical knowledge to assess whether their idea can be converted into a successful business.

Our erstwhile entrepreneurs might have as simple an idea for a business as making and marketing cookies or if he or she is a techie they may want to start a web programming company.  Both will require a small office, some hardware and software, financing for marketing, and, of course, an attorney and accountant and financing for salaries and payroll taxes.

The startup requires between $150,000 and $250,000, perhaps less, but nothing happens quickly so our entrepreneurs must plan to burn some cash until they have a product or service to market.  But, what if their startup costs are $500,000?

Where will they get that financing?

In light of the fact that they or their parents are in debt for about $100,000 in student loans, they’ll have to find financing from someone willing to invest in their dreams.

Under current regulations, recently increased by the Dodd/Frank financial “reform” legislation, they may accept financing only from persons who have assets that total $1 million, exclusive of the value of their personal residence.  Such persons are called “accredited” investors.  Moreover, our entrepreneur may not advertise to solicit investments.  That may only be made for registered securities made effective by the SEC and any state where they seek investments.

Publicly registered offers of stock can cost anywhere from $250,000 for a minimal “direct public offer” to many millions of dollars for registered securities marketed by stock brokers.  There have not been many IPOs—initial public offers—since the dotcom bubble burst in 2000 except for high profile ventures such as Google and LinkedIn and already successful companies like Zipcar.

How many entrepreneurs—when they fully understand the regulations they have to traverse to start their own businesses –will bite the bullet and forge ahead?

Not many, and that’s why we have a lack of new job creation.

Small startup businesses drive job creation and if you kill that initiative you do not create the hundreds of thousands of new jobs needed for economic recovery.

Yes, our politicians understand that new job creation is critical to pulling the American economy out of the worst recession since the Great Depression, but none has a detailed program for reducing the tens of thousands of regulations and requirements that deter new businesses from being created.

That contributes to the inequality that now defines American prosperity about which we are hearing lots of complaints.  Oil depreciation allowances, tax breaks for corporate aircraft, and enormous salaries and golden parachute retirement benefits for corporate executives are in the spotlight. What is not said is that existing entitlements and regulations deter the startup of new businesses and the only secure road to personal wealth is management track employment with established corporations.

This requires the sort of personality not likely to start a business, one that is comfortable with structure, clearly defined rules and standards, and a personality not likely to go out on a limb.  The goal for those who aspire to employment in corporations is to get ahead, work the system, go along to get along, and never ever take risks.

These careerists and those who inherited fortunes are the only ones under current regulations who may invest in private equity deals.

If only persons with a minimum of $1 million in assets may invest in a private business startup, only millionaires are positioned to reap enormous rewards if those businesses thrive.

Ordinary wage earners may invest in publicly traded securities—after these millionaires have made a fortune in early stage businesses.

But, what would have happened if Dodd/Frank had dropped the accredited investor requirement instead of increasing it?

Is the economic boom in new business startups that would occur a greater benefit than the malfeasance and fraud that would also occur?

That calculation never entered the minds of members of Congress who voted for financial reform and that explains why we must still endure the worst recession since the Great Depression.

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