We can restore long-term job growth by supporting startups
With $1.9 trillion in federal stimulus enacted and temporary relief flowing to tens of millions of American households, Washington’s attention has shifted to bettering America’s infrastructure as a way to create jobs. While infrastructure improvements such as greater access to broadband will undoubtedly lead to new job opportunities, America needs much more than one-time federal spending to exponentially increase the long-term job growth on which we depend. This means making lasting investment at all levels of government in new businesses — the drivers of jobs.
Young businesses power virtually all job growth in the United States. Yet, the nation was in a “startup slump” even before the pandemic struck — with new business creation having fallen overall to its lowest rate in more than 40 years. On top of that, one estimate found that 3.3 million U.S. businesses were at one point shut down by the pandemic, including 41 percent of Black-owned businesses and 32 percent of Hispanic-owned ones. At least 400,000 small businesses have closed permanently.
At the same time, we have an opportunity to seize the moment. Millions of Americans have recently decided to take the plunge to start a new business, as a result of layoffs or to fulfill new market opportunities stemming from the pandemic. In fact, more new businesses formed last year than in any previous year, thanks to a 25 percent surge compared to 2019. To ensure that these businesses are permanent and not just products of the pandemic, we must decrease the long-term barriers to small business creation, including more accessible capital and government contracts.
It’s important to focus on emerging small businesses — as a subset of all small businesses — because they drive almost all job growth in this country. That’s why Isabel Guzman, administrator of the Small Business Administration, recently emphasized that helping small businesses includes supporting entrepreneurs who start new firms. Yet, government spending typically bolsters large, established companies. Research even suggests that government procurement practices hinder new businesses.
Government at all levels should focus on correcting that unfair playing field — by putting government resources to work for new business growth. Here’s how:
Provide equitable access to long-term capital. Included in the federal stimulus package is $10 billion to reinstate the State Small Business Credit Initiative (SSBCI), which from 2010 to 2017 provided $1.5 billion to states for expanding capital for entrepreneurs. SSBCI was particularly successful in reaching underserved markets, and 80 percent of its funding supported businesses with 10 or fewer employees.
But for SSBCI’s potential to be maximized in each state, the capital must be structured the right way. If that capital provides just a one-time infusion, it will have limited impact. If it builds long-term capital infrastructure, it could help vastly more businesses for years to come.
States should prepare now for SSBCI with thoughtful planning and design. Lessons can be learned from the last time; several states amplified their capital by building “funds of funds” that helped grow additional funding capacity. That’s what Israel’s government did to build the world’s most successful venture capital industry per capita. Every state in America has an opportunity to create their own version of that model and drive long-term impact.
Allocate 5 percent to start. The nation can provide a major boost to job growth — with zero additional funding — by ensuring that young small businesses, which have never secured a government contract before, receive 5 percent of government contracts, workforce training funds, and economic development funds. In particular, we should put a special focus on businesses in underserved communities. This relatively small shift with big potential impact is what the nonprofit Right to Start calls “5 percent to start.”
In addition, if local Workforce Development Boards and other government workforce programs diversify 5 percent of their spending into entrepreneurial training and support programs, that would drive over $1 billion to help entrepreneurs across the nation. And if economic development agencies allocate 5 percent of their budgets to boost entrepreneurs, that would drive as much as $1 billion to build homegrown businesses across all American communities.
Remove barriers. Needless red tape and other barriers in the way of starting a business should be removed. The newly revised America’s New Business Plan, a pro-entrepreneur policy agenda with more than 200 backers, proposes ways to break down historic and systemic barriers.
Government at all levels should maintain a relentless focus on new small businesses, even as other political priorities compete for attention. Long-term job growth in America is at stake.
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