The Entrepreneur State: Safety Nets for Startups, Capitalism for Corporations

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Here's a new framework for competitiveness: What if the law were biased, not toward the oil and gas industry or the cotton farmers, but to the creative, the self-employed, and the entrepreneurs?

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"If it's the economy, stupid, then it's the jobs stupid," Steve Case, the founder of AOL and the CEO of Revolution, recently told me at his Washington, D.C., office. "And if it's the jobs, stupid, then it's the entrepreneurs, stupid."

What would a government built around "It's the entrepreneurs, stupid" look like? Two weeks ago, the president sent to Congress an agenda, prepared by Case's group Startup America, which proposed expanding visas for immigrants, doubling deductions for small companies, and many more worthy ideas targeted to the problem of entrepreneurship.

Good ideas. We need to think even bigger. The broadest debate in Washington, and on the primary trail, is about whether government needs to step up to create jobs or step back to allow the market to work by itself. But what if we need both: A stronger safety net to lessen risk for wannabe-startups and purer free market approach for established corporations?

That's the big idea, but let's begin with a smaller story.

DREW'S STORY

Here's a true story about my friend, Drew. Drew graduated from Brown University with a 3.98 GPA in economics. With three internships under his belt, he could have easily landed a job at a consulting firm like Bain, as three of our high school friends did, or at a big tech company, like more friends, or at a bank.

Instead, Drew went to work on his couch. To a stranger, he probably looked unemployed.  He wasn't. He chose to not accept any of the jobs he could have landed in order to do something unique in our circle of friends: to become an entrepreneur.

Given the option to work a regular job in exchange for tens of thousands of dollars a year, why did Drew decide to work in his living room? The first reason was probably personal: Drew doesn't like hierarchies. He always wanted to be his own boss. And the only way you can be your own boss at an entry-level age is to start something you can run.

The second reason was intellectual: Drew tended to see the world as problems that needed fixing. I've always been the one to say, "There must be an explanation for the way this works" (this is what journalists sound like) and he's always been the one to say, "There must be a better way to do this" (and this is what entrepreneurs sound like).

The third reason was community: Drew was fortunate to come from a wonderful and well-off family that could support him if everything fell apart. He was surrounded by friends who were eager to give start-up funding and hours of free advice. He had connections, through friends and parents of friends and friends of those parents, to an investment community. Being an entrepreneur is, paradoxically, a decision both to be alone and to be at the mercy of many people's generosity.

As a country, we can't really hope to change reasons one and two. We can and should hope to increase the pool of college graduates, but we can't engineer a generation that hates hierarchies and believes it has better ideas than the rest of the world -- even though both qualities are important for an entrepreneur to have. We can, however, strengthen the safety net for start ups.

Every year, millions of people try to start a company. In the last year, I've met dozens of them. The details differ, but the lessons rhyme. All entrepreneurs need a community of support. They need the advice and intuition of other entrepreneurs. And they need a safety net.

SAFETY NETS AND CAPITALISM

"If you look at a list of US cities sorted by population, the number of successful startups per capita varies by orders of magnitude," the renowned inventor Paul Graham wrote. "Somehow it's as if most places were sprayed with startupicide."

Until scientists invest such a thing for government procurement, the United States would be advised to do the second best thing and adopt a holistic policy to support startups. This isn't industrial planning. It's not about picking winners. It's making rules that increase the odds that entrepreneurs play the game in the hope that many of them will win.

As a general rule, entrepreneurs don't win. They mostly fail. Trying to start a company is like playing a high-risk casino game with your career. It's roulette, except thousands of dollars, thousands of hours, and unquantifiable sacrifices are on the table. If we want more people to play startup roulette, we shouldn't focus on how much to tax them if they win $200,000. We should focus on minimizing the downside of losing so that startup roulette feels less risky. After all, startups shouldn't just be for rich kids who can afford to take a chance on a big idea.

You can build a stronger safety net stitch by little stitch, by creating new tax deductions for startups or making long-term venture capital gains totally tax free. Or you can focus on the whole net. Consider health care. Fear of not having insurance keeps graduates from starting companies. Fear of losing coverage keeps entrepreneurial employees from leaving companies to start their own. A study from the RAND Corporation found evidence of "entrepreneurship lock," where workers resist leaving firms that offer subsidized health care due to the high premiums they would face in the individual health insurance market. "The self-employed are much less likely to have health insurance than are wage/salary workers and even our sample of unemployed and part-time workers," the authors wrote.

"The median successful age for an entrepreneur is 39," said Robert Litan, vice president of research at the Kauffman Foundation. "When these people start things, it's under the table and on the side. To leave a paying job and lose health insurance is a plunge into the void."

We could fortify welfare for startups as we disassembled the welfare state for corporations. The corporate tax code is more holes than Swiss cheese, which distorts business decisions and forces us to keep one of the highest marginal tax rates in the world. Reducing both the rate and the exemptions would raise taxes on some companies and cut taxes for others, but it might also level the playing field, attract more investment, and even raise more money for the government. Combined with our bloated, if well-intentioned, regulatory system, corporate welfare saps the market of competitiveness and makes voters angry by what they perceive as favoritism among elites.

***

It would be naive to think we can cleanse the law of all biases. But what if the law were biased, not toward the oil and gas industry or the cotton farmers, but toward the creative, the self-employed, and the entrepreneurs? What if we combined a liberal approach toward mitigating risk for startups with a conservative approach toward taxing and regulating established corporations? The result might be more people playing the entrepreneur's game, more entrepreneurs winning the game and ramping up their companies, and more companies to hire more workers.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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