Adding to the trauma of deaths, illness, layoffs, and social
isolation, at the end of this pandemic we will find ourselves with tens of
millions unemployed. Without quick, bold policy initiatives, the post-pandemic
economy will create even more trauma. The millennials in particular – a generation
that began its career in the aftermath of the Great Recession and now face this
economic wreckage only a decade into careers – are going to be badly hurt by
this.
Unemployment has longer lasting negative impacts than does
divorce, being widowed, or being laid off.[1]
It’s traumatic and ruinous to someone’s long-term economic prospects and any
policy we need to adopt to address tens of millions who are unemployed has to
account for this.
What would quickly employ people and stimulate wage and
productivity growth? Doing for entrepreneurship what policymakers did last
century for capital and labor. That is, invest boldly, at unprecedented levels.
Prices tell you what markets think is abundant and what is
scarce. Capital and labor aren’t scarce. Entrepreneurship is.
Proof that capital is no longer scarce is simply this: the
price of capital has gone negative. How unusual is that? The Dutch have records
on bond sales that go back 500 years. In all that time they never had negative interest
rates until just a couple of years ago. Growing affluence means that there are
more investors than ever looking to build portfolios. (And hundreds of millions
more reliant on markets through investments in pension funds.) Because of this,
trillions in capital move around the globe in search of returns.
Education seems to also be providing a lower return than it
did half a century ago. The price for college graduates is dropping. The Fed
recently reported that a college degree no longer offers a wealth premium.[2]
Which is another way of saying that market prices for education – like capital –
suggest that it isn’t that scarce. And many millennials, struggling to pay for
housing in cities on wages that aren’t terribly higher than those from a decade
or two earlier are wondering when their return on a college investment is going
to yield a return. It might not.
Once upon a time capital and education were scarce, though, and
investing in them gave the country phenomenal returns. A look at what past
investments in what was scarce did for wages and job creation suggests what could
happen if we make similar investments in what is scarce today. That is to say,
to get some sense of what a startup stimulus might do for the economy, we can
look at what past investments in capital, education and research did for the
economy last century.
In his book, The Rise and Fall of American Growth,
Robert Gordon reports that output per hour between 1920 and 1970 grew 2.82% a
year. Between 1970 and 2014, it grew only 1.62%. If wages had grown at 2.82%
between 1970 and 2019, median income would have been $88,000 rather than the
$48,000 it actually was. Compounded over a lifetime, a difference of 1 to 2% is
huge. You don’t get returns without making investments, though.
During World War 2, the government invested billions in
capital equipment for factories building wartime equipment. Between 1940 and
1945, consumption of capital rose from $19 billion to $116 billion[3],
much of that coming from the government.
Additionally, it sent experts on production and management – consultants
like W. Edwards Deming and Peter Drucker – to help companies make best use of this
capital.
The result was dramatic. On D-Day, June 6, 1944, the Germans
could deploy only 319 aircraft. The United States and its allies deployed
12,837. American manufacturing was more powerful than a Nazi blitzkrieg.
When the war was over, the government let companies keep the
manufacturing and intellectual capital it had funded. Rather than make tanks
and planes, they began making cars and TVs – at rates as impressive as the preparation
for D-Day.
Next, the government invested an unprecedented amount in
education. Between 1944 and 1949, BA degrees conferred rose from 126,000 to 432,000.
The rapid rise in the creation of knowledge workers was essential to the
emergence of the information economy.
Finally, the government spent more on R&D, funding
agencies like DARPA and the NSF. The innovations resulting from this research –
as varied as the internet, communication satellites, and genetic engineering –helped
to create hundreds of new technologies, thousands of new products, millions of
new jobs and trillions in new wealth. Most R&D investments fail to generate
any return. The ones that do, though, continue to compound over time to create value
that dwarfs the initial investment. (In this way, investment in R&D is very
similar to investments in startups: most fail and the few that succeed generate
great returns.)
A startup stimulus could do two things. It could quickly
create hundreds of thousands – even millions – of jobs. And it could yield
returns as dramatic as the long-term returns to education and research made
after World War 2.
While the price markets pay for capital and education seems
to be falling, the the price of entrepreneurship – wealth created by successful
entrepreneurs – is high and still rising.
In 1987, when he was 31, Bill Gates became the youngest
self-made billionaire in history. About a generation later, in 2008, Mark
Zuckerberg became the youngest self-made billionaire at age 23. Investments in
entrepreneurship could offer high returns.
Big investment in startups – entrepreneurship – will pose as
many challenges as big investments in education, research or infrastructure did
for past generations. Anyone who knows how difficult it is to identify good startup
ideas or to launch a company from scratch will realize that a startup stimulus
will be at least as difficult as figuring out how to ramp up production in 1944
to complete one plane every five minutes, launch fifty merchant ships a day,
and finish eight aircraft carriers a month. Or land on the moon or launch
communication satellites. It won’t be easy but it will yield a great return.
This is a big challenge that promises a big reward. A
hundred billion dollars could fund 50,000 startups that employ 700,000 people
for 18 months; a half a trillion would fund about 250,000 startups and create
3.5 million jobs. There would be no question about whether a startup stimulus
would create jobs. It would be designed for exactly that. We could begin
funding startups even as people still shelter-in-place and – depending on how
bad unemployment is – adjust the scope of this startup stimulus up or down.
Americans hit by this pandemic could quickly return to work.
Rather than a gap in their resume and a hole in their savings, they would get
valuable work experience and savings. The trauma of long-term unemployment
would be mitigated and their lifetime earnings, productivity and wealth would
be greatly different.
What would we get for our return? Tens of percent of these
startups will fail as soon as their guaranteed funding is gone, but they will
have provided employment at a critical point in the recovery. Tens of percent
are likely to continue beyond their window of guaranteed funding for another
year or three. Many will become great, viable companies. A few will even become
iconic companies, the GE, GM or Apple of their generation. Successful companies
mean better products and services for all of us, higher wages and more wealth.
Additionally, all sorts of unexpected benefits came from
aggressively investing in capital, education and research. The NSF didn’t start
with the idea of genetic engineering or a computer smaller than a pocket
protector. The same will happen with great investments in entrepreneurship. As more
people become more adept at entrepreneurship, as more communities can at will
create new companies able to create jobs and wealth, economies will become more
prosperous and less subject to long-term sluggish growth that breeds cynicism
and helplessness.
Bold investments in entrepreneurship will not only
immediately create jobs but could trigger a steady rise in productivity and
wages at least as strong as that of the American economy before 1970. The short
and long-term potential of such policy is huge. So is the risk of doing
anything less.
Ron Davison lives in San Diego County, wrote The
Fourth Economy: Inventing Western Civilization, and helps team within
Fortune 500 companies and startups to accelerate product development. @iamrondavison
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