The Comeback Read online

  So the more complete story of job creation is that large companies, smaller businesses, and business start-ups are each an important generator of jobs, and innovative start-ups in particular are the most powerful generators. These start-ups are built by entrepreneurs who have a better idea, the courage to take calculated risks, the ability to build a great team, and the leadership to build a great company. Entrepreneurs, even those who may fail, even many times, are a rare breed and a national treasure. For our economic future, our national policies must encourage and even celebrate entrepreneurship and innovation.

  But tragically, business leaders in this country are all too often demonized by politicians and the media, who also proclaim that the government can create jobs. This mind-set, along with government actions inconsistent with business creation, are hurting our entrepreneurial lead in the world.

  This isn’t just my opinion. In September 2010, the Small Business Association (SBA) published a major study that examined thirty-one factors affecting entrepreneurship in seventy-one countries around the globe.23 It found that the U.S. ranked third highest (behind Denmark and Canada). Although the SBA said that America’s performance remained “strong,” it issued a warning:

  The United States’ apparent weakness in the tech sector and its lack of cultural support for entrepreneurship, coupled with lack of high-growth business, can be traced to a number of sources. Chief among these are the changing political environment and international volatility, the bursting of the tech sector bubble of the 1990s, the recent recession, and the improving performance of other countries.

  Most alarmingly, the SBA found that the reality of America’s place “as a land of opportunity and as the Mecca for individuals wanting to do something new and different seems to be somewhat challenged by the facts.” In particular, the report found:

  Cultural support for entrepreneurship and the American youth’s perception of entrepreneurship as a viable career choice seem to be limited. Firms’ performance in terms of growth and employment generation is not as strong, and the tech sector—the beacon of recent U.S. entrepreneurial success—is seen to have a lower score than the sample averages.

  Similarly, a new book examining the Israeli economic miracle found that it has the world’s highest density of technology-driven start-ups. Further, Israeli start-ups captured more venture capital investment per capita than any other country: “2.5 times the U.S., 30 times Europe, 80 times India, and 300 times China.”24 The authors specifically attribute this performance to an Israeli culture that fosters entrepreneurship and innovation.

  INNOVATION-FRIENDLY NATIONAL POLICIES

  Earlier, in chapter 3, I expressed my firm belief that the factors responsible for American exceptionalism are the reason that the U.S. has been the world leader in innovation. It follows that our national policies should seek to preserve and strengthen those factors, and many specific policies would necessarily follow from such a strategy. My personal preferred guidelines for specific policies include the following:

  Stop penalizing investments in start-ups. Some twenty years ago, virtually all private venture capital funding was directed into U.S.-based companies, but now more than half of such funding flows to foreign firms. What changed? Our federal government enacted policies making it less favorable for investment, while other countries encouraged investments. Our corporate tax rates became the second highest among developed countries, diminishing the returns to investors. The Sarbanes-Oxley law imposed new costs on business. Exiting investments became more difficult as going public became less desirable. Sarbanes-Oxley imposes relatively large costs on small public companies. More, public companies are catnip for plaintiffs’ lawyers seeing quick and lucrative returns after any sudden change in share price. To encourage new investment, we need to modify Sarbanes-Oxley, restore integrity and rationality in our legal system, and lower corporate tax rates.

  Direct any public funding of start-ups by private investors, not by government bureaucrats. Government employees generally are not at all qualified to make risky business investment decisions. Moreover, as shown in the failed 2009 stimulus package, government decisions invariably direct spending based on political impact criteria. I do not advocate any government spending of this type, but if politicians require taxpayer funding of start-ups, all specific investment decisions should be made by private venture capitalists with proven track records who would be required to share in the investment, risks, and rewards of their decisions. Government at most might prescribe targeted technologies. Interestingly, Josh Lerner, another Harvard business professor, argues that even government programs to stimulate bank lending are not relevant to start-ups, because entrepreneurial ventures cannot afford the financial burden of paying interest on loans.

  Take easy unionization off the entrepreneurial table. As risk takers, entrepreneurs must have the ability to make fast decisions about what their companies do and how they do it. Unions inherently slow down and often inhibit fast action. This is exacerbated by proposals such as “card check” that allow sudden unionization without confidential balloting and that allow government arbitrators to set working conditions as well as work rules that drive entrepreneurs to seek more business-friendly host countries and take potential jobs with them. The Obama Administration’s policies requiring unionized or “prevailing wage” government contractors add costs and reduce business incentives for struggling entrepreneurs. Closing off large government contracts to entrepreneurs would have had dire consequences in most of the wars the U.S. has fought.

  Regrettably, until unions recognize that workers’ interests, as with the nation’s interests, lie with greater innovation and entrepreneurship, they represent a formidable barrier to those goals.

  Let any company fail, whether large, small, or entrepreneurial. At its best, the free enterprise system is impartially rational in allocating investment, rewarding smart innovation, and promoting economic growth and job creation. Unfortunately, when political calculations intrude, outcomes are usually disastrous. The most recent major examples are the financial bailouts of GM and Chrysler, which not only wasted billions in taxpayer funds but were primarily motivated by an unprecedented gift to the pro-administration unions which suddenly were lifted ahead of the line of private creditors.

  Billions of dollars in debt, Ford is further burdened by competing against Chrysler and GM, especially since the government wiped out their massive debts. This means Ford must pay several hundred million dollars in annual interest on its debt, while GM and Chrysler have little reason to invest.

  Despite this, Ford stands as one of the most innovative and transformational companies of our era. It has shifted from a car company to a technology company. With a Ford F-150, a small business owner working construction can use an onboard computer, track tools, maintain supplies, and build efficiently.

  Ford is one company that has not only innovated; it has also captured America’s sense of fairness. Many Americans, disgusted at the car bailouts but wanting to buy an American company car, have turned to Ford and are thrilled by what they see.

  For this reason, we have eagerly invited Ford CEO Alan Mulally to give the keynote address at International CES three times. Before Ford, Mulally headed Boeing, and many scoffed when a non-car executive was chosen to lead Ford. A board’s selection of a CEO is its most important task, and the Ford Board proved innovative by thinking outside the Detroit box. Mulally is not only an affable and articulate leader, but his vision for Ford, his refusal to seek a bailout, and his shift of Ford to a technology company have proved to be a winning strategy. By the summer 2010, Ford revenues were up 30 percent from the same period a year ago.25

  Another less-noticed consequence of the GM and Chrysler bailout was the unprecedented executive branch intervention into the process of bankruptcy and creditor rights. It may seem inconsequential, but those who lent Chrysler and General Motors billions of dollars, secured by a claim on the U.S. assets, were thrown overboard in favor of unions who essentia
lly took ownership of these companies thanks to the Obama Administration’s intervention. Nothing in the law gave the unions a more senior claim, but the White House intervention rushed through a bankruptcy reorganization, which gave the union rights and ownership over bondholders that had no principled basis in law and instead reeked of political payback for union support.

  There is seldom a good reason for government preventing a business failure, and the default policy should be to let the free market work its will.

  Make economics, business, and entrepreneurism studies compulsory in school curricula. At one time, reading, writing, and arithmetic marked the education of our populace. Over time, we added valuable requirements in subjects like history and geography. But over the last several decades, the education pendulum has swung toward subjects that have a tenuous relationship to good education and citizenship. As long as taxpayers are funding education at any level, we must educate our future generations about the true nature of their economic futures. They need to learn that private business, fact-based investing, innovation, and entrepreneurism will determine their own standards of living and the economic and political health of our country. Illiteracy in basic economics and entrepreneurism is a certain recipe for national failure.

  Ensure that business tax rates are transparent and predictable. Uncertainty paralyzes decision-making in every realm of human activity. In our current political environment, business tax rates are being driven by ideological, not economically rational, considerations. As a result, entrepreneurs, their potential investors, and their potential customers all hesitate to make commitments. Although I hate to say so, even assured and measurable increases in marginal tax rates can be preferable compare to total uncertainty. It is another penalty that we suffer from when politics and ideology are directing our national policies.

  Change tax laws to favor investment over debt. Our nation has been hurt as existing businesses employing millions of Americans have been bought and decimated by leveraged investment fund firms. These firms borrow heavily to purchase the going concerns, taking advantage of favorable income-tax-deductibility treatment of debt, and so turn a quick profit by firing workers, siphoning cash from the company, and letting it go under or trying to resell it quickly. A shift away from the tax advantage for debt would end many of these corporate dismemberments and job killers, and potentially promote additional investment for growth. If tax laws cannot be changed to favor investment, they should at minimum be neutral between them.

  In sum, privately funded, entrepreneurial, technology-driven companies are the key to our nation’s economic growth, increased standard of living, and full employment. Government never has been and never will be capable of rationally growing our economy and jobs. Its primary role should be to promote policies that enable the private sector to prosper and realize our ever-changing economic potential. I don’t believe in censorship, but I am tempted to forbid the falsehood that government can ever create any jobs other than government jobs.

  Moreover, government is also inherently driven by shortterm, temporary, economic band aids. Just recently, former business school dean and Secretary of Labor and State George Schultz was joined by an elite group of scholars to critique the economically destructive tax-and-spending policies of the federal government. Among their wise policy recommendations, they point out that “long-lasting economic policies based on a long-term strategy work; temporary policies don’t.”26 I heartily endorse their opinions.

  5

  Innovation Requires Immigration

  FOREIGN-BORN INNOVATORS

  In 1979, a Russian family from Moscow immigrated to the United States. That might not seem like much today, with the collapse of the Soviet Union, but put yourself in this family’s shoes. They were leaving behind one superpower for another superpower. But the strength of their native land was an illusion, as is so often the case with totalitarian regimes. The Soviet economy—and in turn its military might—was based on the sinister idea that the individual is nothing more than a tool of the state, another set of working hands that must do what a select few government bureaucrats told the individual to do. His or her dreams and talents didn’t matter because he or she couldn’t act on them anyway. All that mattered was the state and its single-minded attempt to govern every action of its citizens.

  The father of this family, Michael, had wanted to be an astronomer, but the Communist Party, unofficially, barred Jews from studying physics because it didn’t trust them with nuclear rocket research. He became a mathematician instead. Then, during a math conference in Warsaw, Michael had a chance to meet colleagues from the United States and Western European nations. That was the breaking point, as recounted by journalist Mark Malseed in a 2007 article in the magazine Moment. 27 “He said he wouldn’t stay, now that he had seen what life could be about,” recounted his wife.

  Michael finally understood the ruse, as most behind the Iron Curtain did by the late 1970s. The “enemy,” the United States, was their only chance to lead the life they wanted, to be free to do what they wanted. The flow of information from the Free World—the result of advances in innovation—gave the lie to the Communists’ highly complex propaganda machine. This family knew what was waiting for them in America, and it wasn’t what they had been told all their lives.

  It was opportunity.

  Michael and his family were granted permission to leave the Soviet Union. Going with them was Michael’s six-year-old son, Sergey. Years later, Malseed reports, Sergey returned to his native land with his father, who was leading a two-week exchange program for his math students. Malseed writes:

  On the second day of the trip, while the group toured a sanitarium in the countryside near Moscow, Sergey took his father aside, looked him in the eye and said, “Thank you for taking us all out of Russia.”

  As his father had eleven years earlier, seventeen-year-old Sergey finally understood the ruse.

  It’s a touching story, and not at all unique in the short history of the United States. I’m glad I came across it while researching this chapter on immigration, too. You know how I found it? I Googled, of course. Or you could say I found it by using the very search engine Sergey Brin, along with his colleague Larry Page, invented in 1996, and which stands as one of the most consequential

  innovations in our time. Nice work, Communists. You could have had Google first.

  Instead, Google is an American innovation because we accepted the Brins into the country so that they could find a better life. But neither is Sergey Brin, for all his success, at all unique. We also accepted Intel founder Andy Grove (Hungary), eBay founder Pierre Omidyar (France), and Yahoo! founder Jerry Yang (Taiwan). The list goes on. There are the well-known: Alexander Graham Bell (Scotland); and the not-so-well-known: Emile Berliner (Germany), inventor of the phonograph.

  Which leads to the obvious question: Where would America be without these foreign-born innovators? What would America’s economy even look like?

  It’s a scary thought when you consider the “what-ifs.” What if the United States had denied the Brins entry because they were from the Soviet Union—an avowed enemy of the United States? The simple fact is that immigrants are an instrumental part of American innovation and economic growth.

  It’s easy enough to say that we are a nation of immigrants. Almost all Americans are immigrants or descended from immigrants. Native Americans are less than 1 percent of the population.

  But that doesn’t mean that the United States has always been a welcoming country. Indeed, there are several moments in our history where a nativist surge helped stoke an anti-immigrant backlash. It’s also true that each wave of immigrants—Irish, Germans, Italians, Eastern Europeans, Asians—has confronted bigotry upon reaching our shores. So while we applaud ourselves for being an “immigrant nation,” we often forget just how hard it was for many of our forefathers when they first arrived.

  But that’s part of the immigrant spirit, isn’t it? They don’t come here for the guarantee of a be
tter life. They come here for the opportunity for a better life. And whatever bigotry or nativist reaction they find, they endure because, in the end, it’s infinitely better than what they left behind. They believed in a better future for their children—and almost all of them suffered so their children could have it better.

  My wife’s parents are great examples. They were trained as doctors in Communist Poland. In 1969, they escaped Poland to come to the United States with their then-five-year-old daughter (my future wife) to give her a better life. Penniless, they settled in the slums of Detroit. They had to learn English and retake their medical certification tests. They struggled for years but succeeded as physicians. Their daughter was valedictorian of her high school and now practices medicine as a talented retina surgeon, developing and implementing procedures that restore vision. (She’s also a wonderful wife and mother.)

  Clearly, my life is better off because they settled here. But so is our nation. You will find no more patriotic Americans than my wife and her parents. Indeed, my experience has been that almost all immigrants, from the innovators to the professionals to the cab drivers, are extremely patriotic and appreciative of what a gift it is to live here.

  But maybe it is we who should be thanking them. Foreign-born innovators represent a substantial portion of the American economy. A 1999 University of California, Berkeley study found that Chinese and Indian engineers ran 24 percent of U.S. technology businesses started between 1980 and 1998. Following this study, the Kauffman Foundation investigated the matter further. In 2009, they released their results:

  We found that the trend [the UCB study] documented had become a nationwide phenomenon. According to the studies, in a quarter of the U.S. science and technology companies founded from 1995 to 2005, the chief executive or lead technologist was foreign-born. In 2005, these companies generated $52 billion in revenue and employed 450,000 workers. In some industries, the numbers were much higher; in Silicon Valley, the percentage of immigrant-founded startups had increased to 52 percent. Indian immigrants founded 26 percent of these startups—more than the next four groups from Britain, China, Taiwan, and Japan combined.