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An Optimist's View of the Entrepreneurship Explosion

For America to Remain Competitive, the Plodding Hand of Government Will Have to Be Lifted

MARCH 01, 1997 by RAYMOND J. KEATING

Advocates of economic freedom, rejoice. Despite some setbacks of late, the future is promising. True, the 1990s thus far have been plagued by a federal government run amok, including massive tax increases, heavier regulatory burdens, and rising government expenditures. Indeed, recent U.S. public-policy developments leave little to cheer about for proponents of smaller government and free markets.

For example, the top income tax rate on individuals has been increased from 28 percent to 39.6 percent. Factor in the Medicare income tax and the top rate exceeds 42 percent. The corporate tax rate rose by a percentage point, and back in 1987 the capital gains tax rate leaped by 40 percent, from 20 percent to 28 percent. Also, as noted in the chart on the next page, the estimated costs of federal regulations have been on the rise since 1988, according to economist Thomas Hopkins. And lastly, from 1989 to 1997, federal government spending growth will outpace inflation.

Indeed, things look rather grim—at least recently and probably for the short term going forward. However, the long term reveals a more heartening story. In my view, the long run promises enhanced economic opportunities for all. We are moving toward a society whose key features will be greater emphasis on individual liberty, higher levels of entrepreneurship, and less reliance upon and less tolerance of government action. The resulting economic dynamism and growth promise to astound.

Major long-term trends support the thesis that the entrepreneur-liberty society is coming upon us.

Increasing Entrepreneurship

Through a combination of economic survival and the enhancement of sound economic incentives, the level of entrepreneurship in this nation will rise considerably.

An entrepreneurial explosion, if you will, actually has been underway since the late 1960s. The charts on page 126 show a nation of growing entrepreneurship. And considering the many government obstacles and disincentives, this is a resilient and determined bunch of risk-takers. The one-man or one-woman business may best capture the economy’s level of entrepreneurship. Between 1970 and 1995, the number of sole proprietorships filing tax returns jumped by 184 percent. Home-based businesses—full- or part-time—have exploded from almost 6 million in 1984 to nearly 40 million in 1995. Factor in the underground economy and entrepreneurship has expanded even further.

This entrepreneurial trend was given some help in the early 1980s by a few diminishing governmental costs—such as reductions in marginal income and capital gains tax rates, as well as falling real federal regulatory costs. Fighting off high levels of inflation helped as well.

The relative level of entrepreneurship stagnated a bit, however, in the latter part of the 1980s and into the 1990s, due to the above-mentioned and other increases in governmental costs. Consider how much more robust these entrepreneurial indicators would have been without the tax and regulatory hikes of recent years.

Government-imposed obstacles to entrepreneurship, though, will diminish in coming years, with pro-growth incentives being enhanced. Government will be forced to formulate policies that recognize the changing nature of the workforce—marked by increased mobility, diversity, and entrepreneurship. Indeed, rather than focusing on targeted big- business tax incentives or corporate welfare programs, for example, broad-based tax and regulatory cuts will be offered that unleash a torrent of entrepreneurial activity.

In addition, increased competition will continue to exert pressures on large companies to downsize and get leaner and meaner. To use economist Joseph Schumpeter’s phrase, creative destruction will see that entire firms and industries are annihilated due to greater efficiencies and new products. This trend requires formerly reluctant entrepreneurs to take the plunge into the waters of economic risk-taking. In essence, the economy is becoming more and more decentralized.

Leaps in Technology

Great strides in technology help to drive this decentralizing economic trend—from the collapsing costs and expanding powers of the computer to leaps in telecommunications. These monumental changes place us firmly in an era of change and upheaval more tumultuous than the Industrial Revolution. Innovation, invention, and entrepreneurship in computers and telecommunications obviously translate into opportunities in other industries, generating new products, services, and efficiencies.

Technological advancements—as they always have done in the past—give another push to the formerly timid entrepreneur, as larger businesses take advantage of new technologies and shed employees. In turn, these down-scaled individuals move to create their own economic security through self-employment with the help of technological improvements as well.

Internationalization

As has often occurred throughout history, protectionism has recently reared its ugly head. Modern-day protectionists have tried to paint the protectionism-vs.-free trade encounter as a big-business-vs.-small-business standoff. The problem with such assertions is that over 95 percent of firms exporting from the United States have fewer than 500 employees; i.e., they are small or mid-size businesses.

In this case, the conventional wisdom is absolutely correct. In economic terms, the globe is getting smaller every day. International competition is at hand, as are countless international opportunities.

The Limits of Government Action

Government does not work very well. What free-market advocates have been saying for decades is beginning to resonate with the general populace.

Increasing levels of entrepreneurship undoubtedly have accelerated this learning curve. Wrestling with government regulations, paperwork, taxes, and bureaucrats, on a firsthand basis, crystallizes the woes and costs of government action—a shift from theory to the real world. Combine that with the visible harm caused by the welfare state in terms of destroyed lives and government dependency, and the education process regarding the limits of government action is moved along even further. This enhanced knowledge about the woes of government will be the major impetus for the transformation to the entrepreneur-liberty society.

Interestingly, the employees of small businesses already possess a strong understanding of the costs of government. One recent poll by the Small Business Survival Committee showed that 63 percent of small business employees saw the federal government as an opponent rather than a partner, and 70 percent said that government regulations were too numerous and too costly.

Economic Dynamism

All of these trends point to increased economic dynamism. Entrepreneurs are creating new demands at a rapid pace. Current and future leaps in technology only quicken the entrepreneurial pace and allow for global dissemination.

In such an environment, the plodding hand of government will have to be lifted. Tax reduction, deregulation, privatization, and the demise of the welfare state will have to occur in order to compete in a high-tech, decentralized, mobile (in terms of both capital and labor), and global economy. And this trend will not only be required of the federal government, but of states and cities as well. New York, for example, must worry about much more than being competitive with New Jersey and Connecticut, but with Florida, Nevada, Mexico, Japan, China, Hong Kong, and Singapore.

Nations, states, and cities adopting policies that raise costs on the private sector have always been punished by the marketplace. However, such justice will be dispensed more swiftly and with greater severity in coming years and decades due to increasing mobility of labor and capital.

While big-government policies in recent years can understandably depress those of us trying to advance liberty and free markets, I remain an optimist about the future. Indeed, when I shake off the short-term doldrums and look at the big picture, I get downright jubilant over the economic opportunities and possibilities that will materialize in the twenty-first century. While government will always create mischief, keeping market forces on guard, state activism and tolerance for such action will diminish in the coming entrepreneur-liberty society.

Source: Thomas Hopkins, Regulatory Costs in Profile, Center for the Study of American Business, August 1996

Data Source: U.S. Small Business Administration

Data Source: Small Business Survival Committee

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March 1997

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