An Optimist's View of the Entrepreneurship Explosion; R. Keating

~espite 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 gov ernment expenditures. Indeed, recent U.S. public-policy developments leave little to cheer about for proponents of smaller gov ernment and free markets. For example, the top income tax rate on individuals has been increased from 28 per cent 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 cap ital 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 opportuni ties for all. We are moving toward a society whose key features will be greater emphasis Mr. Keating serves as chief economist for the Small Business Survival Foundation and is a principal with Capital Hill Research. on individual liberty, higher levels of entre preneurship, 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 com ing upon us. Increasing Entrepreneurship Through a combination of economic sur vivaland 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 consider ing the many government obstacles and disin centives, this is a resilient and determined bunch of risk-takers. The "one-man" or "one woman" business may best capture the econ omy's level of entrepreneurship. Between 1970 and 1995, the number of sole propri etorships filing tax returns jumped by 184 percent. Home-based businesses-fuB 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 124 Source: Thomas Hopkins, "Regulatory Costs in Profile," Center for the Study of American Business, August 1996 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 stag nated a bit, however, in the latter part of the 1980s and into the 1990s, due to the above mentioned and other increases in governmen tal costs. Consider how more robust these entrepreneurial indicators would have been without the tax and regulatory hikes of recent years. Government-imposed obstacles to entre preneurShip, though, will diminish in coming years, with pro-growth incentives being en hanced. Government will be forced to formu late policies that recognize the changing na ture of the workforce-marked by increased mobility, diversity, and entrepreneurship. In deed, 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 willcon tinue 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 entrepre neurs to take the plunge into the waters of economic risk-taking. In essence, the econ omy is becoming more and more decentral ized.

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 tumul tuous than the Industrial Revolution. Inno vation, invention, and entrepreneurship in computers and telecommunications obviously 126 THE FREEMAN • MARCH 1997 New Business Firms, 1983-1995 850,000 "l"'""'""- .......... ~.......... _ .......... ~.......... ~-_ 600,000 ..-----------m.--m-: 750,000 ~----=-----IIl&----IlII~~ 700,000 +---_&_IIIIt-4Il11-11I1-11J-B-III-_IRI_.-.....:IlIII-I!IIk 650,000 +-...--_W_R-III-III-BJ..-B ..w.--I--..II-C ~ ~ ~ ~ ~ ~ ~ 0 - N ~ V ~ ~ ~ m m m m m ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Data Source: U.S. Small Business Administration Home-Based Bus1nesses larger businesses take advantage of new tech nologies 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 en counter 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 em ployees; i.e., they are small or mid-size busi nesses. In this case, the conventional wisdom is absolutely correct. In economic terms, the globe is getting smaller every day. Interna tional competition is at hand, as are countless international opportunities. The Limits of Government Action Data Source: Small Business Survival Committee translate into opportunities in other indus tries, generating new products, services, and efficiencies. Technological advancements-as they al ways have done in the past-give another push to the formerly timid entrepreneur, as 4S CI) 30 c o 1: 1 S o 1984 1995 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 un doubtedly have accelerated this learning curve. Wrestling with government regula tions, paperwork, taxes, and bureaucrats, on a firsthand basis, crystallizes the woes and costs of government actiona 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 busi nesses already possess a strong understanding of the costs of government. One recent poll by the Small Business Survival Committee AN OPTIMIST'S VIEW OF THE ENTREPRENEURSHIP EXPLOSION 127 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 cre ating 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 cap ital 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 twen ty-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 entrepre neur-liberty society. D FEE Trustee Dinner at the Tarrytown Hilton, in Tarrytown, N.Y. Sunday, May 18, 1997, at 5:00 p.m. Feature Speaker: The Libertarian Congressman Dr. Ron Paul $45.00 per person/$75.00 per couple For reservations, please call Renee Oechsner, at (914) 591-7230.

The Foundation for Economic Education, Inc.