The Old Normal Worked Well……So What We Really Need Is A Back To The Future Event

Posted By on September 4, 2010

Without tax incentives, this may all be for not……..John Mauldin explains the simple facts of job growth…..Want to increase productivity and jobs? The best way it seems, is to encourage private business, and especially startups.  “So we can’t count on the Intels or Microsofts to create employment: we need the entrepreneurs.”

Delta Force

There are two, and only two, ways that you can grow your economy. You can either increase your (working-age) population or increase your productivity. That’s it. There is no magic fairy dust you can sprinkle on an economy to make it grow. To increase GDP you actually have to produce something. That’s why it’s called gross domestic product.

The Greek letter delta (∆) is the symbol for change. So if you want to change your GDP you write that as:

∆GDP = ∆Population + ∆Productivity

That is, the change in GDP is equal to the change in population plus the change in productivity. Therefore, and I’m oversimplifying a bit here, a recession is basically a decrease in production (as normally, populations don’t decrease).

Two clear implications: The first is that if you want your economy to grow, you must have an economic environment that is friendly to increasing productivity.

While government can invest in industries in ways that are productive, empirical evidence and the preponderance of academic studies suggest that private companies are better at increasing productivity and producing long-term job growth.

Going to the U.S. for a second, studies show that it is business startups that have produced nearly all the net new jobs over the last 20 years. Let’s look at this analysis by Vivek Wadhwa.1

“The Kauffman Foundation has done extensive research on job creation. Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977. What this showed was that startups aren’t just an important contributor to job growth: they’re the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.

“When analyzed by company age, the data are even more startling. Gross job creation at startups averaged more than 3 million jobs per year during 1992-2005, four times as high as any other yearly age group. Existing firms in all year groups have gross job losses that are larger than gross job gains.

“Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

“So we can’t count on the Intels or Microsofts to create employment: we need the entrepreneurs.”

Run through the data from around the world. Where has the vast majority of long-term net new jobs come from, even in China? The private sector. And what is the mother’s milk of the private sector? Money. Investments. Angel investors. Private banking. Private offerings. Public offerings. Loans. Personal savings. Money from friends and family. Borrowing against houses. Credit cards. And anything else that provides capital to business.

(We are reminded of the improbable story of Fred Smith, the founder of FedEx, who early in the history of the company could not make payroll. So he flew to Las Vegas and wagered what little cash they had, and incredibly made enough [$27,000] to keep the company alive. Not exactly orthodox investment banking procedure, but it is illustrative of the crazy, gung-ho nature of some entrepreneurs. Eighty percent of all business startups do not exist after five years (at least in the US). We guess Fred figured he could get better odds in Vegas.)

Want to increase productivity and jobs? The best way it seems, is to encourage private business, and especially startups.

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John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

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