So far, details are scarce, but President Joe Biden’s administration has sent a handful of key signals about what its entrepreneurship policies may look like, according to observers.
• a $150 billion plan to provide venture capital for entrepreneurs, especially minority entrepreneurs
• a campaign proposal to increase in the New Markets Tax Credit to $5 billion annually
• a focus on climate change that could send innovation funding to new hubs across the United States
• a $15 minimum wage proposal
• and aid to small businesses under the new stimulus.
The aid to small businesses included in the $1.9 trillion economic rescue plan Biden announced last month, suffers from the basic underlying problem of much government policy aimed at entrepreneurial part of the economy: it’s focused on helping existing businesses, not on starting new ones, says Carl Schramm, the former president of the Ewing Marion Kauffman Foundation and current professor at Syracuse University in upstate New York.
“There’s nothing in all this COVID relief that has any appeal to me as encouraging entrepreneurship,” he said. “If you don’t have your business going, there’s no call for you. There’s nothing and no place for you to go.”
Indeed, new regulations in the Paycheck Protection Plan (passed under the Trump Administration) aim money at the hardest-hit businesses, requiring a 25% quarter-over-quarter reduction in sales for businesses to qualify. That means by definition that those with the most potential, that found ways to grow during the pandemic, could be excluded.
Schramm, who advocates for a position in the administration focused on startups, said the Small Business Administration isn’t designed to support startups — though for the country to recover economically from the pandemic, startups are critical. Companies less than five years old are responsible for 20% of gross job creation, according to the National Bureau of Economic Research.
One of the idea’s on Biden’s agenda is a proposed $15 an hour minimum wage. This could greatly hurt small businesses and new entrepreneurs, Schramm said. “From an entrepreneur’s perspective, that’s like death,” he said.
The federal minimum wage has been $7.25 an hour since 2009. Workers at this level earn roughly $15,000 a year if they work 40 hours a week.
Not everyone agrees an increase in the minimum wage has a direct effect on entrepreneurs, particularly those that are well-established. Some economic research suggests companies turn to automation instead of hiring, or increase prices.
In general, history suggests it’s difficult but not impossible for government policies to spur entrepreneurship, based on a survey of what hasn’t — worked to increase the startup rate, which has been declining for 40 years. Biden’s targeted entrepreneurship proposals mix some old and some new ideas.
Funding minority-owned businesses
Biden’s campaign outlined many proposals on extending funding access to minority entrepreneurs, who have historically been structurally excluded from access to capital. Among other discussions, Biden proposed $150 billion in new capital for businesses, devoting $30 billion of that to invest in businesses owned by minorities. His campaign also proposed allocating $10 billion from the Small Business Opportunity Fund to state and local funds in economically disadvantaged areas, which could potentially spur $50 billion in new equity investment, based on past investments from the Obama-Biden Administration’s State Small Business Credit Initiative, the campaign said. Additionally, the campaign states it will encourage private investment in minority-owned businesses by increasing the New Markets Tax Credit to $5 billion yearly. Between 2003 and 2020, the tax credit parceled out credits worth $26 billion, according to the Tax Policy Center. Investors receive the credits from community development organizations, which in turn invest in businesses and projects in underserved areas.
Felice Gorordo, a Miami entrepreneur and CEO of eMerge Americas who worked closely with the president during his campaign, says to take the administration’s word. “They’re not looking to rebuild the economy as it was before COVID,” he said. “They’re using this crisis as a good way to build back better than ever before, to make these programs and incentives and resources more accessible to communities that have traditionally have been left out and left behind.”
One signal that the Biden administration is serious about improving access to funding to minority entrepreneurs — and capable of injecting its policies into the federal bureaucracy — will be if the recent round of Paycheck Protection Program actually is fairly distributed to entrepreneurs. The last round, as has been reported, went disportionately to white, male-owned businesses, said Ross DeVol, the president and CEO of Heartland Forward, a Bentonville, Arkansas thinktank working to improve economic performance in the middle of the United States.
Even with new initiatives, the administration may not adequately spark innovation. Take former president Barack Obama’s initiatives. His administration rolled out several programs in an attempt to boost entrepreneurship.
The Obama Administration’s Startup America initiative sought to encourage entrepreneurs. Its efforts included committing $2 billion under the SBA to match private sector investments in “high-growth companies” over five years and starting four accelerators to support clean tech companies, according to its fact sheet.
There was also the Startup America Partnership, which was created by the Kauffman Foundation, Obama’s administration and the Case Foundation. It launched 32 startup states and built a network of 13,000 startups in its two and a half years, according to its website. The program laid the groundwork for discussing issues faced by entrepreneurs and was a “launching pad” for initiatives happening now, such as Kauffman Foundation-sponsored Start Us Up and the venture fund Rise of the Rest, whose CEO is the Case Foundation’s Steve Case, according to an emailed statement from the Kauffman Foundation.
Obama signed the Jumpstart Our Business Startups Act in 2012, which eased securities regulations for new businesses in order to make it easier for them to raise funding. This bill did improve access to capital by opening the door for crowdfunding, observers say.
Yet, startup activity under the Obama Administration was actually declining for most of his time in office, according to the Kauffman Index of Startup Activity. It rebounded sharply in 2013, mostly driven mostly by “more people entering entrepreneurship and more people entering out of choice rather than necessity,” according to a 2016 Kauffman report. But even with overall startup activity rebounding in following 2013, new businesses with employees were still on a long-term decline, the report said.
“Despite the best efforts of Startup America, much additional work remains to be done in the entrepreneurial space in this country,” DeVol said.
There’s always the chance that the activity could have been much lower had the administration not paid attention to entrepreneurship, Schramm said — but the track record of the federal government’s interventions to boost entrepreneurship is not particularly strong.
“Moving systems away from favoring large, established companies to a more balanced system that helps communities grow their own businesses is a major undertaking,” according to the Kauffman Foundation statement. “We all need to be in this for the long haul and need elected officials at every level of government to work together, and change systems, to provide more access to the opportunity to start a business.” (Disclosure: the Kauffman Foundation is one of Times of Entrepreneurship’s major sponsors).
Schramm issues a warning about the government getting too involved with business policy. He points to the Pruitt-Igoe disaster in St. Louis during the 1950s, when thousands of poor, Black people suffered due to the poorly-kept government housing. The buildings went up as Black businesses were torn down, a theme that rippled across the country at the time. “That was all with the best of intentions by people in Washington, who thought they knew exactly what was best for poor people,” he said. “We’re going to do that all over again,” he said. Apparently, he added, people have “forgotten how badly it worked last time.”
Where the Administration Might Start
For one, policy makers ought to look beyond the coasts, Schramm said. “Part of the problem there is that I think the policy people who always populate the government, particularly in a democratic regime, have a view of entrepreneurs as just Silicon Valley,” he said.
DeVol, whose job it is to think about ways to drive innovation in the heartland, has some ideas of how tweaking existing policy proposals could benefit entrepreneurship communities.
He points to the Endless Frontiers Act, a piece of legislation that was introduced to the Senate last spring by Sen. Chuck Shumer (D-NY). Part of the legislation would add 10 technology hubs, many of which would be in the heartland. The bill is a bipartisan effort that has also been supported by Republican representatives out of the heartland.
DeVol suggests a “meddling” of this proposal with additional focus on entrepreneurship and commercialization.
An existing program that could be shifted to spark entrepreneurship is the opportunity zones established during the Trump administration, DeVol said. Biden’s administration could make sure that people living in these areas have the information and access to capital necessary to get their businesses off the ground in these pre-established zones through incentives or additional funding, he said.
DeVol suggests what he calls a “micro hybrid program” — where the federal government creates partnerships with community banks that people trust and a program through the Small Business Administration underwrites a portion of the loans. This would enable more people to take out loans to back their business, he said.
DeVol’s idea echoes a finding outlined in a December Congressional Budget Office report: the government could support entrepreneurship through a program geared at increasing access to credit or perhaps expanding SBA’s current credit program. The report also suggests that policymakers direct a part of the federal government’s spending on research and development to new companies or expand programs that provide visas to approve more for highly skilled workers or entrepreneurs immigrating to the U.S. Though, the report does drawbacks of these policies — it’s challenging to distinguish which companies are bound to be innovative and successful and also any program that would be used to identify entrepreneur immigrants “are costly to administer and susceptible to abuse,” according to the report.
Start Us Up, which is composed of over 150 entrepreneurship organizations, writes that state and local governments could increase funding opportunities for businesses that don’t qualify for SBA loans by partnering with philanthropic groups to make funding pools that reduce fees and interest of Community Development Financial Institutions’ short-term lending. This is one of many points in a recent plan called “Rebuilding Better,” which lists steps policymakers can take to support entrepreneurs. Others include:
- Replacing occupational licensing with “less onerous forms of regulation” in industries where public health is not seriously threatened
- Creating “portable benefits” that will follow workers as they move jobs or out of the workforce to start a business
- Starting a “pay-for-success” model that provides funding to incubators and accelerators when agreed-upon benchmarks are met, “such as the number of new businesses created, ease of accessing appropriate capital, increased revenues, new jobs created and sustained, and underserved areas and populations reached”
History’s Best Example?
But there could be a natural fit between an innovation push that emphasizes entrepreneurship and the administration’s emphasis on slowing climate change. There is evidence that increases in government funding spur entrepreneurship and economic development, if the programs are well-designed. Some experts attribute the rise of Silicon Valley to the government’s support for research and development in the middle of the 20th century.
Schramm predicted social entrepreneurship and green ideas will likely be emphasized because Biden has already signed orders halting oil leasing on public lands, he said. There may be higher subsidies offered for people with ideas in this field.
“Once the President makes noise like that at the tippy top, you can be sure that people who are going to execute the entrepreneurship policy will say, well, we should get on board with that,” he said
What the administration can, and should, do is set pointed goals, Schramm said. He offers up an example from his time as president of the Kauffman Foundation, when he would say that the U.S. should have at least as many black billionaires proportionate to the population as we do white billionaires. If the president said something similar, something specific, then people would start thinking about ways to get there.
“We don’t hear that kind of talk,” he said. “Even if you decompose political rhetoric, it’s not based on the assumption that an equal number of black people will become billionaires. The conversation is always that somehow certain parts of our population carry disabilities into the market that they can’t overcome without government help.
“The history is absolutely clear. That’s just not true.”
This story and others on New Builders Dispatch are made possible by a sponsorship from the Ewing Marion Kauffman Foundation. The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that provides access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity – regardless of race, gender, or geography. The Kansas City, Mo.-based foundation uses its grantmaking, research, programs, and initiatives to support the start and growth of new businesses, a more prepared workforce, and stronger communities. For more information, visit www.kauffman.org and connect with www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.