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Will Plans to Boost Investment in Start-Ups Bear Fruit?

David Godow
February 1, 2011, 6:13pm

Yesterday, the Administration announced a package of new plans to incentivize investment among small businesses, hopefully kick starting job growth and business lending in the private sector. One such initiative will create a privately-run "Startup America Partnership" to drive lending to start-ups, while another would permanently remove capital gains taxes on small business stock. As commentators have noted, these moves follow the President's shift in economic strategy to cooperating with business leaders on various stimulative projects.

Programs like these are certainly better than the 2009 stimulus bill, but it's by no means certain that they'll make skittish entrepreneurs loosen their purse strings and invest.

Small businesses, of course, are the darlings of both sides of the political spectrum. They invoke happy thoughts of the local mom and pop or the entrepreneur that pours his heart and soul into his craft. And, as pundits often note, small businesses create a ton of jobs - the Small Business Association estimates the total at 64 percent of net new jobs over the past 15 years (although their definition of "small" encompasses 99.7 percent of all companies).

But does that mean showering them with cash is going to be an economic panacea? Is there a groundswell of profitable ideas that just need an extra push to get them going? Perhaps. Will the business leaders or government bureaucrats in charge of targeting money to start-ups be able to identify them? That's a trickier question to answer.

Basically, the task is to pick winners in an environment where about half of small businesses fail within five years, and the average venture capital-financed start-up has only an 18 percent chance of succeeding (defined as going public). Even if the "Startup America Partnership", run by seasoned corporate execs like AOL co-founder Steve Case, can steer money to the right entrepreneurs at a better than average rate, how much money will be spent on duds along the way? As for capital gains tax exemptions, it's unclear why small businesses should receive a competitive advantage over their larger cousins (that is, the 0.3 percent of businesses that create 36 percent of all jobs).

Again, this is not to say the idea can't work -- it could be a brilliant stroke that gives just the right "nudge" to entrepreneurs who just need a leg up to let loose their great ideas. But one could offer many a Hayekian objection to trying to steer money to the right place at the right time on a massive scale, even if that money is in the hands of businessmen instead of bureaucrats. Moreover, this does nothing to address issues that business owners have already said is keeping them on the sidelines - tax and regulatory uncertainty. And no amount of tax breaks is going to make it go away.


David Godow is Research Assistant


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