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Public Policy and Entrepreneurship

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  • Douglas Holtz-Eakin

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    Abstract

    The image of the American entrepreneur retains an enduring fascination in the minds of the public and policy makers alike. For example, testifying several years ago at a congressional hearing on "the entrepreneurial spirit in America," Wisconsin's Senator Robert Kasten said of entrepreneurs: "They create new jobs. They provide new competition to existing businesses. They help to improve product quality, help to reduce prices, add new goods and services never before thought of, advance new technologies, America's competitive stance." His statement captures the view that entrepreneurial enterprises are valuable sources of technological advance, jobs, and dynamism, a trait commonly attributed to small business as a whole. Our national affection toward entrepreneurs also manifests itself in attitudes towards small business. "Start-up," "family," and other small-scale businesses carry an important weight in discussions of national policy. This durable affection stems in part from the perception that small business is the vehicle by which entrepreneurs provide needed vigor to the economy. In the newly established democracies of Eastern Europe a widely discussed challenge is the need to regenerate a vital entrepreneurial sector. The centralized regime pushed the mass production paradigm to its limit, at times concentrating the entire production of a good in a single factory. The dismal record of poor quality products and stagnant economic growth highlights the need for the competition and vigor provided by start-up enterprises. The national focus on small business is not merely talk. Many government policies are directed toward aiding small businesses. For example, the Revenue Reconciliation Act of 1993 (RRA93) permits the exclusion of 50 percent of capital gains on qualifying investments in start-ups and small businesses held for five or more years. This brief surveys the various notions of "small business," presents criteria that should underlie policies toward business, and reviews the case for public policies to stimulate entrepreneurship and small business. It concludes that it is surprisingly difficult to construct a case in favor of systematically favoring small businesses. Indeed, it is probably not useful to think of creating a "small business climate" through policies like targeted tax breaks, wage subsidies, loan guarantees or outright grants. Instead, policies should be devoted to developing an ehnvironment favorable to innovation, employment, and growth in the economy as a whole.

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    File URL: http://www.maxwell.syr.edu/uploadedFiles/cpr/publications/pb5.pdf
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    Bibliographic Info

    Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Policy Briefs with number 5.

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    Length: 26 pages
    Date of creation: Nov 1995
    Date of revision:
    Handle: RePEc:max:cprpbr:005

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    1. James M. Poterba, 1988. "Venture Capital and Capital Gains Taxation," Working papers 508, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
    4. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
    5. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
    6. Gerald E. Auten & Joseph J. Cordes, 1991. "Policy Watch: Cutting Capital Gains Taxes," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 181-192, Winter.
    7. Holtz-Eakin, D. & Joulfaian, D. & Rosen, H.S., 1992. "Entrepreneurial Decisions and Liquidity Constraints," Papers 129, Princeton, Department of Economics - Financial Research Center.
    8. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
    9. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
    10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    11. Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-59, November.
    12. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
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