speeches · March 29, 2004

Speech

William Poole · President

Allowing Entrepreneurship EvansvilleRotaryClub Evansville,Indiana March30,2004 In my speeches discussing the outlook for Americansseemtobemuchmorewillingto the economy, I almost invariably finish by becomeentrepreneurs.Indeed,arecentsurvey mentioning that I am an optimist about foundthatmorethan70percentofadult the long-run economic performance of the Americanswouldpreferbeinganentrepreneurto United States because of the superb entrepre- workingforsomeoneelse.1Incontrast,thesame surveyshowedthatonly46and41percentof neurial environment in this country. Today, adultsinWesternEuropeandJapan,respectively, instead of just mentioning this view, I will dis- preferredbeinganentrepreneur.Onepossible cuss it in some detail. I don’t think many appre- explanationforthisdifferenceisthat,because ciate how important it is to our future that we theUnitedStatesisanimmigrantnation,wehave buildonoursuccessinthisregard.Idonotknow inheritedourdynamismfrompastgenerations. how to measure the rate of return to the nation’s Manyofthosewhocameherehadthegumption investment in institutions and practices that are tomigratehalfwayaroundtheworldinsearch sonurturingtonewfirms,andgrowthofexisting ofabetterlife.Notonlywerethedistanceslong firms, but I’m sure that the return is high. butalsothetravelwasoftendangerous.However, Notethatmytitleis“AllowingEntrepreneur- eveninCanada—anothernationofimmigrants— ship”ratherthan“EncouragingEntrepreneurship.” only58percentofadultswouldpreferentrepre- WeareextremelyfortunateintheUnitedStates neurshipoverworkingforsomeoneelse. thatpeopleherehaveanabundanceofentrepre- So,whatisitthatsetstheUnitedStatesapart? neurialspirit.Forthemostpart,theissueweface Clearly,thereissomethingintangibleatwork— isthatofremovingimpedimentsanddisincen- whichwecancall“entrepreneurialspirit”—that tives.Wedoaprettygoodjobwithpublicpolicies isindependentofeconomicpolicies.Inaddition, favorabletoeconomicgrowth.Iwon’tdwellon though,theUnitedStateshasbeenrelatively whatwecandobetter,butimprovementsare successfulincreatingapolicyenvironmentthat certainlypossible. takesadvantageofthisintangible,yetvital,asset. Beforeproceeding,Iwanttoemphasizethat Iwilldiscusstherolesofentrepreneurialspirit theviewsIexpressherearemineanddonot andthepolicyenvironmentinturn.Alongthe necessarilyreflectofficialpositionsoftheFederal way,Iwillarguethatthetwoareinterwovenand ReserveSystem.Ithankmycolleaguesatthe thatpolicymakersshouldkeepinmindthatthe FederalReserveBankofSt.Louis,especially realkeytoentrepreneurialsuccess—entrepre- HowardJ.Wall,Researchofficer,fortheircom- neurialspirit—isalreadyinabundanceandthat ments,butIretainfullresponsibilityforerrors. weshouldbecarefulnottowasteit. ENTREPRENEURIAL AMERICA ENTREPRENEURIAL SPIRIT ObserverscomparingtheU.S.economyto Wheneconomiststrytoexplaindifferences theeconomiesofothercountriesoftennotethat inentrepreneurshipacrosscountriesorregions, 1 Blanchflower,Oswald,andStutzer(2001). 1 ECONOMICGROWTH theytypicallyexaminetherolesofalonglistof appeartobeextremelyaversetorisk:Nearlyone- economicandinstitutionalfactors.Whatthey halfofEuropeanswhoweresurveyedsaidthat tendtofindisthat,whilethesefactorsareimpor- oneshouldnotstartabusinessifthereisanyrisk tant,alargecomponentofthedifferencesin atallthatitmightfail. entrepreneurshiphasnothingtodowiththem.2 Inotherwords,evenifallcountrieshadthesame economicconditionsandpolicies,somewould POLICY ENVIRONMENT stillbemoreentrepreneurialthanothers,andthe Discussionoftheroleofgovernmentinthe UnitedStateswouldbeamongtheleaders.The entrepreneurialprocessshouldbeginbyrecog- bestexplanationforthisfindingisthatthereare nizingtherelativeabundanceofentrepreneurial socialfactorsatworkthataredifficultorimpos- spiritintheUnitedStates.Tothisend,itisuseful sibletoquantify.Thesesocialfactorscanbe todrawadistinctionbetweenpassiveandactive referredtocollectivelyasentrepreneurialspirit. policiestowardentrepreneurs.Passivepolicies PolicymakersintheEuropeanUnion,for arethosemeanttofacilitateentrepreneurshipby instance,havebeengrapplingwiththeirper- establishinginstitutions,lawsandregulationsto ceivedgapinentrepreneurialspirit.Whatthey reducethetransactionscostsofrunningabusi- havecometorecognizefromcomparingtheir ness.Activepolicies,ontheotherhand,arethings countrieswiththeUnitedStatesisthatitisnot suchastargetedtaxbreaks,subsidiesandsoforth enoughtohaveappropriatelawsandregulations. thataremeanttodirectresourcesintoparticular Afterall,inmanyrespects,comparedwiththe businessactivitiesbycreatingspecificincentives. UnitedStates,someEuropeancountrieshave Giventheentrepreneurialenergywehavein equivalentorsuperiorinstitutionalarrangements theUnitedStates,activepoliciesareofrelatively forallowingentrepreneurship. limitedimportance.Thefocushasbeen,and Take,forexample,theScandinaviancoun- shouldcontinuetobe,onensuringthatwehave tries,which,asjudgedbytheWorldBank,have amongthebestinstitutionalarrangementsto theproperpassivepoliciesinplacetoallowour allowentrepreneurshiptothrive.Despitethe entrepreneurialspirittothrive.Weshouldhave favorableinstitutionalenvironment,thesesame inplacebasicinstitutionstofacilitatebusiness countrieshaverelativelylowpercentageswho transactions,alongwithminimalinterference saythattheywouldprefertobeanentrepreneur intohowbusinessesactuallyoperate.Inwriting overbeinganemployeeofsomeoneelse.Recall ourregulations,weshouldcarefullyweighthe thatintheUnitedStates,morethan70percent costsandbenefitswhilekeepinginmindthat ofadultssaythattheywouldprefertobeentre- excessiveinterferencecanquashormisdirect preneurs.Incontrast,only30percentorsoof ourgreatestadvantage. Scandinaviansexpressthispreference.3 Aparticularadvantageofthepassiveapproach Americansstandoutinotherwaysintheir isthatentrepreneursthemselvespickthemost attitudestowardsentrepreneurship.4Forexam- promisingareastopursue.Incontrast,active ple,amuchhigherproportionofEuropeansthan policiesordinarilyinvolveeffortsofgovernment Americanssaythattheideaofstartingabusiness topickthewinnerstosubsidize.Experienceindi- hasneverenteredtheirminds.Americansalso catesthatgovernmentshaveapoortrackrecord haveagreatertolerancefortheriskassociated inidentifyingpromisingnewtechnologies.Con- withentrepreneurship,whereasmanyEuropeans sequently,subsidiesoftenprovewastefulasthey 2 GeorgellisandWall(2000)andBlanchflower(2000). 3 Blanchflower,Oswald,andStutzer(2001). 4 EOSGallupEurope(2004). 2 AllowingEntrepreneurship directresourcesindirectionsthatturnouttobe U.S.successisaverybasicinstitutionalarrange- unpromising.Atthesametime,taxesimposedto ment:theactofestablishingabusinessasalegal supportthesubsidiescreatedisincentivesto entity.Youmightbesurprisedtohearthatcoun- entrepreneursingeneral. triesdifferagreatdealintermsofwhatanentre- Itisnotpossibletooutlinetheentirearrayof preneurhastodosimplytoestablishabusiness policiesthataffectentrepreneurship.Becauseof asalegalentity.Thisratherbasicstepmayseem thevastscopeofthesepolicies,Ihavechosena trivial,buttherearesignificantadvantagestosim- fewexamplestoillustratethewaysinwhichthe plifyingthisstep.Onceabusinessisestablished UnitedStatesstandsoutinbalancingpublicpolicy asalegalentity,itgainsaccesstothelegaland requirementswiththeneedsandincentivesof financialsystem,therebyaffordingittheability entrepreneursandotherbusinesses. toborrowandtoenforcecontractsthroughlegal First,thestructuresofourfundamentallegal means.Ifitistoocumbersomeorexpensiveto institutionstendtodifferfromthoseofothercoun- establishabusiness,potentialentrepreneursmight tries.Second,ourcompetitivefinancialsystem decidetoforgotheirventuresaltogetherorthey providesentrepreneurswithareadysourceof willentertheinformalsector,withonlylimited funds.Third,ingeneralwedonotoverregulate accesstothelegalsystemandtocreditmarkets. ourlabormarkets,andfourth,wehavegenerally Generallyspeaking,theviewintheUnited lowertaxrates.However,improvementsinall Statesisthatowningabusinessisaninherent rightandthattheoperationofthebusinessshould theseareasarecertainlypossible,especiallywith belefttotheentrepreneur.Thesimplicityofthe regardtolabormarketandtaxpolicies.ButI’llnot processtoestablishabusinessreflectsthisview: takeupthissubjectbecausemymainpurpose IntheUnitedStates,ittypicallytakes4daysand todayistodiscusstheissueingeneralandempha- $210toestablishabusinessasalegalentity.5 sizetheconditionswehavecreatedintheUnited Theprocessamountstoregisteringthenameof Statesthataresoconducivetoeconomicgrowth. thebusiness,applyingfortaxIDs,andsettingup Beforegoingintotherolethatotherpolicy- unemploymentandworkerscompensation makersplayinallowingentrepreneurship,I insurance. shouldpointoutthattheFederalReservealso Manyothercountriesseemtoviewtheown- playsanimportantroleinpromotinggrowth. ershipofafirmasaprivilegetobebestowedby Businessesingeneral—andentrepreneursin bureaucrats.Additionally,somecountriesimpose particular—benefitfrompricestability.Whenthe regulationsthattakebasicbusinessandentrepre- generalpricelevelisunstable,businessesface neurialdecisionsoutofthehandsofentrepre- moreuncertaintyaboutthefuture,makingitmore neurs.Thisapproachoftenleadstogovernment difficultforthemtoplanefficiently.Andwhen micromanagementoftheactualworkingsofthe peopleplaninefficiently,unavoidablemistakes business,evenbeforethebusinessexists.Itis aremorecommon,leadingtogreatervariability common,forexample,thatbeforeacompanyis inbusinessinvestmentandgrowth.Inflationhas evenallowedtoexistasalegalentity,itsowner beenkeptincheckformorethantwodecades, must:(i)meetrequirementsforthelevelofcapital andyoucanrestassuredthattheFedremains availabletothecompany,(ii)submitdetailed vigilantonthatfront. descriptionsofcorporaterulesandorganization, (iii)obtaingovernmentpre-approvaloffinancial Opening a Business andbusinessplans,and(iv)beamemberofa Generallyspeaking,policymakersinthe tradeassociation.Inthecourseofsatisfyingthese UnitedStateshavedoneagoodjobofcreating requirements,theentrepreneuroftenpaysexorbi- fundamentalinstitutions.Agoodillustrationof tantfeeswhilewaitingweeksormonthsforvari- 5 WorldBank(2004). 3 ECONOMICGROWTH ousformsandapplicationstomaketheirway andpaytodepositors.Inaddition,theycouldnot throughthesystem. operateacrossstatelinesandcoulddealonlyin ToestablishabusinessinJapan,forexample, classicfinancialintermediationactivities— atypicalentrepreneurspendsmorethan$3,500 deposit-takingandlending.Today,mostofthese and31daystofollow11differentprocedures.In restrictionshavebeenremoved. Belgium,ittakes56daysandmorethan$2,600. Otherfinancialinnovationshavealsoledto Greecerequiresthatanentrepreneursatisfy16 avarietyofnewentrepreneurialventures.Onein differentproceduresandpaymorethan$8,000, placemanyyearsistheventurecapitalindustry, including$1,200forsomethingcalled“Certifi- whichhuntsforpromisingnewfirmstofinance cationbylawyers’welfarefund”and$3,700to andhelpmanage.Amorerecentinnovation,dat- simplynotifytaxauthoritiesthatbusinessactiv- ingtothelate1970sandearly1980s,isthe“junk itiesareabouttocommence.Rememberthatall bond.”Thesearesimplyhigh-risk/high-yield thesestepshavetobecompletedjusttoestablish bondsthatallowfirmswithcreditratingsbelow thebusinessasalegalentity. “investmentgrade”tohaveaccesstoinvestors Inmanyways,thedifferencesbetweenthe willingtocarryhigherlevelsofriskinexchange UnitedStatesandothercountrieswithregardto forhigherratesofreturn.Newfirmshavebeen establishingabusinessreflectmorethansimple abletoraisesubstantialamountsofcapitalby differencesininstitutionalarrangements.They issuingjunkbonds.Followingahandfulofscan- alsorevealagreatdealaboutgovernments’under- dalsinthe1980s,junkbondshaveoftenbeen lyingattitudestowardsentrepreneurship.Also, disparaged,although,inreality,theyfueleda giventhatthisprocedureishandledprimarilyat greatdealofinvestmentthenandcontinuetodo thestatelevelintheUnitedStates,theeaseof sotoday. creatinganewbusinessprovidesagoodillustra- tionofhowourfederalsystemworkstoouradvan- Labor-Market Regulations tage.Statesmustcompetewithoneanotherto AnotherareathatsetstheUnitedStatesapart providesuitablebusinessenvironments,orrisk istheextenttowhichthegovernmentregulates losingouttootherstates.Andasweallknow, therelationshipbetweenbusinessesandtheir statesdoindeedcompetevigorouslyfornew employees.Thereiswideagreementaboutthe businesses. necessityofsomeregulationtoprotectworkers fromillegaldiscriminationoremployerfraud. Competitive Financial System Thereislessagreement,however,ontheextent Establishingabusinessasalegalentityallows towhichworkplaceregulations—includingmini- entrepreneursgreateraccesstocreditmarkets, mumwagelaws,mandatoryseverancepay,right- accessthatisdeniedtoinformalfirmsinmany to-worklawsandlegislatedfringebenefits—are othercountries.Butifcreditmarketsareover- necessary.Overregulationofhiring,firingand regulated,evenlegallyestablishedentrepreneurs workingconditionscanmakethelabormarket mayhavedifficultyfinancingtheirventures. toorigidandmakebusinessesreluctanttostart Recentresearchhasshownthatthewaveofbank- upandtohireworkers. ingderegulationthatbeganinthelate1970shas OneofthereasonsthattheUnitedStateshas ledtoincreasedratesofentrepreneurshipinthe beenabletogeneratejobssosuccessfullyisthat UnitedStates.6Inthe1970s,commercialbanks wedonotregulatelabormarketsnearlytothe facedavarietyofrestrictionsthatvariedfrom extentthatothercountriesdo.Withoutquestion, statetostate.Theyoftenfacedrestrictionsonthe thislooserregulationprovidesentrepreneursin interestratesthattheycouldchargetoborrowers theUnitedStateswithmuchgreaterflexibility. 6 BlackandStrahan(2002). 4 AllowingEntrepreneurship AmongOECDcountries,employersintheUnited Again,oneofthereasonsthattheUnited Stateshavethemostflexibilityintermsofboth Stateshasbeenabletomaintainitsrelatively hiringandfiringworkers.7Inaddition,U.S.firms business-friendlytaxpoliciesisitsfederalsystem. facebyfartheleastregulationoftheconditions Manygovernmentalservicesareprovidedatthe ofemployment.Althoughhiringaworkerisstill stateandlocallevel.Forthisreason,stateand acostlypropositionforasmallbusinessinpartic- localgovernmentsareforcedtocompetewith ular,forthemostpart,intheUnitedStatesthese oneanothertoprovideeffectiveserviceswhile costsdonotderivedirectlyfromregulationof minimizingthetaxburden. therelationshipbetweenbusinessesandtheir employees. Examplesoflabor-marketrigidityinEurope CAUSES FOR CONCERN areabundant,andonecanimaginetheeffectthat Ishouldpointoutthat,althoughIhavebeen theymusthaveonthedecisionsofexistingand describingwaysthatthepolicyenvironmentin potentialentrepreneurs.InBelgium,forinstance, theUnitedStatesisinprettygoodshaperelative fixed-termemploymentcontractsareprohibited. toothercountries,weshouldnotrestonourlau- InFrance,themaximumworkweekis35hours rels.EveninthepolicyareasIhavebeenpraising, andtheminimumpaidvacationtimeisfive thereisstillagreatdealofroomforimprovement. weeks.InGermany,themandatorySaturday Manyenvironmentalandotherregulationsplace closingtimeforretailershasonlyrecentlybeen toomuchofaburdenontheactivitiesofentrepre- extendedfrom4p.m.to8p.m.,andstoresare neurs,withoutgeneratingcorrespondinglylarge stillprohibitedfromoperatingonSundays.Many benefitstosocietyasawhole;thetaxcodesfor othertypesoflabor-marketrigiditiesarecommon individualsandbusinessesare,inmanyways, inEurope.Severalgovernmentsproducealistof needlesslycomplicatedandintroducecountless allowablegroundsfordismissal,othersrequire distortionstoday-to-daydecision-making;and third-partyapprovalpriortolayoffs,andmost therearerumblingsthatweshouldimposenew mandateseverancepayofseveralmonthsofsalary. labor-marketrestrictionstomakeitmorecostlyfor firmstomovesomeoftheiroperationsoverseas. Tax System Inaddition,manybusinesspeopletellmethat AsApril15thgetsevernearer,thismightbe theyarereluctanttohirenewworkersbecause asensitivetimeofyeartodiscusstaxes,but risinghealthcarecostsmakeitincreasinglyexpen- anotheradvantageforentrepreneursintheUnited sivetodoso.Otherbusinesses,includingmany Statesisthatbusinessesandindividualsbear doctors,refusetoengageincertainactivities relativelylowtaxburdens.Amongrichcountries, because,withoutmajortortreform,theyfindit onlyJapanimposesacomparablylowtaxburden. tooriskyortooexpensivetopayforthenecessary Taxes,althoughnecessarytofinancepublicserv- insurance. ices,placeaburdenoneconomicactivity.High Whenaddressingtheseandotherimportant taxratestendtosuppresseconomicactivityof policyissues,Ihopethatweareabletokeepin alltypes,notjustentrepreneurship.Butforentre- mindwhatIhavebeentryingtoconveytoday. preneurs,hightaxratescreateanadditional ThesourceofmuchofU.S.economicdynamism incentivethatdistortseffort.Ahightaxburden istheentrepreneurialspiritthathasbeeninstilled createsanincentiveforavoidingtaxes,thereby inAmericansovergenerations.Weshouldbe leadingsomebusinessesintotheinformalsector, carefulthatwedonotneedlesslyrestrictorsup- wheretheiraccesstocreditmarketsandthelegal pressthisspirit.Itisapreciousresource,notto systemislimited. bewastedorsquandered. 7 WorldBank(2004). 5 ECONOMICGROWTH REFERENCES Black,SandraE.andStrahan,PhilipE. “EntrepreneurshipandtheAvailabilityofBank Credit.”JournalofFinance,2002,57(6),pp.2807- 33. Blanchflower,David.“Self-EmploymentinOECD Countries.”LabourEconomics,2000,7(5),pp.471- 505. Blanchflower,David;Oswald,AndrewandStutzer, Alois.“LatentEntrepreneurshipAcrossNations.” EuropeanEconomicReview,2001,45(4-6),pp. 680-91. EOSGallupEurope.FlashEurobarometer146. Entrepreneurship.EuropeanCommission,2004. Georgellis,YannisandWall,HowardJ.“WhatMakes aRegionEntrepreneurial?EvidencefromBritain.” AnnalsofRegionalScience,2000,34(3),pp.385- 403. WorldBank.DoingBusinessin2004:Understanding Regulation.WorldBankandOxfordUniversity Press,2004. 6

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APA

William Poole (2004, March 29). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20040330_poole

BibTeX

@misc{wtfs_speech_20040330_poole,
  author = {William Poole},
  title = {Speech},
  year = {2004},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20040330_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}