Speech

Staying Out of the Way of Entrepreneurs “StrikingtheRightNotesonEntrepreneurship” SponsoredbytheFederalReserveBankofSt.LouisinpartnershipwiththeAmericanBankersAssociation, CFED,EwingMarionKauffmanFoundationandtheFederalReserveBankofKansasCity Memphis,Tennessee April19,2005 Ihave long had an interest in entrepreneur- withoutregardforresourcesundertheir ship. Every school boy and school girl control…Wordsthatdescribeentrepreneurship learns of examples of great entrepreneurs includeinnovative,creative,dynamic,risk- such as Henry Ford. As I was growing up tolerant,flexible,andgrowth-oriented.1 in Wilmington, Delaware, local lore emphasized Somewillsaythatkeepinggovernmentout the importance of the duPont family; evidence ofthewayofentrepreneursisasimple-minded of the family’s business success over many gen- approach,anditcertainlyistruethatwecanfind erations was obvious to everyone who lived in examplesofsuccessfulentrepreneurswithin northern Delaware. It is always risky to pick out government.Nevertheless,wordssuchas“inno- names, because there are so many who will be vative,”“creative,”“dynamic,”“risk-tolerant,” left out, but here in Memphis I am sure that “flexible,”and“growth-oriented”arenotused those who built FedEx naturally come to mind. veryoftentodescribegovernmentemployees. Indeed, I think it accurate to say that every com- Anditiscertainlytruethatcountriesthathave munity in the United States can point to entre- reliedongovernmententerpriseratherthan preneurswholeftatleastalocalmarkandmany privateenterprisehaveapoorrecordof communities can point to their home-grown achievement. entrepreneurs who have built firms of national Whatisanentrepreneur?Entrepreneurs and international importance. It is also note- organize,manage,andassumetherisksofa worthy that great entrepreneurs have enriched thecountrynotonlybythebusinessestheyhave businessorenterprise.Theyarewillingtotake built but also by their contributions to universi- ongreaterrisksthanotherindividualsand ties, museums, libraries and many other cultural dependprimarilyontheirindividualinitiative resources.ThatiscertainlythecaseinDelaware, toachievesuccess.Whenanentrepreneurgoes where many public schools bear the names of toworkinthemorning,hisorherassetsand duPontfamilymemberswhoprovidedlargegifts economicfutureareontheline. to establish and expand the schools. Whatkindsofgovernmentpoliciescanhelp Assuggestedbythetitleofmytalk,myincli- suchapersontobesuccessful?Mybasictheme nationisthatthebestwaytoencourageentrepre- isthatgovernmentshouldconcentrateonpro- neurshipisforthegovernmenttostayoutofthe vidingthefundamentallegalandsecurityinfra- wayofentrepreneurs.Afterall,astheKauffman structurenecessaryforademocraticsocietyto Foundationsays,entrepreneurshipis: function,andshouldavoiddetailedregulation ...associatedwithindividualswhocreateor ofbusinesspracticesandmarketstructures.As seizebusinessopportunitiesandpursuethem muchaspossible,weshouldrelyoncompetitive 1 Kayne,Jay.StateEntrepreneurshipPoliciesandPrograms.KauffmanCenterforEntrepreneurialLeadershipattheEwingMarionKauffman Foundation,KansasCity,Missouri,1999. 1 ECONOMICGROWTH forcesratherthangovernmentforcestoconstrain let’sconsiderthereasonsthatthelevelofentre- privatepower. preneurshipdiffersacrossareas.Althoughthe That’snottosaythatgovernmentsshoulddo largestdifferencesinentrepreneurshipexist nothingaboutentrepreneurship,buttheirrole betweencountries,thelessonsthatthesediffer- shouldbelimitedtocreatingapolicyenviron- encesprovidecanbeusefulforunderstanding mentthatallowsentrepreneurstomaketheirown differencesbetweenregionsandstateswithin decisionswiththeabsoluteminimuminvolve- theUnitedStates.ObserverscomparingtheU.S. economytotheeconomiesofothercountries mentofgovernmentregulators.TheFederal oftennotethatAmericansseemtobemuchmore Reserve,forexample,playsanimportantrolein willingtobecomeentrepreneurs.Indeed,arecent promotingentrepreneurshipandgeneralbusiness surveyfoundthatmorethan70percentofadult growth.Businessesingeneral—andentrepreneurs Americanswouldpreferbeinganentrepreneur inparticular—benefitfrompricestability,astrong toworkingforsomeoneelse.2Incontrast,the bankingsystemandanefficientpaymentssystem. samesurveyshowedthatfewerthanhalfofthe AllthreeofthesearecentralFederalReserve adultsinWesternEuropeandJapanwouldprefer responsibilities. beinganentrepreneur. Similarly,governmenthasotherfunctionsof So,whatisitthatsetstheUnitedStatesapart? criticalimportancetoamarketeconomy,suchas Wheneconomiststrytoexplaindifferencesin maintaininganefficientandhonestlegalsystem, entrepreneurshipacrosscountriesorregions, securityofpersonandproperty,andaregulatory theytypicallyexaminealonglistofeconomic systemthatdealseffectivelywithconditionsof andinstitutionalfactors.Whattheytendtofind modernlifesuchasenvironmentalhazards.I isthat,whilethesefactorsareimportant,alarge obviouslycannottreatallthecomplexitiesof componentofthedifferencesinentrepreneurship thissubjecthere,butsimplywanttoemphasize hasnothingtodowitheconomicsorinstitutions.3 mygeneralviewthatregulationshouldbekept Clearly,thereissomethingintangibleatwork— ataminimumandentrepreneursnourishedrather whichwecancall“entrepreneurialspirit”—aset thanshackled. ofattitudesindependentofeconomicpolicies. Beforeproceeding,Iwanttoemphasizethat Inotherwords,evenifallcountrieshadthesame theviewsIexpressherearemineanddonot economicconditionsandpolicies,somewould necessarilyreflectofficialpositionsoftheFederal stillbemoreentrepreneurialthanothers,and ReserveSystem.Ithankmycolleaguesatthe theUnitedStateswouldbeamongtheleaders. FederalReserveBankofSt.Louisfortheircom- Thebestexplanationforthisfindingisthatthere ments,especiallyThomasA.Garrett,senior aresocialfactorsatworkthataredifficultor economist,andHowardJ.Wall,assistantvice impossibletoquantify.TheUnitedStateshas president,whoprovidedspecialassistance.I beenrelativelysuccessfulincreatingapolicy retainfullresponsibilityforerrors. environmentthattakesadvantageoftheseintan- gible,yetvital,assets. PolicymakersintheEuropeanUnion,for instance,havebeengrapplingwiththeirper- ENTREPRENEURIAL SPIRIT SETS ceivedgapinentrepreneurialspirit.Whatthey THE UNITED STATES APART havecometorecognizefromcomparingtheir Beforediscussingtherelativemeritsofthe countrieswiththeUnitedStatesisthatitisnot variouspoliciestoencourageentrepreneurship, enoughtohaveappropriatelawsandregulations. 2 Blanchflower,David;Oswald,AndrewandStutzer,Alois.“LatentEntrepreneurshipAcrossNations.”EuropeanEconomicReview,2001, 45(4-6),pp.680-91. 3 Georgellis,YannisandWall,HowardJ.“EntrepreneurshipandthePolicyEnvironment.”FederalReserveBankofSt.LouisWorkingPaper No.2002-019B,2004. 2 StayingOutoftheWayofEntrepreneurs Afterall,inmanyrespects,comparedwiththe weshouldhaveinplacebasicinstitutionsto UnitedStates,someEuropeancountrieshave facilitatebusinesstransactions,alongwithmini- equivalentorsuperiorinstitutionalarrangements malinterferenceintheactualoperationofbusi- forallowingentrepreneurship. nesses.Inwritingourregulations,weshould Americansstandoutinotherwaysregarding carefullyweighthecostsandbenefitswhilekeep- theirattitudestowardentrepreneurship.4For inginmindthatexcessiveinterferencecansquash example,manymoreEuropeansthanAmericans ormisdirectourgreatestadvantage. saythattheideaofstartingabusinesshasnever Aparticularadvantageofpassivepoliciesis enteredtheirminds.Americansalsohavea thatentrepreneursthemselvespickthemost greatertolerancefortheriskassociatedwith promisingareasofinnovationtopursue.Incon- entrepreneurship,whereasmanyEuropeans trast,activepoliciesinvolvetheeffortsofgovern- appeartobeextremelyaversetorisk.Nearly mentofficialstoselectspecificbusinessesor one-halfofEuropeanswhoweresurveyedsaid individualseligiblefortaxbreaksorotherfinan- thatoneshouldnotstartabusinessifthereis cialincentives.Specialinterests,ofcourse,tryto anyriskatallthatitmightfail. influencegovernmentdecisionseitherbyseeking subsidiesandtaxbreaksorbyseekingtodisad- vantagecompetitors.Experienceindicatesthat PASSIVE VS. ACTIVE POLICIES governmentshaveapoortrackrecordinidentify- ingpromisingnewtechnologies.Consequently, Discussionoftheroleofgovernmentinthe subsidiesoftenprovewasteful,astheydirect entrepreneurialprocessshouldrecognizethe resourcestowardultimatelyunproductiveven- relativeabundanceofentrepreneurialspiritin tures.Atthesametime,taxesimposedtosupport theUnitedStates.Tothisend,wecandrawa thesubsidiescreatedisincentivestoentrepre- distinctionbetweenpassiveandactivepolicies neursingeneral. directedtowardentrepreneurs.Passivepolicies arethosemeanttofacilitateentrepreneurshipby establishinginstitutions,laws,andregulations PASSIVE TAX POLICIES toreducethetransactionscostsofrunningabusi- ness.Passivepoliciescreateanentrepreneur- Taxesareoneofthebiggestexpensesabusi- friendlyenvironmentwithoutconcernforthe nessincurs.Certainlysomeminimalleveloftaxa- typeandformofentrepreneurialactivity.Active tionisrequiredtohaveafunctioninggovernment. policies,ontheotherhand,arethingssuchas Whilefewpeoplewoulddisagreewiththisstate- targetedtaxbreaks,subsidiesandsoforththat ment,disagreementdoesariseoverwhatconsti- aremeanttodirectresourcesintoparticular tutes“minimal.”Onefactisclear—ataxraises businessactivitiesbycreatingspecificincen- thecostofanactivity,therebydiscouragingit. tives.Thesepoliciesrequiredirectintervention Entrepreneurshipisanactivitythatrequires bystateandlocalgovernmentsintotheentrepre- investment,consumptionandincomegeneration neurialprocess. tobesuccessful.Economicstellusthatasales Giventheentrepreneurialenergywehavein taxreducespersonalconsumption;personal theUnitedStates,activepoliciesareofrelatively incometaxesreducetheincentivetowork;cor- limitedimportance.Thefocushasbeenand porateincometaxesreducetheincentivetostart shouldcontinuetobeonensuringthatwehave orexpandabusiness;andcapitalgainstaxes theproperpassivepoliciesinplacetoallowour reducetheincentivetoinvest.Policymakers entrepreneurialspirittothrive.Entrepreneurship concernedwithentrepreneurshipshouldunder- cannotbeplannedormanagedcentrally.Rather, standthatatradeoffexistsbetweenentrepreneur- 4 EOSGallupEurope.FlashEurobarometer146.Entrepreneurship.EuropeanCommission,Brussels,2004. 3 ECONOMICGROWTH ialgrowthandtaxes.Thebenefitsofadditional governmentcentersandagencies,statesactas governmentprogramsfundedthroughtaxation brokersforentrepreneurialservicessuchasmar- mustbeweighedagainstthecostsofreduced keting,businessstrategies,andtechnology. economicgrowthandentrepreneurialactivities. Statesalsomanagecapitalandentrepreneurial That’snottosaythatthecorrectpolicyisto networks.Theideahereisthatstatescandirect providelowertaxestoparticularbusinessesto entrepreneurstocapitalsources,investorsand encouragetheirventures.Taxbreakstargetedto otherentrepreneurs.Theproblemwiththese aparticulartypeofbusinessnecessarilyrequire policiesisthatthedirectionofentrepreneurship ahighertaxburdenonotherbusinessesand/or is,atleastinpart,inthehandsofstateagencies. onhouseholds.Welackclearstandardsandevi- Aregovernmentofficialsreallyqualifiedtodeter- dencethatpermitagovernmentagencytoaccu- minetheresourcesthatpotentialentrepreneurs ratelyjudgetherelativemeritsofthousandsof need?Providingentrepreneurswithinformation existingandpotentialbusinesses.Thus,inevit- onwheretoobtainresourcesisonething,but ably,politicalcloutweighsquiteheavilyingov- activeparticipationbystategovernmentinthe ernmentdecisionsprovidingsubsidiesandtax managementofentrepreneurialservicesislikely breaks.Apassivetaxpolicywouldbeneutralin tolimitandmisdirectentrepreneurialactivity. termsofthetypeandlocationofbusinessactivi- Inaddition,stateeconomicdevelopmentagen- tiesthatmayoccur.Notonlywouldthisneutral- ciesandassociatedprogramsrequirefunding, itylimittheroleofpoliticalclout,butitwould whichcomesfromtaxrevenue.Suchstatepro- leavegovernmentofficialsoutoftheprocessof gramsreducethepoolofprivatefunds,which decidingwhichbusinessesaremoreworthy canstifleentrepreneurship.Isitreallytruethat thanothersandallowallbusinessestooperate theprivatesectorfailstoprovideinformation inalower-costenvironment. andotherservicesrequiredbyentrepreneurs? TheNGAreportalsosuggeststhatstates shouldinvestindiversesourcesofriskcapital. ACTIVE ECONOMIC Specifically,thereportsuggeststhatstatesshould awardcertaininvestorswithtaxbreaksandother DEVELOPMENT POLICIES financialincentives,andalsoensurethatadequate TheNationalGovernorsAssociation(NGA) capitalisavailableinunderservedareas.However, hasproducedabest-practicesguideforstrength- throughtargetedtaxbreaksandfinancialincen- eningstates’entrepreneurshippolicies.5This tivesstateofficialsaremanagingand,tosome guideprovidesanumberofsoundsuggestionsto degree,controllingentrepreneurship.Yet,iftax streamlinetheoperationsofgovernmentandto breaksandfinancialincentivesareseenbystates limitthescopeofsomeregulations.Theguide asameansoffosteringentrepreneurship,then alsorecognizestheimportantroleofentrepre- themoreappropriatepolicyistolessentheover- neurialspiritandsuggestswaystofosteritthrough alltaxburdenfacedbyallpotentialandexisting thepubliceducationsystem.However,unfortu- entrepreneurs.Thisapproachwouldcreatea nately,alongwiththesesoundsuggestionsare morepositiveenvironmentforentrepreneursby othersuggestionsthatwouldinjectstategovern- removingstatemanagementandoversightfrom mentsdirectlyintothedecision-makingprocess theprocess. ofentrepreneurs. TheNGAalsorecommendsthatthecostsof Onesuchunattractiveactivepolicyisthe complyingwithregulationsshouldbelowered integrationofentrepreneurshipintostateeco- tofosterentrepreneurship.Whilereducingcom- nomicdevelopmentefforts.Throughvarious pliancecostscertainlycannotbeharmfulto 5 Psilos,Phil;Harpel,EllenandCrawford,Steve.AGovernor’sGuidetoStrengtheningStateEntrepreneurshipPolicy.NGACenterforBest Practices,2004. 4 StayingOutoftheWayofEntrepreneurs entrepreneurs,theNGAfailstorecognizethatit isnotonlycompliancecostthathurtsentrepre- neursbutalsotheregulationsthemselvesthat canplaceunnecessaryburdensonentrepreneurs. Thequestionthatshouldreallybeaskedis whetheragivenregulationisnecessaryinthe firstplace.Manyregulationscanbeeliminated withoutdetrimentaleffectsonsociety,whileat thesametimeunshacklingentrepreneursand settingtheentrepreneurialspiritfree. WhiletheNGAofferssomepositivepolicies tofosterentrepreneurship,severalotherNGA policiesIjustdiscussedplacestategovernments incontroloffosteringentrepreneurship.History hasproventimeandtimeagainthat,ifleftunfet- tered,thefreemarketwillprovideentrepreneurs ampleresourcesandampleopportunitiestobe successful. CONCLUSION Governmentinvolvementinentrepreneurship canbebothactiveandpassive,andalthough muchofthepolicydiscussioninvolvesactive policiesitisthepassivepolicyenvironmentthat ismoreimportantforsupportingentrepreneur- ship.Itisunfortunatethatactivepoliciesreceive somuchattention,evenwhilestatesaresome- timesneglectingtheirmostbasicresponsibilities suchasmaintainingacourtsystemthatresolves disputesquickly. Apassivepolicyenvironmentthatisfriendly toentrepreneurs,andtoallbusinesses,isone thatbalancestheuseofregulationsandtaxes againsttheburdensthattheyimpose.More broadly,anentrepreneur-friendlygovernmentis onethatrespectsprivatepropertyrightsandpro- videsawell-functioninglegalsystemthatrecog- nizesandprotectstheserights.Agoodrulemight betoneverimposeanewregulationorestablish anewagencywithoutdisbandinganoldone. Withsuchapolicyenvironment,governments wouldbeallowingentrepreneurshiptoflourish bystayingoutofthewayofentrepreneurs. 5

William Poole (2005, April 18). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20050419_poole

@misc{wtfs_speech_20050419_poole,
  author = {William Poole},
  title = {Speech},
  year = {2005},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20050419_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}