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Robert E. Litan

Robert E. Litan

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Kauffman Foundation: The Rules For Growth

Posted: 02/12/11 09:35 AM ET

The U.S. economy is struggling to emerge from a recession that led to the destruction of eight million jobs. At the same time, the federal budget deficit remains stuck above $1 trillion. Having already allocated more than $1.6 trillion toward economic stimulus (the 2009 stimulus package and the December 2010 tax cut agreement), both parties in Washington should be looking for ways to boost growth without spending even more money, directly or through even more tax cuts.

We know one thing for sure: New jobs will come from a healthy and growing private sector. Furthermore, the businesses that are most likely to create jobs are new businesses. In fact, between 1980 and 2005 nearly all net job creation in the United States took place in firms less than five years old.

Keep in mind, new businesses aren't necessarily small businesses. The key to a new business isn't its size, but rather its entrepreneurial mindset. New businesses aren't afraid to upset old ways of doing things. They uncover new markets and new business opportunities. They don't just exploit existing demand; they create new demand (think Apple). And the most successful grow rapidly -- from 10 to 100 to 1,000 employees and more in a few years' time.

Getting America out of its economic doldrums requires more of these new, high-energy firms. Policymakers should focus their efforts on creating the conditions that allow these companies to be born and flourish.

Last summer, the Kauffman Foundation pulled together leading experts in business, law, and regulatory policy to think creatively about how to reframe America's legal system to promote innovation and long-term growth in incomes and jobs. They came back with a series of recommendations we call the Rules for Growth, which is also the title of a new book on the subject. Perhaps most importantly, these "rules" have zero or negligible budgetary costs but could dramatically improve the climate for entrepreneurs and job creation.

To fuel entrepreneurial activity, we need more entrepreneurs. Where do entrepreneurs come from? Frequently they come from abroad, and more often than not, they study at our universities. Research shows that educated immigrants are disproportionately likely to start a business.

More than a quarter of technology and engineering companies started in the United States from 1995 to 2005 had at least one founder who was foreign born. These companies produced more than $52 billion in sales and employed nearly 450,000 people in 2005. In today's capital-rich and highly mobile global economy, these skilled foreigners can settle anywhere. Policymakers should reform America's immigration laws to make it easier for highly-skilled immigrants to make their homes and start their businesses in America.

We also need to reform our tax code by taxing consumption rather than income and investment. Taxing income and investment penalizes entrepreneurial risk-taking, while taxing consumption encourages saving that will finance national investments and risk-taking. To promote faster innovation in particular, the Congress should finally make permanent the existing research and development tax credit.

Another way of increasing our entrepreneurial pool is to make it easier for entrepreneurs to get innovative products to market. Two key changes can guide the way.

First, improve university technology licensing practices so university-generated innovation is more quickly and efficiently commercialized. In 2009, the federal government spent $90 billion (60 percent of the government's total R&D budget) on university-based research. Yet too many of the breakthroughs achieved at universities languish in the laboratory because universities are not as effective as they could be at giving their faculty innovators what they need to bring new discoveries to market. Congress should direct federal agencies to make commercialization a higher priority for federally sponsored university research and to encourage universities to provide greater freedom to faculty inventors to license their discoveries either to firms they start or to other firms.

Second, the U.S. legal system, while giving needed protections to intellectual property, frequently stifles innovation and unduly protects patent holding firms from needed competition. The patent process should be reformed to be more socially useful, allowing post-grant reviews of contested patents, while enabling patent applicants to pay more for speedier examinations (which would both reduce the huge patent backlog and help fund the patent office's activities).

These steps, along with the rest of the Rules for Growth, can jump start America's entrepreneurial engine, paving the way for sustained growth in jobs and income -- all at little or no cost to taxpayers. What's not to like about that?

To access the Rules for Growth book online or download in e-book format, please visit www.kauffman.org/rulesforgrowth.