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States Need to Push Startups, Too

March 19, 2012 by Robert E. Litan

Ask most entrepreneurs which level of government has the most impact on their business and you’re likely to hear that either or both state and local governments affect them as much as the federal government. States and localities regulate their entry into business, especially if, as is increasingly true, entrepreneurs need a license. A myriad of state taxes, fees, and regulations can also have a major impact on any business, new or existing. Local zoning rules, meanwhile, can literally determine whether a business even gets off the ground. Thus, while federal legislators consider how to rejuvenate America’s startup engine — which I argued in an earlier post is key to getting the U.S. economy back on a path of sustained rapid growth — it is important state and local policy makers do all they can to boost startups in their jurisdictions. Admittedly, this will be a mind-shift for many state and local officials (mayors, legislators, and city council members), who traditionally have approached economic development through what has come to be known as “smokestack chasing” — offering packages of special tax and regulatory breaks to attract plants, facilities, and jobs from other states. Not only is this a “zero sum” game for the nation as a whole, but it is shortsighted. In this globalized, increasingly footloose economy, firms that move plants one day have no long-term commitment to staying. They will simply pack up and leave if other places, located inside or outside the U.S., offer them a better deal. Accordingly, the best way for states and cities to assure their own economic health and long-run growth is to give birth to new firms and nurture their growth. There is no one-size-fits-all approach to doing this. But there are some good ideas from which state policy makers can choose. In January 2012, the Kauffman Foundation released two reports that provide a menu of options. The first, Startup Act for the States, offers a series of policy ideas relating to the different stages of a firm’s life. The second, A License to Grow, makes a persuasive case (at least to this author) that states and localities should begin reversing the disturbing trend of requiring an ever larger fraction of the labor force (now close to 30%, up from about 5% in 1970) to get some kind of license before conducting business. States should begin on their own to make it easier for new firms to launch and prosper. But the federal government can nudge the process along. Proposed federal startup legislation would rank states, much as the World Bank now ranks countries, on how friendly their laws and policies are to new business. A little sunshine like this would encourage some healthy and much needed competition among the states, not for aging smokestacks, but rather in creating the conditions that will sustain the entrepreneurial growth our economy so sorely needs.


Author

Robert E. Litan

2012 Economic Growth Fellow

Robert E. Litan is Director of Research of B-Gov, a subsidiary of Bloomberg LLP. Previously Litan was Vice President for Research and Policy at the Kauffman Foundation and a Senior Fellow in Economic Studies at the Brookings Institution. He has authored or co-authored more than 20 books, edited another 14, and authored or co-authored more than 200 articles in journals, magazines, and newspapers. He has served in several capacities in the federal government. From 1995 to 1996, he was associate director of the Office of Management and Budget, and from 1993 to 1995 he was Deputy Assistant Attorney General. He received his B.S. in economics (summa cum laude) from the Wharton School of Finance at the University of Pennsylvania; his J.D. from Yale Law School; and both his M. Phil. and Ph.D. in economics from Yale University.

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