It's new business, not business, which is important


We see various politicians running around and firehosing our money at extant businesses as a way of stopping the recession and there are those who praise such actions. They are those, of course, who have not really quite grapsed what a recession is. It isn't a time when 100% of the people lose 10% of their income: it's when 10% lose 100%. And it isn't particularly a time when more people lose their jobs than normal. It's when fewer of those who do fail to find new ones. For the gales of creative destruction are always roaring through the economy: it's the creating of new businesses and thus new jobs which fails at these times.

According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.

The US economy is little different from the UK in this regard. The importance of this is that a rising unemployment rate (which is of course simply the balance between those jobs lost and new created rather than an absolute measure of either) is not particularly caused by firms dying, thus our solution is to prop such up. That is always happening and does not always lead to a rising unemployment rate. It is the lack of new companies and organisation providing those new jobs which leads to the rising unemployment rate. Thus, in order to lower it, we should turn our attention not to the old and large companies, but to the small and new.

And there is a simple, no cost, solution to the problems of the small and new. No, not subsidised loans, not government provided capital, rather, an absence of government in crucial parts of the system. The absence of the dead hand of the bureaucracy that stifles their creation. The thousands upon thousands of regulations and laws that state that you may do this, you must fill out that form, you may not do that, do not proceed without authorisation.

Get rid of that and we'll have more small firms created, more expanding, and thus a lower rate of unemployment. All at no cost: you see, sometimes, there really are free lunches.