SmoothSpan Blog

Thanks to Techmeme, I just read Andy Grove’s post about job creation in the US, entitled, “How to Make an American Job Before It’s Too Late.”  While there’s some goodness in the story, I have to say that just as Andy left the restaurant unsettled, I left from reading his post unsettled.  While I generally avoid politics, the good old American holiday of Fourth of July is coming, so this is a good nationalistic discussion to have: what to do about creating more jobs in America?  We sure do need a lot more of them.

The first unsettling thing was Grove’s view that small companies are not the engines of job creation in America:

It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world.  New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Mythical Moment

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment.

No, sorry Andy, but you’re wrong.  It’s been well established for a long time that small companies are the engines of job creation in America.  This is not just supposition, and it’s not just a little bit true, it is well-documented and a huge difference.  See for example this data from Jeff Cornwall:

The columns represent net job creation. The big giant spike that’s doing most of the work is for new companies with less than 50 employees.  A little deeper analysis is available here, and goes back all the way to a study published in 1979 before we were so worried about the impact of China on the job market.  The OECD has a particularly in-depth white paper on how public policy impacts the small firms that are the drivers of growth.  There are many other such write ups.  Sorry, Andy, it doesn’t look like Intel and companies like it are the engines of job creation in America, much as we love to admire them.

This brings me to the second unsettling thing about Grove’s piece.  He advocates tax credits for companies that don’t outsource:

We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.

My problem with this is a simple one:  Just as Grove mistakes the ability of large centrally run corporations to create jobs and do well by the worker, he also mistakes the ability of a large centrally-run government to do well by the worker and create jobs using tax policies.  Isn’t it ironic that small and decentralized is so much more efficient than big and monolithic?  Isn’t that the real lesson of Silicon Valley, rather than the Intels of the Valley?  Isn’t it also the real lesson of the American way where individual voters and capitalists decentralize government and business?

These policies he advocates will, as Grove points out, largely serve the interests of the Big Companies (those who are “scaling out”) who weren’t the job growth drivers even before all this manufacturing outsourcing had taken such root.  Today, not only are they not job growth drivers, they’re net job exporters.  Moreover, what role did Grove play in doing his own outsourcing at Intel?  They were busy building multi-billion dollar chip fabs while he was CEO until 2005.  Did they all get built here in America?  Aren’t you late to this party and didn’t you have a hand in some of the problems you’re raising?

Now as I said, there are some things to like about the article.  I do agree with Grove, particularly in the economic situation we find ourselves in, that as he puts it, “Job creation must be the No. 1 objective of state economic policy.”  Unemployment in this country has reached ridiculous proportions, and the primary thing we seem to be doing about it is giving people government jobs and projects to work on.  The predictions on what happens to the jobless rate when the temporary census workers go back to being unemployed are scary.  BTW, how long exactly will it take businesses to build the giant new plants here at home needed to get back out from under those taxes?  Can we really afford to wait that long?  And how efficiently will whatever agency administers this plan be at not handing it over to cronies as a rich new source of high pork-content budget dollars? 

If you want to talk stimulus and public policy, why aren’t we empowering the small businesses that really are the Engines of Job Creation?  Come to that, what has been the problem with Silicon Valley lately, and what role has public policy played in that?

Well, let’s start with the VC’s.  They can’t get a decent return on their funds.  As Fred Wilson puts it, IPO’s just aren’t what they used to be.  Because of Sarbanes Oxley and other regulations, it’s much harder for small companies to get to IPO’able size.  Because of the excesses of the Dot Com boom, investors are a lot more skeptical about these IPO’s.  In fact, the OECD white paper I mentioned earlier talks about regulatory overhead as being a key issue for small companies.  To put it simply, they just don’t have the margin to deal with the extra overhead.  Yet, SOX and other regulations want to treat them just like the Big Players.  Why are we fettering the little guy instead of encouraging him?  SOX and all the other regulatory changes meant to curb a few excesses like Enron (which BTW, was WAY larger than any tech startup when they caused their problems) have slammed the lowest common denominator.  And, unless I am sadly confused, Wall Street just found another novel way of crashing the economy.

Andy, if you want to create a real plan for action, get rid of all the red tape Washington puts our small business through.  Put your tax credit scheme into effect, but instead of giving those credits to Big Companies for building plants here, give them in the form of tax breaks for the little guys.  That’s right, slash what they pay, give them cash incentives to hire, and make the Big Guys who outsourced pay for it all so we don’t drive the National Debt any higher.

Hey, who knows?  With a positive enough environment for small business, maybe some will wind up being the next Intels and you can get some of that scaling out going on too!