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‘Startup America’ Will Have a Bad Ending

Is Obama's latest economic initiative boon or boondoggle?

by
Jay Schalin

Bio

May 28, 2011 - 12:00 am

In January, the Obama administration announced a major new initiative to revitalize the national economy called Startup America. Its main objective is to unleash the nation’s latent entrepreneurial energy.

But it is just as likely to unleash a wave of failed enterprises and crony capitalism.

For one thing, it may have already been exposed as a cynical political ploy. According to the American Spectator, in February, an unnamed White House staffer stated that Startup America was largely a ruse: “It’s one more way to engage corporate America. We know many of the executives are predisposed to Democrats, this is just a way to build more connections.”

Even if it is instead a legitimate attempt to spur the economy, it should be met with skepticism — as should all such government programs. Government is rarely good at picking economic winners and losers, even when attempting to be objective. Startup America openly mixes political priorities with economic goals. Specifically, one of its core goals is to “inspire and empower an ever-greater diversity of communities and individuals.” Such a divided mission is a blueprint for failure and political payoffs.

Another ill-conceived goal of the program is to “accelerate green technology innovation.” The environmental sector is often heralded as the wave of the future by the eco-friendly Obama administration, but one study by Spanish economist Gabriel Calzada showed that each “green” job created by his government actually destroyed 2.2 other jobs. And 90 percent of those green jobs were temporary.

The program has two distinct strategies. One part is government action — mainly, providing capital for startup companies using $2 billion given by the Small Business Administration. This infusion of capital is probably the wrong tool for the job of jump-starting the economy. “A shortage of private equity is not what’s holding back America,” says Karlyn Mitchell, professor at NC State University and former Federal Reserve economist specializing in small business finance. (The more likely culprit for the economic malaise is uncertainty about the future.)

The other strategy, consisting of corporations partnering with federal, state, and local agencies, is more complex. On the positive side, it doesn’t take an “all your eggs in one basket” approach. Different partners will tackle the problem of spurring entrepreneurial activity in different ways.

One recently announced partnership, the Blackstone Entrepreneurs Network in North Carolina’s Research Triangle region, will spend $3.6 million donated by the Blackstone Group’s charitable foundation to recruit 15 “master entrepreneurs” to work with researchers at four universities.

This arrangement is designed to tear down what, according to Mitchell, may be the most crucial roadblock to entrepreneurial success by university researchers: a deficiency of business savvy and expertise. Blackstone’s master entrepreneurs will guide them through the necessary paperwork and planning.

But despite such hopeful details, Startup America’s total negatives outweigh the positive. Perhaps the biggest problem of all is the program’s potential for crony capitalism. Corporate charity often accompanies questionable quid pro quo agreements between private firms and government: in one particularly blatant example, in 2008, General Electric awarded $11 million in grants to schools in New York to Congressman Charles Rangel’s district, shortly after Rangel — the powerful head of the Ways and Means Committee — reversed his opposition to a tax shelter that greatly benefited GE. (Rangel has since been censured for other pay-to-play schemes.)

Major corporations are rushing to sign up as program “partners,” including IBM, Ernst & Young, and Intel. Firms have already pledged over $800 million in services, expertise, and capital to the campaign. Given the comments by the aforementioned unnamed White House staffer, it is doubtful that altruism alone accounts for their generosity.

With only $2.8 billion in mixed public-private funding to date, the program may look fairly insignificant now. But it has a great deal of potential for making economic mischief: the waste of taxpayers’ money, the interruption of natural market forces needed to actually restore prosperity, greater government control, and corruption. Let’s hope Startup America doesn’t do for entrepreneurship what HUD did for urban communities — or what Fannie Mae and Freddie Mac did for the housing industry.

The author is Senior Writer at the J.W. Pope Center for Higher Education Policy.
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