I think the authors are on to something, although I think their solution is inadequate.

It is pretty clear right now that there are some very unusual aspects of this business cycle, in historical terms. The first of these is how long it is taking for people to find employment. The Labor Department has tracked the median duration of unemployment since the late 1960s. During this time period, it has stayed pretty much between 3 and 12 weeks. This measure is important, because it is an indication of how long it takes for people looking for work to find a job. If the median duration of unemployment is, say, 5 weeks, it means that half the people found a job in less than 5 weeks, and half the people needed more than 5 weeks.

At the beginning of 2010, the number was more than 20 weeks. You can see this in the following graph:

Not only are people staying unemployed longer, but those people are disproportionately men and younger workers – as much as 75% of those who have lost their job this cycle are men. And unemployment among teenagers is 27% – and for black teenagers, it’s above 50%.

So, we have lots of surplus human capital, and a tremendous need for job creation. Moreover, we have an entitlement structure that will require high levels of productivity from the under-30 set to have any hope at all of being able to meet even a pared-back set of benefits (Social Security, Medicare, etc.). With the unfunded liability of those entitlement programs nearing $100 trillion (or >$300,000 for every man, woman, and child), if we do not generate significant productivity growth over the next 20 years, the entire system will collapse.

There is one, and only one, way to do this: unleash the entrepreneurial talent of the citizenry. We have to establish and maintain the conditions required for new company formation. These include:

1. Lowering barriers to starting a business.
2. Lowering tax rates.
3. Dramatically shrinking government (to keep capital from flowing from the productive private sector to the non-productive public sector).
4. Decreasing the cost of employment, especially mandated rules and benefits.
5. Control the cost of public sector employment.

(Aside: One of the most alarming statistics I’ve recently seen is:

The number of employees of US Dept. of Transportation with a salary of more than $170,000 per year in December 2007: 1
The number of employees of US Dept. of Transportation with a salary of more than $170,000 per year in July 2009: 1,680

If talented people continue to be recruited out of the wealth-producing private sector into the wealth-reducing public sector, we will never be able to achieve the growth levels we need to sustain our economy.)

In other words, we need to do pretty much the exact opposite of the legislative agenda of the Obama Administration.

There has been a lot of discussion over the years here at the BC about the “elites” and their dysfunction. But the problem is not that there is an “elite” – unless we decide to embrace anarchy, there will have to be one POTUS, and GE will need to have one CEO. The elites we will always have with us.

No, the problem occurs when the “elites” believe that all decisions must be made by them. There may indeed be only a handful of people who are truly capable of competently performing the job of President or Governor of a state. But there are millions of people who are perfectly capable of competently performing the job of small business owner. Yes, some people may only be able to manage a a handful of employees; but that is enough. Me, personally, I may not have what it takes to be POTUS, but I can manage a firm with hundreds of employees. Most days, anyway.

So, it’s not that there is a not distribution of talent and skills – there is. It’s just that the distribution is not bimodal.

Look, there are 5.7 million firms in the US; 5 million of them employ less than 20 employees. Create the conditions where each of them can hire 1 more employee, or the number of small businesses can increase by 10%, and we will recover 80% of the jobs lost during this recession. Do both, and the unemployment rate will fall below 6%.

Then what is the solution to the challenges we’re now facing?

It’s not our brilliant elected officials.
It’s not the boring bureaucrats who implement the vision of the brilliant elected officials.
It’s not the savvy corporate chieftains who seek rents and protection from said brilliant elected officials and boring bureaucrats.
It’s not the high-flying Wall Street firms who use free money from the brilliant elected officials and boring bureaucrats to pay huge bonuses to bankers who sell impenetrable products to the savvy corporate chieftains.

The solution is all around us: the entrepreneurs who take risks, serve customers, deploy capital, hire workers, and drive innovation. The small business owner. The guy or gal who works hard to survive, then build a business they can be proud of, and that people are proud to work for.

They don’t want tax credits.
They don’t want health insurance subsidies.
They don’t want government earmarks.
They don’t want to be thrown in jail for bad business decisions.

They want to ply their trade.
They want to support their family, and their community.
They want to know the rules and have them enforced fairly.
They want to decide for themselves how to spread their wealth around.

Unleash them, and we have a bright future ahead of us. They have brought us this far, and there’s more gas in their tank.

But continue to saddle them with more ever more administrative, regulatory, and tax burdens, and they’ll fail.

And our nation with them.

L3