What Obama Doesn't Understand About Entrepreneurs and Jobs

Harvard Business School's Josh Lerner, an expert on entrepreneurial finance, has largely good things to say about recent steps out of Washing D.C. to strengthen small business growth.

But the Obama administration has gone wrong on some key policy directions, Lerner says, steps that could seriously undermine the best of intentions.

For example, the administration is focused on the idea of loosening up bank credit to fund expansion. Yes, that would help many small businesses, but not the ones that create jobs -- the object of this exercise. Lerner points out that very young companies -- say less than 5 years old -- are the biggest job creators. A 25-year-old small business is more likely cutting than hiring. Actions to help venture capitalists and angel investors, who are also hampered these days, would better serve start-ups.

He also criticizes the administration for political targeting of selective industries, most notably green technologies. That has the effect of drying up support for entrepreneurs in other fields who may be doing more to create jobs.

Instead of picking winners and losers with its policies, Lerner suggests the White House follow three principles.

  1. Remove politics from funding decisions. "One of the most common fates of government programs to stimulate high-technology ventures is that funds end up getting distributed in ways that have more to do with political calculations rather than the actual needs of society."
  2. Observe where private investors are making bets. "By focusing on supporting firms that have raised matching funds (and eliminating those entities that use "fuzzy math'' from consideration), public officials can boost innovative entrepreneurs far more successfully."
  3. Create an environment friendly to entrepreneurs. "Numerous academic studies show that one of the most critical contributors to the entrepreneurial environment is the presence of low marginal tax rates on long-term capital gains. Yet the new health care law seeks to fund reforms through higher capital gains taxes (among other sources), suggesting that the United States appears to be heading in an entrepreneurially unfriendly direction."
Read Lerner's full column, Creating Small Business Jobs. You can also see a recent interview I did with Lerner on his new book, Boulevard of Broken Dreams, which looks at both successful and failed efforts by governments to encourage entrepreneurs.

Do you think this administration is on the right track when it comes to supporting job growth? What's your advice to the president?