The Real Risk-Takers

Thomas Friedman is a well-respected columnist for The New York Times. Although I do not always agree with him, I always enjoy reading his columns because they are well written and thought provoking. I like Mr. Friedman because he is a free thinker. He does not automatically take a liberal or a conservative position on every issue.

In his latest column, which was published this week, Mr. Friedman argues the country will not be able to create new jobs without having more people who are willing to take risks. He also points out most new jobs are created by small businesses. Mr. Friedman quotes Robert Litan, who directs research for the Kauffman Foundation, who said, “Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less. That is about 40 million jobs. That means the established firms created no new net jobs during that period.”

Mr. Friedman wrote, “Good-paying jobs don’t come from bailouts. They come from start-ups. And where do start-ups come from? They come from smart, creative, inspired risk-takers.” He added, “If we want to bring down unemployment in a sustainable way, neither rescuing General Motors nor funding more road construction will do it. We need to create a big bushel of new companies—fast. We’ve got to get more Americans working again for their own dignity—and to generate the rising incomes and wealth we need to pay for existing entitlements, as well as all the new investments we’ll need to make.”

After defining the problem, Mr. Friedman offers his solutions. He wrote there are two ways to develop the risk-takers who will create the new jobs we need. The first way is to improve our schools. The second is to recruit talented immigrants. Mr. Friedman thinks we should do both.

Although Mr. Friedman is much smarter than I am, I think he is overlooking an important and necessary piece of the puzzle. In my opinion, we won’t be able to create new companies, with a corresponding increase in new jobs, simply by graduating more smart students from our educational institutions, or by importing more smart immigrants, or by doing both. These smart students and smart immigrants won’t be able to start new companies without money. New companies require capital, and they must be adequately capitalized to be successful. If the smart students and smart immigrants don’t have their own money, they will need to attract the investors who will provide the funds the companies need to be successful.

Based on his column, Mr. Friedman apparently thinks the real “risk-takers” are the smart people who will come up with the ideas to form the new companies that will create the new jobs. In my opinion, the real risk-takers are the investors who are needed to provide the capital without which the new companies will never be formed. The investor who puts up money is the one who is taking the most risk when a new company is being formed. Of course, an entrepreneur who resigns a position with a good company to go to work for a start-up is also taking some risk, but it’s a different type of risk. If the entrepreneur is well qualified and has good marketable skills, he will find another job if the new start-up company is not successful. The investor, on the other hand, will have lost his investment if the company is not successful.

There are plenty of smart people today who have good ideas for new companies, but they can’t find the investors to back them. Many investors are sitting on the sidelines because the government has reduced their incentives to take risks and has created uncertainty over the rules and regulations to which businesses will be subject in the future. At a time when the country needs investors who are willing to take risks, the government has announced new and increased taxes on investment income. In other words, the government wants investors to take risks by making investments, but the government also plans to take a larger share of the return earned by those investors who are lucky enough to make money on their investments. In addition, the government is constantly increasing and changing the rules and regulations to which businesses are subject. All of this is reducing the incentives for risk taking.

Mr. Friedman’s column contains some good ideas, but it doesn’t go far enough. Smart people alone will not be able to create new companies and new jobs. Someone has to make investments in the companies in order for them to be successful. Unfortunately, our existing government policies are doing more to discourage investment than to promote it.

There is an old saying that always has been and always will be true. If you want more of something, you tax it less. If you want less of something, you tax it more. Stated differently, if you want more investment, you tax it less. If you want less investment, you tax it more. To me, it’s common sense. Our elected leaders have either forgotten or don’t believe this simple rule. All of us are paying the price for the lack of common sense on the part of our elected leaders.