Entrepreneurship: What's Government Got To Do with It?

ST. LOUIS — So, you can count on a dream and your willingness to work hard and take a financial risk. But, if you want to be an entrepreneur, should you also get help from the government?

You might want some, say St. Louis Fed economists Tom Garrett and Howard J. Wall. But you shouldn't get much, at least not directly.

Garrett and Wall spoke at a Fed-sponsored event Oct. 18 in St. Louis titled "Entrepreneurship: What's Government Got To Do with It?" that discussed whether passive or active policies are better fuels for entrepreneurship.

Active policies include targeted tax breaks and subsidies. These policies require direct intervention by state and local government. Garrett and Wall say active policies rarely lead to net economic growth. Passive policies, on the other hand, require no direct government intervention and create an entrepreneur-friendly environment by lowering the cost of doing business for everyone. These include:

• reducing regulation and compliance costs,
• lowering start-up costs and
• cutting taxes.

A state that enacted these policies could expect more residents to quit their 9-to-5 jobs and open a business. Such a state should also see more successful entrepreneurs.

"If you lower the price of entrepreneurship, you'll get more of it," agrees Bryan Bezold, a session panelist and the chief economist and director of research for the St. Louis Regional Chamber and Growth Association.

The West and New England remain the country's most entrepreneurial regions. The South lags behind, but is catching up fast. Mississippi posted one of the biggest gains from 2000 to 2004 in the rate of entrepreneurship. But why? Did state officials enact an enticing piece of legislation that encourages entrepreneurship?

"Or," asks Chad Moutray, another session panelist and the chief economist for the U.S. Small Business Administration, "did people go to Mississippi and suddenly decide to become entrepreneurs?"

Venture capital firms handed out $24 billion to entrepreneurs in 2004. They awarded about $9.6 billion of that to California start-ups. Massachusetts, the No. 2 choice among venture capital firms, was awarded $1.1 billion.

Interestingly, neither California nor Massachusetts has the reputation for being a pro-business, low-tax state. Instead, both those states rely on risk-taking citizens and lofty, research-oriented schools like Stanford University and the Massachusetts Institute of Technology to create exciting, high-tech companies and energize local economies.

Missouri and Illinois rank about in the middle among the 50 states in entrepreneurial activity.

One argument goes that the bi-state may lack the all-important "entrepreneurial spirit" that pushes start-ups in California and some other states. That may or may not be true, Garrett says. One thing seems certain, though:

"If entrepreneurial spirit is in short supply," Garrett says, "then all the venture capital you can find isn't going to lead to much entrepreneurship."