Starting Up to Capture Talent Flow

The fifth Dear Mr. Chafee column on Ted Nesi's blog, by technology consultant Allan Tear, sounds really good, but I don't know that it contributes all that much by way of concrete suggestions for Rhode Island's advancement:

Startups. A recent Kauffman Foundation study shows that firms less than five years old — startups — have generated nearly all of the net job growth in the U.S. over the past 25 years, while established firms averaged near-zero growth in aggregate. It matters less if the startups are what we think of as "old economy," "Main Street" or "innovation economy" businesses. What matters is that we start talking about new startups and entrepreneurship as the primary engine of job creation in Rhode Island. Remember: our economic stalwarts of today — Hasbro, APC, GTECH and FM Global — were all Rhode Island startups once.

It's long been a central plank of Anchor Rising's program for turning Rhode Island around that the state should make it easier for people to start new businesses, which means reducing taxes (especially on capital investments and income that some might consider "excess"), lightening regulations, and erasing mandates that favor established players. So, in that regard, any evidence that points in that direction is welcome. That said, there's something conspicuously semantic about the study that Tear cites:

The BDS series tracks the annual number of new businesses (startups and new locations) from 1977 to 2005, and defines startups as firms younger than one year old.

The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.

Further, the study shows, job growth patterns at both startups and existing firms are pro-cyclical, although existing firms have much more cyclical variance. Most notably, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

Basically, when companies are brand new, they hire. Then they reach stasis, begin to fail, or continue to grow, with the net effect being stasis, depending largely on how well the economy is doing in general. It probably oversimplifies matters, but one can easily imagine that, when times are good, capital investment exists to encourage employees to break off on their own, and when times are less good, more folks are forced (or willing) to jump ship and start new companies, accepting less money, thereby keeping the number of startup jobs stable.

Whatever the case, Rhode Island should definitely revamp its policies with an eye toward the perspective of job creators. Inasmuch as new businesses turn into established businesses, though, the state clearly cannot shift in such a way as to strangle them when they pass the one-year mark (or the five-year mark). In other words, Tear's dislike of clichés notwithstanding, the state just has to improve its businesses climate.

Back to Tear:

Talent Flow. As a state that feels like we've lost much in the past few decades, we are obsessed with holding onto what's left, and that is doubly true when it comes to conversations about our college graduates leaving, or Brain Drain. But the most vibrant economic hotspots have a flow of talent coming and going; learning, studying, starting companies, creating art, doing research, treating patients — and, yes, often moving on. This flow benefits us immensely as a state, bringing new ideas and global expertise, and imparting an affection for and connection with the Ocean State. When we shift from talking about Brain Drain to Talent Flow, we can begin to engage the energetic and smart folks that already flow through our state, get the most from our time with them, leverage them as Ocean State alumni if they move, and create new reasons for them to stay. The 21st century economic challenge is not to attract companies, but to attract talent.

This is well and good, as long as there isn't a net loss of talent, which is what I understand "brain drain" to mean. It's also crucial that Rhode Island keep in place the structure to retain the "new ideas and global expertise" that flowing talent can bring. That means attracting companies and making the state an attractive place in which to start them. In practice, companies are collections of people, so the line between "talent" and "companies" isn't all that stark. The distinction is that the latter include the institutional structure that captures the aggregate expertise of employees, consultants, and customers. In other words, the businesses are the "we" that benefit from transient populations.

We can bat around the specific terminology that we use to discuss Rhode Island's economic policy, and if one set of words makes hip people feel more comfortable embracing ideas that we right-leaning reformers have been shouting from the outskirts all along, then it's to the better. The danger is that the establishment forces that continue to clasp the state's legs are adept at twisting buzzwords — which tend, by their nature, to imply more than they explicitly state, thereby leaving much to subjective interpretation — in such a way as to further entrench themselves and hinder the rest of us. Consider the comments to Tear's essay...