Why US entrepreneurs are repressed

The economy naturally wants to create jobs, but in too many cases the government says those jobs are illegal. The reigning philosophy says that workers need protected, whether or not they want to be.

Melanie Stetson Freeman / The Christian Science Monitor /File
In this February 2007 file photo, workers in Somerton, Ariz. harvest winter lettuce. Some argue that regulations meant to protect workers actually hinder growth and economic expansion.

This is a tale of two stories. The Neocor story is about when my first company, Neocor Tech, decided to hire its first worker. Robert Reich's story is about a hypothetical worker named George who is laid off then hired back in a new capacity. Reich's story is what motivates the thousands of rules and regulations in America that are hostile to new firm formation.

First, consider Reich's story, which comes from his essay in the NY Times last month reacting to a new study showing higher rates of entrepreneurship in 2009:

[The Kauffman Foundation's] upbeat interpretation doesn’t include lots of people who don’t particularly relish becoming their own employers, like an acquaintance whom I’ll call George. George was an associate partner at one of the world’s largest technology and consulting firms until he lost his job last year in a wave of layoffs. For months, George knocked on doors but got nowhere because of the deep recession.

Finally, his old firm got some new projects that required George’s skills. But it didn’t hire George back. Instead, it brought him back through a “contingent workforce company,” essentially a temp agency, that’s now contracting with George to do the work. In return, the agency is taking a chunk of George’s hourly rate.

Technically, George is his own boss. But he’s doing exactly what he did before for less money, and he gets no benefits — no health care, no 401(k) match, no sick leave, no paid vacation. Worse still, his income and hours are unpredictable even though his monthly bills still arrive with frightening regularity.

The nation’s official rate of unemployment does not include George, nor anyone in this new wave of involuntary entrepreneurship. Yet to think of them as the innovative owners of startup businesses misses one of the most significant changes to have occurred in the American work force in many decades.

Wow. Scary story, even if it lacks factual evidence. It leaves the impression that George needs the protective hands of the state to police his employer.

My story isn't from last year, but I didn't start a company last year. I started Neocor with Jim Coyer in 1994, and this is the story of how a new firm hires its first worker. We were joined by Ken Herskind in 1995 as a partners not an employee. We gave him some equity and a chunk of monthly revenues. I worked for free. Jim lived on the good graces of Mister Visa. In truth, we were terrified of hiring an employee because the process looked like it would involve a lot of legal stuff that we didn't have time to digest. The benefits of being an employer didn't outweight the costs until late in 1996 when we started bursting at the seams.

I notified the state and federal authorities that Neocor wanted to be a registered employer. Keep in mind this was three guys in an LLC, one (yours truly) a grad student, the others living hand to mouth. The company was really four computers and a T1 line piped into Jim's studio apartment, which lacked air conditioning, by the way. Our desks were old doors on sawhorses. So the government sends me back four or five reams of forms, printed regulations (fine print on newspaper, center-stapled), pamphlets, and on top, a short letter. The letter said, "You are officially a U.S. employer, and a known oppressor of the working man. Congratulations!" Sure, it didn't literally say that. But that was the message.

The fact is that American style capitalism is not the Wild West of freedom-worshipping cowboys that the media pretends it to be. Our laws assume all companies are potential exploiters, and regardless of size, treat them as if each one has a layer of lawyers and accountants that can handle the weight of the protective regulations. My favorite, to this day, is the tax Neocor had to start paying to help fund California's unemployment insurance program. But we were employing people! We were solving the problem that they were taxing us, as if we had caused it. Only George Orwell could appreciate the irony: employers shall pay the unemployment tax.

Which story is true, mine or Reich's? Both are. But which story is right? The economy naturally wants to create jobs for people, but in too many cases the government says those jobs are illegal. The reigning philosophy says that workers need protected, whether or not they want to be protected. If an individual wants to work 20 hours a week so they can be a part-time mom (or dad), the philosophy of Robert Reich assumes this choice is somehow involuntary. Any trend towards greater flexibility must be bad, must be resisted. A rise in independent contracts -- even if those are the only jobs to be found -- must be squelched.

Maybe Reich is right, but he can only be right if economics is wrong. The marginal product of labor must be a fiction. George must prefer unemployment to working as a contractor. Allowing workers to choose higher pay instead of government mandated protections must be a dangerous illusion of liberty. And if he's right, then hundreds of millions of pages of paternalism actually are necessary to trump the free will of 300 million Americans. But don't kid yourself, cowboy, because regardless whether that story is right, it's the story that rules.

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