We’re Going to Need Startups

April 1, 2020

The economic damage from COVID-19 business shutdowns could be massive. We’re starting to see the effects with initial unemployment claims spiking to a record 3.3 million last week.

In an effort to keep businesses in one piece, the $2.2 trillion federal relief package provides loans to large businesses, and essentially provides grants to small businesses that retain employees. We will nonetheless see many bankruptcies in coming months.

Another part of the downturn will be less visible—the tens of thousands of businesses that won’t be started in coming months. In a normal year, about eight percent of the nation’s businesses disappear along with the jobs and incomes they support. Fortunately, entrepreneurs replenish the economy with the creation of more than 400,000 new businesses employing about 2.5 million workers in a typical year.

Due to the crisis, many entrepreneurs are likely shelving their startup plans and many new jobs will not be created. The Wall Street Journal profiled an innovative startup that the crisis has sadly pushed into bankruptcy:

Satellite venture OneWeb Global Ltd. has filed for bankruptcy after raising more than $3.4 billion from SoftBank Group Corp., Airbus SE and other investors to build a satellite network that would beam cheap internet connectivity from space.

… The company pioneered low‐cost, automated production of such satellites, fueled by funding from Japan’s SoftBank and other investors, including aerospace giant Airbus, Qualcomm Technologies Inc. and the government of Rwanda.

The bankruptcy filing raises new questions about the financial viability of such broadband‐via‐satellite projects largely targeting developing regions. Entrepreneur Elon Musk and Jeff Bezos, founder of Amazon.com Inc. are among those pursuing the same markets.

OneWeb said it had exhausted its financing to build out an orbiting constellation of roughly 70 spacecraft and was seeking more capital just as the coronavirus pandemic roiled financial markets and shut swaths of the global economy. SoftBank is OneWeb’s largest creditor, owed $903 million, and shareholder, according to court papers.

OneWeb set up a manufacturing site near Florida’s iconic Kennedy Space Center able to turn out satellites for roughly $1 million apiece while initiating work on ground stations and inexpensive antennas designed for developing countries. Airbus executives praised the production initiatives as major advances reducing the time and expense of satellite manufacturing.

When we are over the worst of the health crisis, attention will turn to rebooting the economy. We will need an army of startups to help create that V‑shaped growth trajectory that unemployed workers will desperately need.

To spur high‐tech startups such as Oneweb, policymakers should cut the capital gains tax rate, which would increase incentives for entrepreneurship and stimulate the flow of risk capital. Tax reforms would also lend support to industries gaining new attention during the crisis, such as biotech, telemedicine, and other health‐tech activities.

To spur lower‐tech startups such as restaurants, policymakers should repeal minimum wage laws, particularly state laws that set wages above the federal level. Millions of people will need work, but many startups and struggling small businesses will not be able to afford the high wage rates imposed in states such as California, New York, and Washington.

To spur self‐employed startups, policymakers should start repealing occupational licensing rules, which are state restrictions on the entry into hundreds of occupations. Climbing out of the recession, many people will be looking for new types of work after prior jobs have disappeared. Licensing rules can impose expensive and time‐consuming requirements that unemployed people will not be able to afford in a struggling economy.

States impose licensing rules not just for doctors, but for interior designers, travel agents, bartenders, makeup artists, animal trainers, and massage therapists. Licensing rules “often bear little relationship to public health or safety,” with more training typically needed for a cosmetologist than an emergency medical technician. The share of U.S. jobs requiring an occupational license increased from 5 percent in the 1950s to about 29 percent today.

While federal and state policymakers are holed up in their homes in coming weeks, they should be thinking about tax and regulatory reforms to spur short‐term recovery and long‐term growth.


More on minimum wages here and here, and more on occupational licensing here and here.


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