America is in the midst of an entrepreneurial economic transformation the likes of which we have not seen in over 100 years. Over half of the GDP comes from businesses under 200 employees, and for the past twenty years these small companies have created 70-80% of all new jobs every year.
We know that reduced regulation, low taxation with a simple system, and property rights are what spurs entrepreneurial economic growth. The evidence is in on this from study after study conducted in economies around the globe.
So what is the current leading edge thinking coming out of Washington?
On the tax front there is a push to modify the Alternative Minimum Tax and to modify the tax structure as it effects venture capitalists. That is it. No significant push to eliminate the current tax code and its 65,000 pages and over 600 active forms. After all, we don’t want to force the over 1.5 million tax preparers in this country to find honest work.
Also, there is more of a push to expand the march toward socialized entrepreneurship. A new group is being formed, made up of bureaucrats and those with a vested interest in expanding government’s role in the entrepreneurial economy, at an event called the National Summit on American Competitiveness. Their agenda is as follows:

America’s economic leadership in the 21st century is directly tied to the competitiveness of four key economic drivers: the role of the private sector; education and workforce issues; energy independence; and partnerships in innovation. The National Summit on American Competitiveness will convene the nation’s premier leaders of business, government, academia and the research community to address the core components and lessons of each of these drivers.

I hear no mention of free markets….. I guess they know best, don’t they…..

Canada’s experiment with socialized entrepreneurship is showing signs of failure. A report just issued from the Canadian think tank Institute for Research on Public Policy by Professor Guy Stanley from McGill University states that:

Canada’s national innovation system has many strengths, but is crippled by three glaring weaknesses:
there is a near fatal disconnect between the national science capacity and the national ability to commercialize the research; Canada’s traditional value chains are not evolving rapidly enough to ensure future prosperity growth; and the inducements or automatic regulators that would enable the system to heal itself without significant change are almost entirely absent.

So what to do — what to do? Free up the entrepreneurial forces in Canada and free up the markets? Dismantle the failing centralized economic planning and coordination in Canada? Not according to the author of this report. He calls for more government direction and meddling in the markets of Canada.

Unlike many of its more successful competitors, Canada has no microeconomic coordinating institutions of sufficient scale to re-align science, industry, and national prosperity or competitiveness objectives, or to accelerate the development of organizational competitive advantage.

“Microeconomic coordinating institutions” refers to agencies of the government that would direct the economy at the transactional level. It is not enough to have politicians trying to steer the economy at the macro level through tax incentives and other programs. Mr. Stanley so distrusts free men and free markets that he is calling for Canada to manage and steer business to business and business to consumer activities toward objectives set by bureaucrats in a new government agency.
We already are beginning to see the results of Canadian socialized medicine as their health care system continues to implode. I hope our neighbors to the north keep that in mind as they consider creating the same impossible solution for the rest of their economy.

I wrote a post last week at my blog, The Entrepreneurial Mind, on another example of the disturbing trend toward what I call socialized entrepreneurship. We have had an explosion of entrepreneurial activity in the economy, not just in America, but around the globe. Politicians and bureaucrats have just now started to notice this change. Their reaction? They want to manage it and control it. They are trying to institute control over the private equity markets through tax policy and government largess. And they are trying to gain control and favor over the entrepreneurs by offering government hand-outs for new businesses in certain industries that they have picked as future winners. None of these policies, which I collectively call socialized entrepreneurship, have been shown to work over the intermediate and long term.
The specific program I blogged about was about a new set of initiatives in Oregon called The Oregon Innovation Plan.
Here is what I said about this plan:

This is bad policy. The best thing the state of Oregon could do to increase innovation and entrepreneurship is to simplify and reduce taxes, and cut any regulations that are getting in the way of small business formation and growth. Use the $38 million to cut taxes. Also, angel investment networks don’t need the government’s help in getting started. Freeing up the market will spur business creation, which in turn attracts investment money. Finally, the worst part of this new policy initiative is to have politicians and bureaucrats pick winning industries. That is what free markets do best.

The post created some interesting comments.
One reader said the following:

Young people with the notion of starting a business are going to see a government program as being far more accessible, thusly realistic and possible, than existing Angel networks. Cutting taxes does little to incentivize entrepreneurs; I’d hardly believe that one might think to themself “oh man, the taxes are just too high in my state to start a business. I guess I’ll just find a job.”

What have we come to in this country when people think that a government program is more accessible than individual investors? With government programs come the inevitable government regulations. Every study that looks at entrepreneurship and innovation find that free markets work better and that less regulation leads to more start-up activity. The latest example can be found in the newest study from the World Bank on business start-up activity around the globe.
And the comment about taxes is just plain wrong. We have also seen study after study that show clearly that tax rates to matter in entrepreneurial activity. Look at the studies using the Global Entrepreneurship Monitor data for evidence of the power of taxes to encourage or squash entrepreneurial aspirations.
Another commenter said this:

While I don’t disagree that politicians ought not to pick markets, you should have looked at the who’s who in that committee group before you made that assumption. It’s chaired by Dave Chen, one of the smartest venture capitalists anywhere. Although I’ve never met him, I’ve heard him speak and I’ve got a post featuring him on my blog called “Choose Investors Wisely or Not at All” and you have to admit it’s a refreshing point of view for a VC. The vice chair is from Open Source Development Labs, and the group includes (along with some politicians) an honor role of high-tech business in Oregon. That means Intel, IBM, Batelle, Microsoft, some other companies you’ve heard of, plus two other VC firms besides Dave Chen’s. It’s a pretty good group.

So its OK to create government welfare for an industry if everyone guiding that program is in that industry? That sounds vaguely like the rationale for the military industrial complex. We saw how efficient and effective those politicians and business leaders were — including all of their $500 toilet seats, not to mention all of the weapons programs that not a single general wanted or supported.
There is more money available for high tech investment than there are deals to invest in. That is called “over hang” in the market, which we have a lot of right now. Let free markets put that money to work and see what it can really do.

I couldn’t resist offering a comment on President Bush’s subprime mortgage proposal for my first posting here at LockeSmith. From Forbes:

US President George W. Bush is set to announce for the first time a series of measures aimed at easing the US mortgage crisis marked by rising defaults and foreclosures, US media said today.
The proposals target homeowners who have fallen behind on their mortgages and are the administration’s first official response to the troubled US housing sector which has riled world markets over the past several months.
Among the measures included are a [program] that would allow people to refinance with government insurance if they are unable to pay adjustable rate mortgages, which offer low introductory rates but can rise over time.

For free markets to work, they need to be left, well, free. We had a series of mortgage companies make bad loans to people who should not have taken them in the first place. No money down, interest only, variable notes known as subprime mortgages. This created a huge speculative bubble in real estate. People bought houses way beyond their means, while others snapped up condos hoping to quickly flip them for a profit.
Over time the market always catches up with such risky economic behavior. That is what is happening now. The bubble has burst and housing prices are adjusting back to a more sustainable level of growth. Or so we thought….
Now President Bush decides to step in and spend what could be billions of dollars to “rescue” the market. All this is doing is postponing the day of reckoning.
People made poor economic choices. Why should the rest of us be left to pay the bill to cover their assets?