Californians perceive the Golden State as a bastion of entrepreneurship and innovation, and in some ways they’re correct. Silicon Valley, after all, is a hub of researchers, entrepreneurs, venture capitalists and innovators.
But a look at the entire state tells a different story. California’s vaunted start-up culture is under siege. Policy makers must act to prevent further deterioration of the state’s entrepreneurial climate.
In 2005, the last year for which the U.S. Census Bureau has data, about 860,000 businesses called California home. That same year, California recorded more than 96,000 business start-ups, which represented 12.5 percent of the number of businesses created nationwide. Business creation is a key measure of entrepreneurship. An enormous amount of individual effort, risk, and fortitude, along with a healthy amount of creativity, is required to start a business.
There is, however, another side to the story — business failures. In 2005, more than 83,000 businesses shut their doors in California. That represents 12.3 percent of all U.S. business failures. Thus, California experienced a net 1.6 percent increase in the number of businesses within its borders in 2005. Not exactly a staggering level of growth.
In fact, California ranked a mediocre 15 among the 50 states in terms of the number of businesses launched in 2005. Over the most recent five years for which data is available, California’s record of launching businesses was similarly mediocre — just 16th nationwide.
Meanwhile, entrepreneurs in neighboring states were starting new businesses left and right. Nevada, Utah, Idaho and Arizona all had higher rates of business creation than California.
Reform is necessary if the state is to capitalize on its vast potential and reclaim its spot at the top of the entrepreneurial heap. Indeed, the state has long suffered from economic underperformance. The current recession is making a bad situation worse.
California has the fourth-highest unemployment rate in the country, and its private-sector job growth is stagnant. Over the past five years, more U.S. citizens have left California than have entered — a net domestic drain of more than 1 million residents. If California is to turn its economy around, entrepreneurship must play a key role. To promote and renew entrepreneurship, state leaders must start rewarding risk-taking, investment and diligence.
How can policymakers do so? One way is through tax cuts — and lots of them.
In order to ensure the sustainability of tax relief, government spending also must be reduced. Officials must change their mind-sets to extract more bang for each tax buck they spend.
Regulatory reform is also a priority. The state must stop strangling businesses and entrepreneurs with burdensome and often counterproductive regulations.
Entrepreneurship is the state’s flywheel of economic activity. Unfortunately, we have fallen behind on this critical measure of economic success. Changes are needed if California is to live up to its potential — and its reputation — as an entrepreneurial leader.
Jason Clemens is the director of research and Robert Murphy is a senior fellow at the Pacific Research Institute. They are co-authors of the California Prosperity Series, the first installment of which will be released this month.