A Startup Agenda for 2015

With the economy approach full capacity – the lowest unemployment rate consistent with stable inflation – attention must now turn to how to increase the potential rate of growth of the economy (“the supply side”) above the anemic official projections of roughly 2 percent.

In practical terms, this means reversing a three-decade long decline in the “startup rate”, or the ratio of new firms (those less than a year old) to total firms. New firms are important for productivity growth, the most important driver of potential growth of Gross Domestic Product (GDP), because they have no vested interest in the status quo, but rather are more likely to disrupt it than even to incrementally change it. It is no accident, for example, that many of the inventions that define modern life – the telephone, computers, cars, airplanes, air conditioning, and Internet search – were brought to us by (American) entrepreneurs, not established firms.

We only have an imperfect understanding of what has caused the secular drop in startup rates, although declining population growth and the rise of business concentration seem to play some role. There is still room for two constructive federal policy measures, however, and 2015 could the year when one or perhaps more are adopted at the federal level – assuming that a Republican Congress and a Democratic President can find a way to reach middle ground – or at the very least, next year will be one when a serious bipartisan conversation begins about these two topics so that necessary compromises could be reached in 2016 or shortly after the next Presidential election.

The first, and perhaps most obvious pro-startup policy change, is reform of U.S. immigration law to grant substantially more permanent work visas to high-skilled immigrants, especially those educated in U.S. universities and graduating with advanced degrees in science, technology, engineering and math (STEM), and those who launch a business in this country (the so-called “startup visa”). Sizeable expansions in the annual numbers of both types of visas are important for turning around the nation’s 30-year secular decline in entrepreneurship: immigrants generally, but especially those in tech fields, are more likely to launch a business than native-born Americans. A bipartisan comprehensive immigration reform bill, which included both the STEM graduate and startup visa measures, was passed by the Senate in 2013, but appears dead for now, in the wake of the mid-term elections, and Republican anger over President Obama’s Executive Order refraining from deporting approximately 5 million children of undocumented immigrants (which although technically can be reversed by a future President is politically almost certainly to be permanent).

At this writing, there is a reasonable chance that after emotions cool, a Republican Congress at some point in 2015 will develop and pass one or more piecemeal immigration reform measures. If this occurs, it is likely that these bills could include some additional permanent work visas for STEM graduates and more startup visas, with liberalized eligibility requirements (under current law, foreign entrepreneurs must bring with them $1,000,000, or $500,000 if the business is located in economically distressed area, and the total number is capped at 10,000 per year). If the President wants something more to add to his legacy, beyond the controversial steps he took on his own under the post-election Executive Order, he will not let the perfect be the enemy of the good, and will sign a suitable high-skilled immigration bill that has been sorely needed for some time.

A second entrepreneurship-related initiative is actually one that, at the very least, would not aggravate the secular decline in the entrepreneurship rate – an objective just as important as legislation that promises to increase it.

Specifically, I refer here to potential reform of the Affordable Care Act. Repeal of the Act will not happen on President Obama’s watch, since the ACA is perhaps the piece of legislation he most wants to be part of his legacy. At the same time, there is a slim chance the Administration could accept some modification to the Act, given its unpopularity, out of an effort to help some Congressional Democrats avoid defeat in 2016.

The key for current, and more important for potential entrepreneurs, is that any ACA reform not eliminate “guaranteed issue,” or the requirement that health insurers take all who want to sign up and not do not take their preexisting health conditions into account in setting premiums. Research has shown that the entrepreneurs are most successful when launching their businesses in their late 30’s or early 40s, which means that they typically must leave an existing employer that provides them and their families with health care coverage. If would-be entrepreneurs currently working for such firms have a preexisting health condition (and many do by this age) and they are not covered by their spouse’s health insurance policy, then in the absence of guaranteed issue, the inability to purchase affordable health insurance can be a significant deterrent to launching a business.

The ACA’s guaranteed issue provisions address this risk and thus represent an important benefit for entrepreneurs. Despite widespread discontent with the ACA in general, there seems to be much less opposition to retaining guaranteed issue as part of any ACA reform.

That’s the good news. The potentially bad news is that elimination of the individual mandate, which is one objective of those seeking ACA reform, would impose severe costs on health insurers and drive them, or policy makers, to take steps that could unravel health insurance markets. The individual mandate gives an insurers a broad enough pool of risks to help offset the problem of “adverse selection” – those with the greatest health care risks signing up for insurance – that a guaranteed issue requirement entails. Without that mandate, insurers accepting an unusually high volume of new customers (or renewals by those already signed up in the first year of the ACA) will need to raise premiums for all those they insure. This could induce some existing customers to drop or reduce their coverage, which would only increase the fraction of unhealthy patients in insurers’ risk pools, inducing insurers to increase premiums even further. Like a cat chasing its own tail, health insurance could descend into a death spiral, leaving only very high cost, unhealthy insureds as customers, clearly not a result that anyone in either party would want.

Alternatively, as insurers raise premiums, federal and/or state insurance regulators will face political pressure to curtail rate increases. If this happens, then insurers operating under a guaranteed issue requirement but without the individual mandate, will find their profits steadily eroding, perhaps morphing into losses. Over time, this will lead either or both to more consolidation of health insurance providers or the departure of some insurers from the business, resulting in less competition and choices for health insurance consumers – and yes, ultimately higher premiums, or if regulators do not permit them, then more exits and consolidation, another form of death spiral.

Accordingly, those who want to repeal the individual mandate will need to find another way of avoiding a meltdown of insurance risk pools if they want to retain guaranteed issue, as they should. The only other way I know of doing this would be for the federal government to providing subsidies to insurers who take on an unusual mix of unhealthy clients, beyond the subsidies that are now currently part of the ACA (and which are set to expire). But this will add to the budget deficit, which for the near future in any event, is a political non-starter.

Perhaps, and even hopefully, there are clever policy analysts out than I who can come up with another way to preserve guaranteed issue without unraveling health insurance risk pools. ACA reformers may need to find one if they are not to add to the burdens that budding entrepreneurs, especially those with industry and other real-world experience, already face when they seek to launch out on their own. My wish for 2015 – in addition to a breakthrough on immigration policy toward the highly skilled – is that this potential problem is solved as debate over the future of the ACA surely will intensify.