Why The Stimulus Package Isn't For Startups: The Gov't Doesn't Want Creative Destruction

Politics

from the startups-are-about-short-term-job-destruction dept

Earlier this week, I was on a fun panel put together by the Telecom Council of Silicon Valley, which was mainly focused on what the Obama Stimulus plan (and the broadband allocation specifically) would most likely mean for the industry. At one point, an attendee in the audience said that he was from a startup, and questioned how he might partake of the stimulus funds — and I responded, perhaps flippantly, that he was out of luck: the stimulus isn’t for startups. That’s not entirely true, of course. There will be some token amounts of money handed out to startups, but pretty much everyone on the panel agreed, the administration has made clear that the stimulus package is about creating jobs as quickly as possible, and the administration has made it clear in so many words that this means handing it to incumbents. They’ve been pretty frank that the stimulus plan has a lot less to do with increasing broadband capabilities than with job creations — and plans to get funds that show more job creation will get preference over those that actually increase broadband.

And that’s why the stimulus package is not for startups — and is potentially dangerous in the long run. Truly revolutionary startups don’t immediately create jobs — they destroy them. The process of creative destruction takes on those incumbent providers and wipes them out. We’re seeing it with plenty of industries today that are challenged by new upstarts that have upset their old business models. And, while most economists should recognize that this process is good for the overall economy, in that it leads to economic growth and more efficiency, it does upset the status quo, and causes many big companies to contract or disappear altogether.

So, think about it from a government bureaucrat’s perspective right now. Go back a few decades, and assume someone came to you with a plan to create the internet — and even accurately described how it would allow a great free exchange of information. The reaction, if you were trying to deal with an economic crisis, would be to focus on all of the jobs it upset. People can share music online? Think of all the job losses in the music industry! People can read news for free? Think of all those newspapers shutting down! But they wouldn’t consider all of the economic activity created by the internet — the billions of dollars and millions of new jobs created thanks to it.

If, today, you had a concept for a totally new technology that would greatly increase broadband access across the globe, in a revolutionary way. It would allow anyone to have super high speed access anywhere. It wouldn’t be that costly to create or build or even maintain… and it wouldn’t even require making use of existing infrastructure. From any normal calculation this would be fantastic. It would spur enormous new economic growth opportunities and speed along our economy in massively useful ways. Yet, it’s exactly the type of project the government would be against right now — because it would make AT&T, Verizon and others obsolete… and think of how many people that would put out of work, at the same time that the gov’t wants to claim how many jobs it’s created.

That’s an extreme hypothetical, but it’s useful in illustrating the point. So, this focus on using the stimulus for short-term job creation is dangerous in that it will likely be used to prop up existing incumbent businesses, because they can create the most jobs most quickly — by doing very inefficient things. The startups that do things more efficiently end up doing short term job destruction, even if the long-term results would be a much larger, more stable economy with larger job creation.

Filed Under: creative destruction, job creation, startups, stimulus