A Faster Way to Grow
Robert E. Litan
One of the questions or challenges we constantly wrestle with at Kauffman is how
could annual U.S. economic growth be increased by one additional percentage point.
It is not an idle question. If, for example, the economy grew at 4 percent annually rather
than 3 percent, GDP would double six years faster (eighteen years versus twenty-four
years). Given the magic of compounding, this extra one percent would cumulate over a
century to produce roughly three times the level of GDP than would otherwise exist.
Such a world would be a far more comfortable one than many of us may be able to
imagine. It would mean a dramatically lower level of poverty, while the average
American would have a living standard that is three times as comfortable as one that he
or she would otherwise enjoy (imagine today, for example, the average family income
being roughly $135,000 rather than its current level of about $45,000). A richer society
also would have more resources to address the public challenges upgrading our
infrastructure, doing more to clean the environment, and so on that would make life in
America even more comfortable for all our citizens.
So what is the key to faster growth? A series of recent studies establishes clearly that,
at least in the U.S. economy, growth in output and employment is driven strongly by the
creation and growth of new firms. It thus may be tempting to answer the "How do we get one percent faster growth?" question by figuring out how many more total firms need to be started each year. But this is a shotgun approach, the proverbial equivalent of throwing a lot of mud (firms) against the wall and hoping that some of it sticks.
A nuanced, and I believe more useful, inquiry is to try to estimate how many very
successful, rapidly growing new firms it would take each year to lift the economy-wide
growth rate by one percent. The firms to which I specifically refer are those truly
innovative or inventive enterprises that bring to the market something new a product,
service or process that generates substantially more benefits for society as a whole
than any single entrepreneur, inventor, or firm can capture alone. Think, for example, of
General Electric and the electric light, which literally opened up new horizons for all humanity to work and experience new forms of leisure when it is dark outside. Or, more
recently, consider breakthrough computer programs, such as the Microsoft or Linux
operating systems, that have established a platform on which tens of thousands of other
productivity enhancing applications can run. The same is true of other platforms, such
as Apple's iPhone of Google's Droid, or new technologies, such as genetic sequencers
or cloud computing, which facilitate the formation and growth of other companies, many
with complementary technologies.
Not all innovations generating social gains in excess of private rewards find their way
into measured GDP, however. Many health care innovations new pharmaceuticals,
medical devices, and treatments both lengthen and improve the quality of life for
millions, if not billions, of people. To be sure, the inventors of these marvels reap
handsome rewards (though not always), but they surely do not capture the health
benefits enjoyed by all the beneficiaries of these technologies. Economists may attempt
to put a price on these gains in health, and thus quantify the overall improvement in
social welfare, but these gains generally are not traded on the open marketplace. Still,
they are very real, and in some respect they do translate into additional GDP (since
healthier individuals are more productive and can work longer). However they are
considered, health benefits should be treated as if they added to GDP, and for purposes
of this essay, they essentially are.
If very innovative firms are the drivers of growth in both output and jobs largely
because of the excess societal gains they generate beyond the private reward their
founders, shareholders, and employees reap then it stands to reason that the steady
creation of more such firms will increase growth in the long run. In this essay, I focus for
illustrative purposes on one particular class of such firms those inventive firms whose
revenues grow to an average of $1 billion and ask: How many such new firms would
the U.S. economy have to create, in a steady state, to generate an additional one
percentage point in annual economic growth?
The billion dollar revenue threshold is an admittedly arbitrary way of focusing on only
the most inventive successful firms. It is based, however, on what I believe to be a
plausible assumption: that the products, services, or processes whose social benefits
substantially exceed their private benefits are most likely to be brought to market by
'home run' firms whose revenues grow to some significant level, such as an average of
$1 billion. This is not to say that all billion dollar firms generate social gains far in excess
of their private gains; only that, on average, firms of this size are likely to have been
more inventive (as demonstrated by their revenue success) and exhibit higher ratios of
social to private gains than firms in smaller size cohorts. But I also don't want to be
interpreted as denying the important contribution of smaller but successful new and
existing firmsor the "singles" and "doubles" whose ratio of social to private gains are
likely to be somewhat lower than the "home runs." Indeed, the home runs will need
services and supplies from the singles and doubles, and the latter firms surely will
purchase some of the outputs of the home runs.
Thus, to the extent that the singles and doubles generate additional productivity growth
for the economy, this will reduce the numbers of billion dollar companies required to
generate an additional one percent in economy-wide growth. Put another way, the
order-of-magnitude estimates that follow ranging from thirty to 150 new billion dollar
companies each year, with a more probably estimate of sixty are likely to overstate the
numbers required. This should make it a bit less daunting to achieve the one percent
extra growth target than the following estimates may suggest.
