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President-elect Obama has posted his latest weekly address where he lays out key parts of his economic recovery plan. While I agree with his ideas for greening government buildings, improving roads and schools, and modernizing our heath care system, and while these may be a necessary first step, there are more direct and long-term actions this administration could take to revitalize our economy.
Choosing specific projects may create jobs for certain companies in certain industries for a while, but it doesn’t create a market. When the government funds public works projects, there are many benefits. It creates some temporary jobs, which helps some people maintain their standard of living. This also keeps those workers in the market as consumers. Just as importantly, it creates public works that we hope will enable entrepreneurs to invent new products, better systems, or otherwise improve our quality of life. These entrepreneurial projects will be the job-creating companies of tomorrow. Creating temporary jobs and public works may or may not kick-start the economy. The hope is that when the economy grows, the government (ie, the taxpayer) can make back those funds by virtue of a vibrant economy. But this initiative does not encourage others to invest in roads, schools, or a green economy. It does not by itself lead to an economy that grows organically. Why not aim our government funds and energies directly toward our goals? The government’s role should be to decide on the direction we should take, then to create incentives and otherwise facilitate economic growth in that direction. This approach allows entrepreneurs, investors, and the public to be actively involved in our economic recovery.
The goal is to create a globally competitive, environmentally responsible, future focused, vibrant economy that stands on its own. In other words, we want investors to invest their money in green alternative energy, better educational systems, digital health care solutions, and broadband availability (to list a few President-elect Obama has already chosen). We also want them to do it now.
In a recession, the market is so volatile that everyone is reluctant to invest. Common wisdom for working Americans is to save about six months worth of salary, in case you are laid off, as I was last Thursday. Common wisdom for investors is to move funds from the more volatile stock market to safer government bonds. There are still people who want to invest their money, but the risks in any market investment, whether a large company that has been around for decades (GM, AIG) or a startup, are much higher. Angel investing (investing in startups) is typically very high risk, but is also what we need to take our economy in a new direction.
The solution is for the government to create incentives and reduce risks for entrepreneurs and investors who are creating companies that further our goals. At the same time, we can involve average people in angel investing in a way that reduces their risk and engages them in the process of choosing which projects are marketable, and which add to the common good.
The Obama administration has already chosen our direction, based on wide feedback from the American people. Now is the time to create incentives, reduce risks, and facilitate.
Imagine the administration choosing a team of experts in new technologies, entrepreneurship, and venture capital. This team will facilitate entrepreneur-investor cooperation in our chosen direction. Projects identified as outstanding by the team of experts could fall into a special category that carries a type of insurance plan for investment. There could be a cap on the percentage of funding investors could lose if the business doesn’t thrive, guaranteed by the government. In this way, investors are still encouraged to choose wisely, since they could lose some of their investment, but they also have incentive to invest now and not wait till later, and to invest green instead of otherwise.
Simply being chosen by this team of experts would be an incentive for entrepreneurs, since it would be easier for them to gain funding if their project is approved for the investment program. Other incentives for entrepreneurs could include government grants (cash prizes) for creating the best new green technologies. This approach is already being used by the X PRIZE Foundation to create new technologies in space flight, fuel-efficient cars, and genomics.
This program could also fill a little-discussed deficiency with how we invest in new companies. Currently, the process of getting funding for a new company is for insiders only. Much like politics, it is a field where who you know determines your success. The Obama administration has excelled in its efforts to bring average Americans into the political process, which brings millions of ideas and voices to the table and improves our government’s decisions. This administration could also bring average Americans into
the investment process. Companies such as prosper.com and other peer-to-peer lending sites have already proven ways that small investments can lead to large loans. Using these types of techniques could allow millions of Americans to be involved for the first time in angel investing. This would bring millions of opinions to the world of startups and give a much better sense of marketability. It could even create new, web 2.0 styles of marketing, where demand is created while products are still in development.
These ideas are not a full fledged proposal. They are simply a skeleton that exemplifies the basic concepts behind the government’s role in revitalizing our economy: choosing a direction, providing incentives, removing obstacles, and involving the public.