Why Hillary Clinton’s Student Debt Idea Is Smart - TIME

Why Hillary Clinton’s Student Debt Idea Is Smart Posted: 29 Jun 2016 06:19 AM PDT Foroohar is an assistant managing editor at TIME and the magazine’s economics columnist. She’s the author of Makers and Takers: The Rise of Finance and the Fall of American Business. One of the most interesting economic solutions proposed by Hillary Clinton recently on the campaign trail is that the financial burden of education be eased for future entrepreneurs. Under her proposal, college graduates who start a business may end up being able to get their student loans deferred, interest-free, for up to three years as they launch new ventures. Those who locate in “distressed communities” or start a social enterprise also could ask the government to forgive as much as $17,500 in loans after five years in business. The goal is not just to create jobs and encourage entrepreneurship amongst millennials, who are graduating with record debt and entering a still weaker-than-normal job market, but also to help boost enterprise creation in general, which has fallen dramatically in this country since the 1970s. This is a big deal, because it ties into the most important economic question of the day, which is why there isn’t stronger productivity growth in the economy right now (economic growth is essential productivity plus demographics). In a speech Tuesday, Fed Governor Jerome Powell touched on the issue and the stakes: “One factor that may contribute to low productivity growth is the notable decline in recent decades in measures of the dynamism of our economy. Entrepreneurs start new firms; most of them fail, but a few of them succeed, grow very rapidly, and account for significant amounts of job formation. Older firms shrink or go out of business if they fail to keep up with innovation and advances in productivity. Workers change jobs and move around the country (or the world) as their careers evolve and as companies grow and shrink. These processes can be painful and messy for both workers and firms, but they are essential to the allocation of resources to their highest, most productive uses. The high levels of innovation and fluidity of our economy have long been thought to be among the principal reasons for our high and rising living standards.” Start-ups are a key driver of productivity. But the birthrate of startups has been in decline since the 1970s. Since then, it has dovetailed with a shift in how the financial sector business model works — it no longer invests primarily in new business, but rather buys up and trades existing assets, and funding for small and mid-sized start ups is still scarce (while increasing monopoly power on the part of large firms squashes new ones, as Robert Reich and others have recently written.) As Governor Powell puts it: “New firms can be loosely grouped into two categories: those started by “lifestyle entrepreneurs” who want to be their own boss, but who have little prospect or desire for high growth; and those founded by transformational entrepreneurs who start businesses that aspire to grow dramatically and change their industry. Before 2000, the decline in new firm entry was mainly in the first sort; since 2000, it is also found among the so-called transformational firms. While the drop in the formation of lifestyle-type firms could be neutral or even a positive for productivity, as in the case of the U.S. retail sector, the reduction in the creation of high-performance new firms suggests that lower dynamism could be associated with slower productivity growth . . . Fewer start-ups has meant lower “job flows,” as measured by job creation and destruction, and fewer opportunities for workers to find better jobs. And labor market dynamism across many dimensions has declined by more than can be explained by the reduction in startups. Workers have become less likely to leave their jobs, change jobs, or move geographically to take new jobs.” This is a big deal in a country in which labor mobility has traditionally given us a leg up economically over Europe and other nations. I think Clinton’s idea to tie together entrepreneurship and student debt forgiveness is a great one, and a good way to make some of Bernie Sanders’ most popular ideas more doable. I hope to hear more about portable benefits, another key idea that could help bolster entrepreneurship, from her soon.