In the next COVID-19 bill, target innovation and entrepreneurship

June 15, 2020

4 minutes

The surprise decline in the unemployment rate has shifted the discussion regarding additional COVID-19 relief legislation. Appearing on CNBC on Monday, White House senior adviser Kevin Hassett said that, while a fourth legislative package is highly likely, another positive jobs report in June would “absolutely affect the things that we pursue.”

A fourth legislative package is needed to complete America’s economic comeback. And, this time, the legislation should focus on accelerating the economy’s growth and job creation potential by strengthening the nation’s commitment to innovation and entrepreneurship. The content of such a package are two major bills introduced into Congress in the last 90 days.

The Endless Frontier Act was introduced on May 27 by Sens. Charles Schumer (D-N.Y.) and Todd Young (R-Ind.), along with Reps. Ro Khanna (D-Calif.) and Mike Gallagher (R-Wis.), and is intended to enhance U.S. leadership in science and technology.

Scientific and technological innovations drive gains in productivity, which in turn drive economic growth, job creation, and expanding opportunity. Unfortunately, over recent decades U.S. government investment in research and development as a share of gross domestic product has fallen near historic lows. Meanwhile, other nations – China in particular – have dramatically increased their investments in scientific discovery and technology. To remain a global innovation leader in an increasingly competitive world economy – and to accelerate the economic recovery from the COVID-19 crisis – the United States must renew its commitment science- and technology-driven innovation.

The Endless Frontier Act will address this national priority in several important ways. The Act would expand the National Science Foundation (NSF), to be renamed the National Science and Technology Foundation (NTSF); establish a new Technology Directorate within the NTSF; authorize $100 billion for the new directorate to reinvigorate American leadership in the discovery and application of ten key technology areas that will define global competitiveness; authorize an additional $10 billion for the Commerce Department to designate at least 10 regional technology hubs; and fund programs to accelerate the transfer of new technologies from the lab to the marketplace.

The principal way new innovations and technologies are transmitted to the marketplace is through new businesses, or “startups.” Repeated research has demonstrated that startups are disproportionately responsible for the innovations that drive economic growth and job creation. Indeed, according to the Kauffman Foundation, startups – not large businesses – are responsible for almost all net new job creation.

Despite their importance, startups are extremely fragile because they are new and the COVID-19 crisis has taken a devastating toll. Thousands have been forced to lay-off employees or have failed. A paper released by the National Bureau of Economic Research (NBER) showed that business ownership among African-Americans plunged 41 percent – or by 440,000 businesses – between February and April. Another NBER paper released last month showed that early-stage venture capital investment dropped by 38 percent over the same period.

Simply stated, the COVID-19 emergency has imperiled an entire generation of the nation’s most innovative and promising young companies – and, in turn, the demise of thousands of these companies imperils the post-COVID economic recovery.

The New Business Preservation Act – introduced in the Senate on March 18 by Sens. Amy Klobuchar (D-Minn.), Chris Coons (D-Del.), Tim Kaine (D-Va.), and Angus King (I-Maine), and in the House on March 26 by Reps. Dean Phillips (D-Minn.), Terri Sewell (D-Ala.), Ro Khanna (D-Calif.), and Tim Ryan (D-Ohio) – would address this threat to the nation’s startups and economic resilience.

The legislation would incentivize continued venture capital investment in America’s most innovative and promising young companies by establishing a program, administered by the Treasury Department, which would allocate $2 billion in federal dollars to the states on a straightforward population basis to attract private venture capital by offering a 1-to-1 match of federal dollars with venture capital investment in promising startups, particularly in states outside the major venture capital centers.

The legislation is modeled on Israel’s “Yozma” program of the late-1990s, which successfully incentivized U.S. venture capital firms to invest in promising Israeli startups, and builds on recent successful federal-state partnerships to support small businesses, such as the State Small Business Credit Initiative (SSBCI).

Importantly, the legislation is carefully structured so that the federal government will not “pick winners and losers,” but rather will rely on private entities to source and manage investments in promising early-stage companies in every state. All investment decisions will be based entirely on private investor determination of the economic prospects of the new companies receiving equity capital.

New innovations and technologies, coupled with the survival of America’s most innovative and fastest growing new businesses, are essential for a strong economic recovery following the COVID-19 emergency. To ensure America’s comeback and longer-term prosperity, Congress should swiftly pass the Endless Frontier Act and the New Business Preservation Act.

John Dearie is the President of the Center for American Entrepreneurship and Rustin Finkler is Communications and Research Manager at Village Capital, the largest supporter of seed-stage, impact-driven startups in the world. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Village Capital.

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