Can Hot Companies Survive Obama, McCain?

Oct. 31, 2008 — -- Whichever candidate is elected president of the United States Tuesday, he is going to face the same collection of economic problems.

And those problems -- a credit crunch, recession, limping stock market, growing international protectionism, a burst housing bubble with the attendant mass foreclosures, inflationary pressure from the bail-out, rising unemployment -- are all adding up to a perfect storm of economic woes, with the potential to play upon each other and create even more nasty system effects.

What this means is that for perhaps half of the first term of the new president, he will likely be unable to implement most of his social programs and deliver on his campaign promises ... but, instead, will spend most of his time focused upon economic triage and be at the mercy of larger social forces.

And that doesn't even take into account the fact that the new president, whoever it is, will (in Democratic vice presidential nominee Sen. Joe Biden's words) likely be seriously tested by one or more of the bad guys around the world. If that occurs, and the odds seem pretty high, then whatever dreams the president-elect had when he decided to run for office, the reality will be a lot closer to trying to successfully navigate the ship of state through rock-strewn raging rapids.

The crucial challenge, then, for the new president is to figure out how to nurse the U.S. economy back to health -- and quickly. Only a healthy economy can create the wealth needed to implement all of those changes the candidates have promised. Only a strong economy can absorb the next generation of workers, pay for added health care and lift the poor upwards to a better quality of life.

Happily, both candidates seem to understand that.

Unfortunately, neither one seems to have a realistic strategy for getting there.

There's a good reason for that. Sen. Barack Obama, being a Democrat, seems to have very little idea of how the economy actually works and ritually evokes business not as the only true creator of wealth in our economy, but as a predatory menace.

Sen. John McCain, being a Republican, has a marginally better understanding of the economy and the role of business -- but his attention, as usual with GOP elders, is focused upon established companies, which undergird our economy, but do little to create new jobs or new wealth.

What is missing from the economic debates of this campaign -- as it has been from every presidential campaign at least since the Reagan years -- is a recognition of the absolutely central importance of the entrepreneur to the health of the American economy.

Entrepreneurs, and the new companies they create, are the source of almost all of the new jobs, the new wealth, technological innovation, revolutionary new products, positive balance of trade, and improvements in productivity (and thus, international competitiveness) in the U.S. economy.

Yet, in the debate over how to 'fix' America's current economic mess, they are the forgotten men and women. They alone have the ability to not just slice the economic pie more fairly, but actually make it larger, rewarding everybody -- just as they have over the past century.

Indeed, at a time when we are arguing over income redistribution, no one seems to have noticed that the greatest income redistribution mechanism ever created is entrepreneurship -- which essentially creates each year, from nothing, hundreds of thousands of new jobs, and billions of dollars of new wealth -- money that is less likely to go to the same old fat cats, but smart young inventors, veteran middle managers, even secretaries and factory workers.

Entrepreneurial start-ups are also brilliant trust-busters, because they pull down or render obsolete older, less competitive big companies and replace them with smart, fast-moving upstarts. The result is a fairness, and equality, and a virtuous upward economic spiral that has never been duplicated by government fiat.

But to do that, entrepreneurs have to be protected. And they have to be unleashed. And even though I've heard Obama and Republican vice presidential nominee Gov. Sarah Palin both mouth the word "entrepreneur" in recent days, nothing I've seen in either platform suggests that this is much more than lip service.

The Republican Party, for example, despite being genetically pro-business, has over the last eight years done its level-best to slowly strangle all new high-tech business creation in the U.S. From the crushing cost and bureaucracy of the Sarbanes-Oxley corporate reform legislation, to the board of directors-gutting new governance rules or the forced valuation of stock options, the current administration couldn't have done a better job of gutting new business creation in the U.S. (Yes, I know many of these new regulations emanated out of Congress, but where was the fight from the White House?) and strengthening the power of big business.

That, of course, may have been the plan all along. As I've written many times, entrepreneurs, busy with company-building, have little influence in Washington and no distinct constituency to argue their case.

Meanwhile, established and big companies understandably hate entrepreneurship and will do almost anything to slow the progress of entrepreneurs -- like all of those onerous regulations described above. And it has worked: This year has seen almost no high tech company IPOs, traditionally that moment when entrepreneurs gained their freedom and rewarded their teams.

These days, the only recourse for a hot start-up company is to sell out to an established company -- further consolidating power and wealth. And meanwhile, of course, those older companies find it much more pleasant to buy these new competitors than compete with them.

Nothing in McCain's campaign suggests that he understands any of this, or will change the status quo. To look more hip and in-the-know about the tech world, the senator likes to point to the fact that eBay's Meg Whitman is his campaign's advisor on business.

She is, in fact, one of the finest business executives I know, but Meg is not an entrepreneur. And this suggests that a McCain presidency is not going to come to the aid of America's entrepreneurs -- and that the best we can hope for is that it will get out of the way, at least when it comes to taxes. That may work, but it will be a long, slow recovery.

As for Obama, leaving aside all of his other proposals for massive social change, the single most frightening plank in his platform is his plan to increase the capital gains tax. If there is one single factor in the U.S. economy that defines the rate of new company creation, it is taxation on capital gains -- in particular, the differential between the capital gains and regular tax rates. To understand the long Reagan/Bush/Clinton boom of 1980-2000, you need only look at Reagan's slashing of that differential.

Assuming that his comments about "corporate greed," etc. indicate that he has no intention of getting rid of Sarbanes-Oxley or any other crippling corporate regulation, then Obama's plan to raise the capital gains tax will all but kill creation of new companies -- especially new tech companies -- in America. No new Apples or Facebooks or Twitters, no explosive new industries spinning off endless amounts of money and jobs, no new competitive advantages in the global economy.

I don't see how you can accomplish real change, finance massive social works and raise up the poor and middle class when you are stuck in a 1970s-type economic doldrums with the inevitable cultural malaise that follows.

I had coffee yesterday morning with a Silicon Valley veteran who is a serial entrepreneur and staunch Obama supporter, and I asked him about this dark scenario. He didn't disagree with my assessment, but only replied that Obama was a smart guy and that he hoped the president-elect would surround himself with equally smart guys who would explain it to him.

I told him that was a pretty dangerous kind of hope.

So who does get it? Ironically, it may be my own governor, Arnold Schwarzenegger. Two weeks from now he is convening in L.A. a Conference on Small Business and Entrepreneurship (I'm one of the keynote speakers). The last time anybody attempted this was President Reagan back in the early 1980s -- so long ago that the hot technology topic was the fax machine. I suspect Schwarzenegger is going to come away with an earful -- and a far deeper understanding of what really drives California's economy.

It seems to me that the new president-elect should take a clue. Right after his inauguration, he should invite the nation's small business owners and entrepreneurs to a summit ... and then, during the opening address, announce the death of Sarbanes-Oxley and the cutting of the capital gains tax. I guarantee that before that speech is finished, the attendees will already be rushing out the doors to make the new president's term in office a roaring economic success.

TAD'S TAB: It's the weekend, and if you're feeling as lazy as I do, how about a nice couch potato Web site? It's an Internet TV remote; basically a library of links to all sorts of streaming network shows. It updates often, so check back frequently to find new links. You'll find it here.

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.