Charlie Rose's interview with Carl Schramm on Tuesday, May252010
Carl Schramm, President and CEO of the Ewing Marion Kauffman Foundation
source: Charlie Rose - Carl Schramm

EXCERPT:

CHARLIE ROSE: Carl Schramm is here. He is the president and CEO of the Ewing Marion Kauffman Foundation. Based in Kansas City, the foundation focuses on promoting entrepreneurship and improving education. He’s also an economist who writes about how entrepreneurship spurs economic growth around the world.
His new article in the May-June issue of "Foreign Affairs" magazine is called "Expeditionary Economics -- Spurring Growth after Conflicts and Disasters."

CHARLIE ROSE: Behind all this is a philosophy about what makes a difference. That idea is what?

CARL SCHRAMM: Charlie, it’s the central idea with the Kauffman foundation is about. You know, we’re in this wonderful position of having had Mr. Kauffman, who was born poor in America and died a billionaire, decides the 1993 when he dies that the arc of his life was about entrepreneurship. He could start a business. And he saw the achievement
of one destiny, the business of creating business.
And at Kauffman we’ve actually made that into the centerpiece of a great deal of study around how you get an economy to grow. And in a sense the philosophy we used principally in the United States, and we’re very, very busy in the great recession at hand in New York and Detroit and many cities that have been hard hit, we try and get entrepreneurship under way.
But the thesis that’s alive in this article is that what’s good in the United States is good almost any place in the world. That the universal about starting an indigenous economy is getting firms underway. In fact, there’s no other variable that explains growth better than the velocity the rate of which new firms are being formed.

CHARLIE ROSE: What’s the connection to this idea and the idea of globalization?

CARL SCHRAMM: Well, in a sense globalization in many regards exists because of the mimicking of the entrepreneurial economy or entrepreneurial capitalism in the United States.
If you think about this, and this is instructive as to what’s going on in Iraq -- if you think about this, the huge swing up in the Chinese economy and the Indian economy, which have together in 30 years have wiped out about 25 percent of the world’s destitute poverty, the magic in both places was a copycat of the American economy.
That is, all that growth is connected to the creation of brand new firms. Both countries have become hugely entrepreneurial, and it’s often missed by people that it is actually a copycat economy. They studied our entrepreneurship, they studied the way we funded it, they studied our culture and they took it home.
And in a sense, the lessons that China and India teach us and teach the rest of the world are applicable, I argue here, in Iraq.

CHARLIE ROSE: They also places in Singapore and places like that.

CARL SCHRAMM: Indeed. Singapore, it’s over the moon in terms of where they’ve gone. But Singapore, people forget the history of Singapore. It’s such a special case. People now say, but Singapore, it always looked like. But in the lifetime of one man, the master mentor --

CHARLIE ROSE: Lee Kwan Yu.

CARL SCHRAMM: -- it came from nothing, a fishing village, to the extraordinary economy it is.

CHARLIE ROSE: And because of the appearance of this program, we know this story Deng Xiaoping when he gained power sent people over to talk to Lee Kwan Yu, hundreds of them, to figure out what he’s doing over there.

CARL SCHRAMM: Yes. And that’s our happy condition at the Kauffman Foundation. We have people come from all over the world. They come to Kansas City where we’re headquartered and the question is, Carl, how do we create growth economy like yours?...And the answer always is you’ve got to focus on firm formation, the creation of new enterprise. The more entrepreneurs you have, the faster your GDP will expand. That sounds like a simple formula, but not many people know what that translation is.

CHARLIE ROSE: Does it matter whether the business is locally owned and locally originated or whether it is some multinational company coming in and creating something in Iraq or whatever the subject country is?

CARL SCHRAMM: It matters hugely. Now, the best way to ground that answer is to invite you to think back on America’s history. If we turn the clock back to 1800, we don’t find any multinationals coming here, we don’t find English banks coming here, we don’t find English corporations coming here. We don’t have venture capital.
We built this economy, this messy capitalist economy, from scratch against all kinds of odds. And that translates 200 years later to the same thing in a sense that if you want a robust, indigenous, growing economy, one that would survive in the case of Iraq, it has to be based on local indigenous entrepreneurship.
And the reason is if we’re going to achieve political stability, people have to own the economy. If, for example, it’s, let’s say Dow Chemical owns a plant or one of the great petroleum companies or one of our huge industrial companies like General Electric, it’s all going to be General Electric.
Let me say differently, because I think you’ve had my friend Andan Neil Cotti on.

CHARLIE ROSE: Emphasis is his company.

CARL SCHRAMM: Emphasis is his company. What he did with Emphasis and its cofounders was something of extraordinary iconic value to India. People in India can look in Bangalore where they started and see the campus, and it looks just like California.
And it’s Indian invented, people who went to school in India. It’s us people in India did this. And I always ask people to look at that example because it’s cultural -- the profundity of that in the cultural memes of the people who live in India just can’t be discounted. That’s us, we did this. We created a globally competitive software company at the front end of technology.
It is critical to have those companies owned by native people.

CHARLIE ROSE: The question of Iraq is an interesting one because they have huge oil revenues, the potential of huge oil revenues because they didn’t do a lot of refining there for a long time, new refining. So where is that today? And what role can that play?

CARL SCHRAMM: ...One is that you’re not going to have a stable democracy if you have an economy built just on oil. And the second is an economy built just on oil almost in every case reaches a level of corruption that creates huge political instability or else abuse of the native population over time.
I actually think there actually might be a new way to think about this, and I call it sort of extractive entrepreneurship. And that is you can’t beat the trump of all that oil there. That is a -- it’s an overwhelming economic variable, and it’s an asset.
On the other hand, think about America again. Ours was and still is to a huge extent an extractive economy. Yet we have a diversified economy. But in the beginning it was hugely extracted.
And in a sense we built the railroad to assist, it’s a new technology, the assist the extractive technology of the United States. You know, the first railroad is the Baltimore-Ohio. It’s to get the grain from the Midwest to the closest eastern port, Baltimore.

CHARLIE ROSE: Talk about this article, "Expeditionary Economics," and what happens and what’s the role of the military?

CARL SCHRAMM: And the military reached out to us and said "Would you have thoughts about Iraq." When your military -- when the government calls you think about this, and I was flattered that they would come to us. And as I said, lots of other countries come to us.
But the military, on the outside you think they must have everything under control. In fact, I think what they were saying, and I’ve gotten to know lots of people there very well, is the huge frustration that we don’t have an economy working...Shock and awe. And it took us a while for General Petraeus to come to the fore and say the second act we have to pacify and now deal with the insurgency.
And I think what my argument here is the military has to have a third competency. If we’re going to get out and leave a stable democracy behind, we’ve got to know how to start what will become a robust economy...So the argument here is we probably have to have a different role for some part of our soldiering force. In other words, they have to become competent at stimulating firm formation and village economies and a regional economy and a national economy.

CHARLIE ROSE: Do you have an infrastructure that will promote?

CARL SCHRAMM: ...For example, Charlie, I’m sure you’ve dealt with Hernando Desoto before.

CHARLIE ROSE: Yes, I have.

CARL SCHRAMM: Hernando gave us all a long time ago one of the vital measures. If you’re in my business, this is like a doctor taking a pulse. When you go to a new country or you want to know something about a new country and whether or not there’s going to be robust entrepreneurial capital, the question of question is how long does it take to incorporate a business here?...[Y]ou hear continuously about the importance of the rule of law. But without the incidents of ownership, i.e. property documents to say this is my business, this objectification of my idea --

CHARLIE ROSE: And rules and order and there’s a sense of a structure you can operate within...The other question that interests is when you go into whatever the country is --...say Africa or Latin America. You take those places and there is not an entrepreneurial spirit or experience among the people...Is that a problem? Or, second part, is the entrepreneurial idea something that is instinctive with all human beings?

CARL SCHRAMM: I’m heavily invested in the views that this is just part of human nature. History tells us this. And I think the probably determinative evidence that I put forward is you see entrepreneurship everywhere.
But let me visit with you about this. I got my Ph.D. in 1973 as an economist. I took a lot of courses in international development. The doctrine among academics in the United States was you would never see development in India and you would never see development in China. They were culturally incapable of ever entering the first world as it was called back then.
Boy, are economists wrong. You know, you’ve been to China, you’ve been to India. They are hyper-entrepreneurial, and I might say what gave me a lot of optimism, if found cause to be optimistic in Iraq, was they have a population, our traders, you know, there are businesses being formed. They’re informal businesses, unfortunately, because we can’t get into a modern economy with informal businesses.
But daily life given to anybody is to trade stuff, to make stuff, to trade stuff, to buy stuff, to sell.

CHARLIE ROSE: Some people come back at you and say "I’m betting on America because its experience of innovation and entrepreneur is to so deeply ingrained." You seem to be saying "Not so fast. Don’t count that we have some magic that no one else has."

CARL SCHRAMM: I think I’m in that camp. Don’t count that this is our birthright and we have a special genetic or national climb to this.
The good news is, incidentally, as I said before, America can take a great deal of pride that we’ve exported a great deal of this. We didn’t do it intentionally, but we opened up our universities to people from all over the world. They came, they saw, they took it home. They figured it out.
At Kauffman we have delegations two or three a month from across the globe saying entrepreneurship is the factor that counts to American growth. They got that right.
But going forward I think it’s going to be more and more difficult for America to contest with the world because the world’s pretty good at entrepreneurship. You can figure this out. And we are in some ways making it more difficult for small businesses to get started in the United States...[T]here’s always this tension among economists. Every time you have a recession the Keynesians come out of the closet.

CHARLIE ROSE: Spend more public money.

CARL SCHRAMM: The debt hand of Keynes gets very vital and all of the guys who six years ago were being celebrated as Schumpeterian entrepreneurial economists sort of whimper away and go away.
Now, the Keynesian model wants a predictable economy. It’s a real model that sees three actors, and they’re John Kenneth Galbraith, the guy who put this unholy thing to text, and that is the countervailing powers of big labor, big government, and big business.
That blew apart in the 1980s. We actually got to be very, very entrepreneurial. Think about 1970, we didn’t know what a venture capital firm was. We didn’t even have the word "entrepreneur" in our vocabulary.

CHARLIE ROSE: In the 1970s?

CARL SCHRAMM: No, no. If you took the SAT in 1970, a precocious kid might say "I think that means inventor." And if you ask again, he -- you know, who are inventors in America, you would name dead white men. Think about your own childhood. You’d be talking about Thomas Edison and so forth.
I have a 20-year-old. My youngest is 20 years old. She can name 20 people, some of whom are basically her age and certainly the upper bound is 50, who started huge companies.
And the point of that is if you think about this, maybe as much as 40 percent of the GDP in the United States comes from firms that did not exist in 1980. My children have grown up in an era of entrepreneurial capitalism.
But when the Keynesians come back, they want order. My kids grew up in what I call "messy capitalism." You didn’t know who was running -- Galbraith kept saying you know, "innovation is going to come from Bell Labs, General Motors laboratories." This is his thesis. He write this is in about 1984 after Intel, Genentech, Microsoft, and a whole host of huge host companies had already been started. The entrepreneurs were working their way in.

CHARLIE ROSE: The interesting thing about that is Bill Gates has been quoted often as saying to the question what do you fear? He said I fear two people in a garage somewhere with some idea that I don’t understand the potential of. It turned out he was right. Their names were Larry Page and Sergey Brin.

CARL SCHRAMM: And it’s times like this -- I don’t mean Bill Gates because I don’t have any evidence in particular, but the big firms go to government and they basically say "don’t threat garage take hold." It’s vital to the national interest that we guys have the market share and the reason you governments should pay attention to us is we create jobs. You can’t afford to let us be challenged by these upstarts, which, of course, is the hallmark for entrepreneurial capital.
Bill Gates was an upstart. And he worries about upstarts. But so does General Motors. And when we move to protect huge companies, we send very important signals to people, and that is they win and I can’t. So we don’t see this much challenge going on.

CHARLIE ROSE: What’s the role of government in all of this?

CARL SCHRAMM: Well, my view is that, you know, government has to -- our government has to first understand how important entrepreneurs are. And actually I’m getting a little more optimistic about this because the language in Washington -- you know, President Obama has just had a summit on entrepreneurship.
And we were very, very pleased about that, because that’s sending a countersignal and that says, you know, entrepreneurs are very important and we’re going to recognize how important this is. And now the next part of the drama is what can we do by way of public policy to ensure that more people start businesses.
So if you think about per capita business formation, the incorporations, only one country in the world, that’s Israel, beats us. Americans start businesses. This is graduation season, polling that we’ve done suggests that about 70 percent of new college graduates hope to start a business in their life. That’s really important.
By the way it also says that the people growing up the fastest -- the 500 fastest growing businesses in the United States start those businesses when they’re 39. So American entrepreneurs are not kids in garages. They’re often middle aged people who know an awful lot and can start a successful, high growth company.

CHARLIE ROSE: And they’ve learned something somewhere and they want to be their own boss, and they work as long as they want to be, but if they work that long they want to see some direct result in terms of how it affects them.

CARL SCHRAMM: So if I was to opine on this, I say it would be great if we had a national policy, if we want to see GDP grow at four a year -- it’s grown at three percent for the last 100 years, which is extraordinary, and that that delta, the next four percent was entirely the formation of new firms that got to be big firms. So instead of 700,000 new starts a year, America would be better off with a million starts a year.

CHARLIE ROSE: But is there anything the government should do to promote that idea? I’m just taking -- is there anything that Iraq should do to promote that idea or Russia should do or China, but specifically the United States because that’s where we are?

CARL SCHRAMM: Well, I’m not going to opine about Russia, but I’ll talk about America and Iraq. In the United States it’s very important, and I think we’re making steps -- I was just the SBA the other day. We’re actually making it easier for people to get capital. And that’s a huge big step.
And I think, you know, the real centerpiece here is we actually have to focus on unemployment rate because when we were at our fastest rate of firm formation, unemployment was at about four percent. And the secret of that is it’s so much easier to take the risk of starting a firm if you know you fail you’ve got a job. That’s really important.
So it almost sounds contradictory that we need a much tighter labor market to get more firms started.

CARL SCHRAMM: To return to India, one of the most extraordinary groups in the United States is TIE. And that’s no longer in the United States. They have 26 chapters. It’s The Indus Entrepreneurs, T-I-E. It’s this fraternity around the globe that helps people of India extraction start businesses.
And it started in the United States in the Silicon Valley. They now I think have 26 chapters all over the globe. And I’ve been with these folks and it’s just the most amazing thing.

CHARLIE ROSE: So where do you come down on this argument by Paul Volcker, which is that too many of the best and brightest in America have gone into financial engineering and made tons of money...But it essentially was transactional money...And they haven’t gone and become the Bill Gates and the Sergey Brins and just go on and on and on, especially in a place like Silicon Valley, to create something new because they were on the cutting edge of a digital revolution. Is that a problem for us?

CARL SCHRAMM: It is a problem, and I’d go Mr. Volcker one further. I think many too many of our smartest kids are being encouraged to take roles in the government. You know, the government doesn’t create wealth, and smart kids in the government create rules, and over time those rules, in fact, inhibit lots of startup businesses.
And if we could get fewer kids to go to business school and fewer kids to go to public policy schools and loads more kids to go to engineering schools we might achieve that four percent growth rate. That’s where we need our talent.
And some people are always shocked when I say that because I’ve been giving a few graduation speech this is time of year. I say, you know, think about what entrepreneurs do. Think about the psychic return of bringing some brand new idea into concrete.
Entrepreneurs teach us about human needs we didn’t know we need. Think about the cell phone. It’s now part of an anatomy. That was an entrepreneur who made that real.
The second thing they do which has a phenomenal psychic return -- I’ve started businesses myself -- Bill Gates has said this, John Rockefeller said this, Ewing Kauffman said this. These are people who understood that a job, a secure employment was an extraordinary gift. You give people dignity and you give their families purpose and meaning.
And that’s what entrepreneurs do. And I don’t mean that lightly. This is not fluff. Our statistics in the United States tell us that all net new job creation in this country are firms less than five years old.

CHARLIE ROSE: All?

CARL SCHRAMM: All new net job creation is in brand-new firms.

CHARLIE ROSE: You don’t believe that universities are great innovators of innovation or not?

CARL SCHRAMM: No, they have been historically. You can’t argue with. That our quarrel with universities is they’re in where near as efficient as they have to be getting intellectual property out into the market.
See, so many universities, Charlie -- when the government clarified ownership research that was paid for by the government, they let universities own it. They ceded and said we’ll never enforce a property right. Now it belongs to the university. That was about 27 ago.
A lot of universities basically said, well, we own this, this is the way we’re going to grow our endowments. And they have been extremely careful custodians and husbanders of intellectual property to the detriment of the society in terms of not moving it out of the university into commercial applications fast enough.
And that’s a really central issue about how we make our own economy grow faster. We’ve got to get better ideas out. Universities have been blessed with a huge amount of public money to do basic research, and if I was to make our macroeconomic life work better, I’d pay a lot of attention to making the train out of university laboratories into commercial applications and businesses go much faster.

CHARLIE ROSE: You like the idea of DARPA.

CARL SCHRAMM: You bet you. DARPA can make a decision quickly. It’s a public agency in the Defense Department. We enjoy so many things in this society because there was a bright person who went to DARPA and said if I could do this, would you be interested? And DARPA gives them their first funding.
We have some great things about the way government stimulates brand new businesses. We have a system called SBIR, Small Business Investment and Research grants. And these are vital to the growth of the new in our society and in our economy.

CHARLIE ROSE: So suppose the president calls you up and says "Listen, you’re a smart man. You have an interest in a lot of issues and you’re particularly interested in economic growth, and you’re particularly interested in the United States playing a positive role in terms of whatever it can, give, help, benefit other countries, hoping that
we’ll create friendships that will serve us all.

CARL SCHRAMM: So I think I’d say the president if there’s one single thing, you have a lot of things on your mind. If you were to issue one statement about aid, say that the course of the United States going forward is to stimulate robust growth in countries that we help, robust growth.
This may sound like pie in the sky, but if you look at correlates between wealth and growth, the world is about three times wealthier than it was in 1950. And you look at death by organized violence, war, civil war, and war between nations, it’s dropped radically.
And I don’t want to sound Pollyannaish about this, but if we’re going to do defensive economics in the future -- excuse me, preventative defense, we have to think about growth. That’s the key word.

CHARLIE ROSE: This from the chairman of the joint chiefs, Admiral Mullen -- "Our financial health is directly related to our national security.