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What Grows An Economy?

This article is more than 9 years old.

During the Great Recession and its aftermath, the U.S. economy has performed slightly better than flat. That’s hard to believe, isn’t it? But the numbers tell the story. In 2008, 2009 and (projected) 2010, the U.S. GDP was (and is), $14.3 trillion, $14.2 trillion and $14.6 trillion.

Yes, it’s hard to believe the economy was flattish – factually, ever-so-slightly growing – over the worst patch in our lifetimes. Why did the economy feel so much worse if it was merely flat? Good God, what would happen if the economy actually shrank over several years?

Answer: Americans are accustomed to growth. And with a growing population, we need growth.

Since World War II, the American economy has averaged 3.3% growth per year. But as economist Donald Luskin has written, small changes in GDP cause big swings in stock market values, investor animal spirits, and consumer sentiment. That’s why 4% growth feels like a boom, 2% growth feels like a recession, and flat feels like the 1930s.

Right now, America is in a “growth recession” which I would define as statistical growth but at a subpar rate – let's say 0% to 3%, net of inflation. Put another way, growth in the 0% to 3% range is technically growth. It just feels lousy.

How can America get back to 3.3%-plus growth? A vital question, this. It should be the economic policy question. That’s because 3.3%-plus growth, sustained over multiple years, and not just captured in a quarterly spike, sustains a positive feedback loop. Investors feel good and start pulling their money out of non-productive assets like gold. Employers feel good and start hiring. Consumers feel good and start buying. That’s what real 3.3%-plus growth would do for America, and what sickly 0% to 3% growth can never do.

How do we get there?

Carl Schramm, who heads America’s top entrepreneurial think tank, the Kauffman Foundation, has a stunningly good insight into what causes an economy to grow. Growth, he says, is directly correlated to startups that get big. I interviewed Schramm onstage last week at a Churchill Club event at Microsoft’s Silicon campus in Mountain View.

Schramm said:

“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.”

Schramm says the U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful startups.

This is an amazing statistic. Schramm is describing the X factor of America’s historical success.

Yes, we want our large multinational companies – the Apples and IBMs, Walmarts and Exxon Mobils – to be successful. But their success, while necessary for a healthy economy, won’t grow the economy much more than a Western Europe-like 2% per year (a rate of growth, as we’ve learned, that feels moribund to an American).

Yes, we also want millions of Americans following their dreams and starting cottage businesses that support their needs and their lifestyles. But a proliferation of cottage businesses won’t push the country past 3.3% growth, either.

The X-factor is startups that get big. Note that Schramm is not arguing for Google and Facebook hypergrowth. Those are wonderful success stories, and they contribute to America's wealth. But what really matters is a hundred or so companies, per year, that launch, find a market, execute, scale, learn, adjust and sail over the billion-dollar mark within two decades.

If America wants to recapture its 3.3% average rate of growth it has enjoyed since World War II, it had better get serious about removing the tax and regulatory barriers for these kind of startups with the potential to scale.

For starts, any immigrant who graduates from a U.S. university should get a green card along with his/her diploma. So should any immigrant who starts a business that grows to more than 5 people on the payroll. Ambitious immigrants, disproportionately, create growth companies.

America needs growth. None of our problems – deficits, debts, unemployment, mortgage defaults, malaise – will improve with no growth or low growth. We need average growth of 3.3% or better. And now, thanks to the Kauffman Foundation’s Carl Schramm, we have an important clue about how to get that done.

I'm the publisher of Forbes magazine, where I write a biweekly column called Innovation Rules. I'm also a regular panelist on cable news' popular business show, Forbes on

I'm the publisher of Forbes magazine, where I write a biweekly column called Innovation Rules. I'm also a regular panelist on cable news' popular business show, Forbes on FOX (with an average viewership of 1.2 million households per show in 2012), and frequent guest analyst on CNBC's The Kudlow Report. My 2004 book, Life 2.0, was a Wall Street Journal business bestseller. I'm also an entrepreneur, an active angel investor, and sit on three outside boards. For co-founding Silicon Valley's largest public affairs organization, the 6,500-member Churchill Club, I'm a past Northern California winner of Ernst & Young's prestigious "Entrepreneur of the Year Award." I earned a B.A. from Stanford University. I lecture up to 50 to 60 times a year on the innovation economy.