What Is Undermining USA Job Creation?

I attended a Silicon Valley executive networking meeting this past week. Here’s what the participants concluded:

• People can’t wait for 2009 to end; 2009 just can’t end soon enough.
• Many want to close additional business before the end of 2009 to have strong momentum going into 2010.

The US needs job growth. Many economists are predicting a “jobless economic recovery” meaning there won’t be much hiring going on for some time to come. When people leave their positions either due to normal attrition or layoff, there is often no intention to replace them. This isn’t what the US needs.

Unemployment in California just hit 12.5%. The effective rate of unemployment may be understated by as much as 5% due to furlough days, temporary shut-downs, people who have given up looking for work, etc.

I see many factors undermining job growth; 2 of the most critical structural impediments are:

• Out of control health insurance premium increases
• Access to capital

Out of control health insurance premium increases

Health insurance costs have been spiraling out of control for at least the last 5 years and, realistically, much longer. The insurance companies are passing along double-digit premium increases year after year. Mine went up 16% this year, I’ve heard of many others in the same situation, one business owner in Massachusetts saw a 30% increase with no discernible rationale or explanation.

A woman in the insurance business tried to say, “Well, Dave…you don’t understand…” Frankly, I don’t want an explanation—I want a solution. What came next was some diatribe about how the insurance companies are just passing on costs, how we need to get people to eat differently and exercise so the system can right itself in 30 or 40 years, etc. Yada, yada, yada.

When did it become acceptable to pass on double-digit premium increases year after year? When did it become acceptable to have premium increases that are 5 times or more the rate of inflation? I get incensed just writing about this. And, of course (as we have been warned), it will only get worse if and when the insurance companies have to cover people with “pre-existing conditions” who are denied coverage today.

Business leaders need to be “mad as hell and not take this any more!” America seems to be the only country in the world that looks at this issue with such complacency. America is also one of the few countries in the world that allows people to be driven into bankruptcy due to lack of insurance coverage.

We’ve got Congress fiddle-farting around trying to balance the needs of their constituents with the needs of the special interests that fund their getting into office. This is the height of absurdity. I’ve heard that if you ever saw sausage being made, you would never eat it. I’m beginning to feel that the health care reform legislation is similar—it’s not going to be palatable.

Ever-increasing health care costs are a deterrent to hiring people at a time when job growth is badly needed. So, what were ideas the group had to overcome this problem?

• I suggested we start with the assumption that American does not have the best health care system in the world (contrary to some talking points). We don’t have the best system by a wide margin—we are actually ranked 19^th in the world. I suggested everyone read T. R. Reid’s book “The Healing of America.” We should look for best practices from all around the world and incorporate changes here in the USA as quickly as possible.
• One person offered we should stop hiring people and put everyone on a 1099 so there will be no obligation to offer health insurance. Wow—great idea! Is the IRS going to change the rules to treat “real employees” as temps? Or, do we just allow people to work a few months; take a few months off, rinse and repeat?
• Outsource the jobs internationally to avoid the negative deterrents to hiring domestically. That’s going to really help with USA job creation.
• Suck it up—just recognize that increasing health care costs are our future and there’s nothing that can be done about it.

Sorry, but, I’m a change agent—change agents do not embrace the status quo when the status quo is so obviously unacceptable. The insurance industry must be far more than a pass-through point—they need to drive their own structural changes that decrease costs and undermine fraud. Right now, they are not incented to do that. They just pass it on.

Access to capital

I “romanced the past” by reminding people of what Silicon Valley was like back in the 70’s, 80’s and 90’s:

• Entrepreneurs came up with seemingly viable business ideas
• Venture capitalists funded the ideas with equity financing realizing that there wouldn’t be an instantaneous return on their investment
• Employees worked their butts off trying to deliver top value to the marketplace driving company growth, revenue and market valuations
• IPO’s were a frequent occurrence and were a reason for people to work so hard looking for a “big payday”
• Go find the next great business adventure and create excitement

Did the formula always work? No. But it was the driver of what made Silicon Valley Silicon Valley. I can tell you—people were excited about going to work everyday. Can we say that today? No. Why isn’t that happening today?

• Insufficient capital undermines the formation of new companies and the expansion of existing companies both of which negatively impact job creation. What incentives can be offered to get investors out of the bleachers and back on the field of play?
• People lending money are offering terms that one could only imagine as having originated from loan sharks. It is harder and harder to get equity investment; money lent in today’s world is debt with high interest rates and short timeframes for repayment.
• The dot com bust in 2001, Enron and then ensuing Sarbanes-Oxley audit requirements have dramatically altered the availability of capital and desirability of taking companies public. Is the US and investors getting any return or benefit for the cost of SOX? Is the value commensurate with the cost?  I think not.  There will always be white collar crooks—we see evidence of that everyday in the news.
• IPO’s are a rarity today; getting acquired seems to be the stronger exit strategy and apparently is not as attractive an exit strategy as IPO’s used to represent.

One gentleman in our meeting suggested an approach the San Jose Mercury News has just today (22NOV09) referred to as “extreme bootstrapping”—finding unemployed people, letting them work for free with the hope that there might be a job in it for them someday or some royalty payment, etc. Call me crazy, but, that’s not what we need either. Hope is not a strategy.

Summary

There is no question that access to capital and health care insurance costs are undermining job creation. Removing structural impediments to job creation isn’t just desirable—it’s key to turning this economy around. Job growth will come from small, entrepreneurial ventures. More attention must be paid to small companies, getting them financed and giving them incentives to create real jobs.

What do you think?

Dave Gardner is a management consultant, speaker, author of Mass Customization: An Enterprise-Wide Business Strategy and blogger who resides in Silicon Valley. He helps companies resolve business execution problems that threaten profitability and growth. He can be reached through his website at www.gardnerandassoc.com.