Full text of Inside the Vault : Fall 2004

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Do You Want To Be Your Own Boss?

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Do You Want To Be Your Own Boss?
Observers comparing our economy with those of other countries often note that Americans seem to be much
more willing to become entrepreneurs. A recent survey found that more than 70 percent of American adults
would prefer being an entrepreneur than working for someone else. In contrast, the same survey showed that
only 46 percent of adults in Western Europe, 41 percent in Japan and 58 percent in Canada preferred being
an entrepreneur over working for someone else.

What Sets the U.S. Apart?
When economists try to explain differences in entrepreneurship across countries or regions, they typically
examine the roles of economic, governmental and institutional factors. These things are important, but they
don't tell the whole story. U.S. policies and social factors—what might be called the entrepreneurial spirit—
also contribute to Americans' willingness to take risks and become their own bosses.

How Do Policies Matter?
Some ways in which the United States stands out in supporting the entrepreneurial spirit include:
1. legal institutions that ensure property rights, including intellectual property;
2. our competitive financial system, which provides financial capital from a variety of sources;
3. a free market ensuring that all markets, including labor, are not over-regulated; and
4. a business-friendly tax structure that—compared with those of other developed economies—is
relatively low.

Risky Business
European policy-makers have found that it's not enough to have laws and regulations that encourage
entrepreneurship. Attitudes—especially toward risk—are also important. A recent survey commissioned by
the European Union finds many Europeans have never considered starting their own business. Nearly onehalf said that one should not start a business if there is any risk that it might fail.

What Will $210 Get You?
Rules across developed countries vary greatly in what an entrepreneur must do to establish a business as a
legal entity. These rules are important because once a business becomes established as a legal entity, it has
the ability to borrow from the financial system and to enforce legal contracts.
The World Bank has catalogued the processes an entrepreneur must satisfy to establish a business in
different countries. Table 1 provides these differences for rich countries, including the United States, across
four categories:
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the number of procedures,
the amount of time to satisfy the procedures,
the costs associated with the procedures and
the minimum amount of financial capital that an entrepreneur must have on hand at the time the
business is established.

Table 1

Number of
Procedures

Time
(days)

Cost
(US$)

Australia

2

2

402

0

Belgium

7

56

2,633

75.1

Canada

2

3

127

0

Denmark

4

4

0

52.3

France

10

53

663

32.1

German

9

45

1,341

103.8

Greece

16

45

8,115

145.3

Ireland

3

12

2,473

0

Italy

9

23

4,565

49.6

Japan

11

31

3,518

71.3

Netherlands

7

11

3,276

70.7

New Zealand

3

3

28

0

Norway

4

24

1,460

33.1

Portugal

11

95

1,360

43.4

Spain

11

115

2,366

19.6

Sweden

3

16

190

41.4

Switzerland

6

20

3,228

33.8

United
Kingdom

6

18

264

0

United States

5

4

210

0

Minimum capital (% per capita income)

In the United States, it typically takes four days and $210 to establish a business as a legal entity. The steps
include registering the name of the business, applying for tax IDs, and setting up unemployment and workers'
compensation insurance. But in Japan, a typical entrepreneur spends more than $3,500 and 31 days to follow
11 different procedures.

Can We Do Better?
Although there are many ways in which U.S. policy is friendly to entrepreneurs, there is still room for
improvement. Many regulations place too much of a burden on entrepreneurial activities without generating
large benefits to society. Tax codes for individuals and businesses are, in many ways, needlessly complicated
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Do You Want To Be Your Own Boss?

and introduce distortions in decision-making. And we are often tempted to impose labor-market or trade
restrictions to make it more costly for firms to move operations overseas.
The entrepreneurial spirit has provided the spark that enlivens the U.S. economy. That growth can only
continue if we resist the urge to over-regulate entrepreneurs and if we provide prudent policies that foster free
enterprise.

Questions for Classroom Discussion
1. What are some reasons that might explain why an American is more likely to favor being an
entrepreneur than a European is?
2. According to Table 1, in what countries could establishing a business take less than a week?
3. According to Table 1, which four countries had the highest cost (in U.S. dollars) to establish a
business? Which four countries had the lowest?

This article was adapted from "Entrepreneurs in the U.S. Face Less Red Tape," which was written by Bill
Poole and Howard Wall and appeared in the October 2004 issue of The Regional Economist, a St. Louis Fed
publication.

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Q&A

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Q&A
Why is there a new $50?
Series 2004 currency was designed to stay ahead of the advancing technology counterfeiters use. The $20
was issued in 2003, followed by the $50 in 2004. The new $100 will be released at a future date.
Has U.S. currency ever been redesigned before?
Yes. The Department of the Treasury and the Federal Reserve released a new design for the $100 note in
1996, followed by new designs for the $50 in 1997, the $20 in 1998, and the $5 and $10 in 1999. These were
the first significant design changes since 1928. Prior to 1928, designs changed frequently.
If new designs are a continual process now, when should we expect the next new design?
To stay ahead of counterfeiters, the United States will create new designs every 7-10 years.
What are some of the changes in the new $50?
You'll be able to see several new, colorful features:
background colors of blue and red,
copper-to-green color-shifting ink,
a waving American flag and metallic silver-blue star, and
small yellow 50s.
Will the old notes (currency) be recalled or devalued?
No. The United States has never devalued its currency.
Why not make our new currency really colorful like many other countries' currency or change its
size?
The U.S. dollar is associated with stability, security and strength. Changing the size would not affect security,
but it could create confusion for millions around the world who recognize the traditional appearance of U.S.
notes.
What should people do if they receive a counterfeit note?
Most often, counterfeiters attempt to pass their notes at businesses. If you think you've received a counterfeit
note, do not return it to the passer. Immediately notify the local police or the U.S. Secret Service. Note the
passer's physical characteristics, and (when possible) write down the license plate number and description of
the vehicle. Safeguard the note and release it only to the proper authorities.
For more information on currency, go to www.moneyfactory.gov.
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Economic Snapshot

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Economic Snapshot
3rd Quarter 2004
Q4-03 Q1-04 Q2-04 Q3-04
Growth Rate - Real Gross Domestic Product

4.2%

4.5%

3.3%

3.7*

Inflation Rate - Consumer Price Index

0.7%

3.6%

4.7%

1.9%

Civilian Unemployment Rate

5.9%

5.6%

5.6%

5.4%

*Advance estimate

Graph from August 2004 issue of National Economic Trends.

What does total compensation as a percentage of national income
mean?
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Economic Snapshot

Over the past 50 years, labor's share of national income has averaged 70.5 percent and is, therefore, a much
larger portion of national income than the portion that goes to owners of capital.

What is the difference in total compensation (orange line) and
wages and salaries (black line)?
Total compensation includes employer-paid social insurance contributions and benefits such as health care,
pension plan contributions, etc. This chart indicates that while wages and salaries have declined from 58
percent of national income in 1970 to 52 percent in 2003, total compensation as a percent of national income
has remained fairly stable.

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