I was at an entrepreneurial conference in Chicago this weekend. The keynote speaker started off with the requisite witty anecdotes, followed by statistics about the impact of new and small businesses on the U.S. economy. To wrap up, she barreled into an Objectivist rant demanding that government get out of the way of new businesses. She may have thought that her screed was motivational, but it only left myself and most of the people in the room thinking "WTF?".
So, what's the real impact of government on new business formation? Government can stimulate new businesses with R&D tax credits, accelerated depreciation and taxing capital gains at lower rates than regular income. However, tax rates themselves have very little to do with either encouraging or discouraging new businesses. Consider that Chicago's "structural environment" is, in many ways, superior to Silicon Valley: At least as many top universities, excellent infrastructure, significantly lower state and local taxes (a 3% personal income tax vs. 9% in California, for example), and a more lenient, business-oriented regulatory structure. Chicago is physically closer to many more U.S. markets and to Europe, and is only a few hours further away from Asia.
Nevertheless, even with all those advantages, the rate of startup formation in Silicon Valley is one to two orders of magnitude higher than the rate in Chicago. Why? The reason is cultural, not governmental. Silicon Valley has a culture that, for several generations now, has inculcated the belief that it's better to have control over your own destiny than to give control to your employer. If you're happiest when you're getting a regular paycheck with good benefits, you're not likely to try to start your own company, and if you do try, you're likely to fail.
Chicago's culture is far more the norm for U.S. big cities; most people are perfectly happy with regular paychecks and don't have the "fire in their bellies" to go out and change the world, or at least a little piece of it. The problem with that thinking is that the regular paycheck and benefits lifeline is going away. Companies are moving away from permanent employees and toward contractors, temps and outsourcing. As Daniel Pink wrote a number of years ago, we're becoming a "Free Agent Nation."
So, the biggest reason why Chicago doesn't rival Silicon Valley as a startup formation mecca isn't government policies, it's a mindset that believes that if we do a good job for our employers, we'll be taken care of. Until many more people here believe that they can do a better job of looking out for their own best interests than can an employer, Chicago won't become a startup mecca. The speaker at last weekend's conference got a part of the Objectivist pitch right; it's just that the problem isn't government vs. startups, it's dependence on big business to provide support vs. taking responsibility yourself.