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How Many Jobs Will the JOBS Act Produce?

Posted by Larry Doyle on March 28, 2012 4:13 AM |

Smile for the camera.

If it smells like a job, sounds like a job, and feels like a job, you can rest assured that in this day and age most politicians will jump all over it and look for a photo op in the process. In so many words, that is exactly what has transpired with the passage of the JOBS Act. This newly launched government initiative is intended to Jumpstart Our Business Startups.

How might this program work? How many jobs might it generate? Are there any risks involved in the process? Do we dare ask these questions, or should we just accept the fact that it says “jobs” and it is an election year so it must be a good program. Is this the best we get out of Washington these days? 

Thankfully, a Sense on Cents favorite writer did go behind the scenes and ask these questions. Let’s navigate and review the work of Bloomberg’s Susan Antilla as she writes, The JOBS Act Won’t Create That Many Jobs:

When sponsors name a piece of legislation the “JOBS Act” (an acronym for “Jumpstart Our Business Startups”), it’s a good idea to examine their claims about how many jobs it creates. In this case, they’re so overblown that a new name might be in order. “JOBS In Theory” might work.

Supporters of the bill, which awaits President Barack Obama’s signature after passing the House today, cite new provisions that will allow so-called “crowdfunding” as fuel for new jobs. Under the plan, private companies will be able to tell their stories to investors over the Internet without the muss and fuss of registering their shares with the Securities and Exchange Commission.

That may sound a little risky for investors who plunk down as much as several thousand dollars apiece in these million-dollar offerings — but hey, this is about creating jobs, right?

Maybe not.

Representative Patrick McHenry, a North Carolina Republican and a supporter of crowdfunding, said in a March 8 press release that “Economists predict the legislation will lead to a ten percent increase in new business startups, helping to create at least 170,000 jobs in the next five years.” Sounds good to me.

I asked Ryan Minto, McHenry’s spokesman, how they’d come up with that rosy prediction. He told me in an email that economists at Regional Economic Models Inc., known as REMI, had done a study and “provided us with the figure.”

So I asked REMI’s associate economist Scott Michael Nystrom for a copy of the study. He e-mailed a four-page summary that predicted only 100,000 new crowdfunding-related jobs, not 170,000. And those jobs would arrive within eight years, not five.

Nystrom had initially given Minto a preliminary estimate of 170,000 jobs, according to a copy of an email from Nystrom to Minto that Minto shared with me. But you won’t see any update on McHenry’s web page. Nystrom said in an e-mail that REMI had done the research for Republican Senator Scott Brown of Massachusetts, who, like McHenry, supported the legislation.

In the end, though, it almost doesn’t matter. McHenry had said that crowdfunding would lead to new business startups, but it turns out that’s all just a guess anyway. “The 10% increase in start-ups is not a product of research,” Nystrom explained in an e-mail. Bad news, crowdfunding fans: All the economists did was come up with an “if-then” scenario. If business startups were to rise 10 percent as a result of crowdfunding, then the economic models predict 100,000 new jobs by 2020. Problem is, we don’t know if there would be a 10 percent increase — or any increase at all.

Nystrom said “it is difficult to anticipate” what effect crowdfunding might have on startups. Not so difficult for crowdfunding’s supporters to leave us with a wildly exaggerated estimate, though.

We may not know how many jobs the JOBS Act will generate, but I do caution people about committing capital via crowdfunding. Why so? What are the risks in crowdfunding? Our Investing primer points out that,

1. the creation of standard business plans is important so that individuals can be as fully informed as possible when deciding where to commit their capital.

2. a low percentage of new business ventures end up being successful.

Navigate accordingly and while you do look for Susan Antilla’s work often. She always asks the questions that need to be answered.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

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