Let’s not have another lost decade of American entrepreneurship

By James Pethokoukis

So what does a lost decade for American entrepreneurship look like? Well, here you go:

And a few numbers from the new Economic Innovation Group (EIG) report (which also supplies the above chart):

The country’s startup rate, or the share of all firms in the economy that were formed within the past year, stood stable at 8.2 percent in 2019, essentially unchanged from 2018 and only slightly above the all-time low of 7.4 percent reached in 2010, after the Great Recession. The startup rate remains one of the few economic indicators that never recovered from the 2007-2008 global financial crisis.

In absolute terms, 2019 saw the highest volume of new firm starts since 2008 (although nearly 100,000 fewer than in 2006, the year with the most on record), for a total of 438,000 new firms launched. However, an off-setting 459,000 firms failed in 2019, meaning the U.S. economy did not generate sufficient new firms to replace those it lost. In other words, while the firm death rate recovers towards historical norms, the startup rate has been languishing.

The explanation for this “lost decade” highlighted by EIG is one of demographic stagnation — specifically America’s continuing transformation into “an older, slower-growing nation with fewer births, fewer immigrants, and fewer prime-age workers.” It’s a trend that suggests a number of policy responses, including increased immigration and higher labor-force participation among women and older Americans.

But there is some good news coming out of the pandemic. EIG notes that “new applications to start businesses hint at a subsequent explosion in entrepreneurial activity shortly after the pandemic hit in 2020.” That surge and follow-up boomlet was one topic of my August podcast chat with University of Maryland economist John Haltiwanger, who specializes in researching entrepreneurship. From that conversation:

Pethokoukis: Overall, how have entrepreneurs been responding to the economic tumult of this pandemic?

Haltiwanger: They responded in a surprising way. In the Great Recession, new business applications and startups plummeted. And while we saw evidence that the same thing was happening in the first six to eight weeks of the pandemic, there has been a surge in new business applications starting last June. The surge was especially high last summer and then tapered off a bit in the fall. But in 2021, it surged again. Overall, seven of the highest months ever in the data are between July 2020 and now.

What do you think explains that?

New businesses are forming to enable remote activity between workers, businesses, and consumers. A full third of the surge in applications is in the e-commerce industry, and other sectors that have also surged also support online retailers, such as trucking and warehousing. We’ve also seen a huge surge in professional, scientific, and technical services — lots of computer design and software programming. Those are places where you might expect there to be a surge because there are new market opportunities to do business differently.

I also think the businesses that started up last summer may be different than the businesses that are starting up this spring. . . . Perhaps the businesses that started last summer were the “necessity”/”transitory” kind, while the businesses this spring are a little more forward-looking. But we don’t have any evidence to determine that at this point.

How should policymakers boost startups and dynamism?

There’s room for improvement in policy areas such as non-competes and occupational licensing. And immigration reform, particularly at the high-skill level, is really important. The United States is a magnet for the best and the brightest to come to get graduate educations — in particularly in STEM — and we ought to keep as many of those highly trained individuals in the United States by permitting them to stay and thrive, and to start businesses.

More broadly, policy is often all about incumbents. We often think enough about the businesses that aren’t there, but could be. And so we need advocates for new and young businesses. I’ve often said that the Small Business Administration would be better if it was the Young Business Administration — if it was asking, “What are the barriers to entry? What are the obstacles in this particular environment? Where are the market failures that are going on?”

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