The Slow Death of American Entrepreneurship

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For FiveThirtyEight,  writes: Mark Zuckerberg was a billionaire before age 30 and investors are fretting over the prospect of an another tech bubble, but according to the data, U.S. entrepreneurship is on the decline.

“Business dynamism is inherently disruptive, but it is also critical to long-run economic growth.”

Americans started 27 percent fewer businesses in 2011 than they did five years earlier, according to data from the Census Bureau. As a share of all companies, startups have been declining for more than 30 years.

It isn’t clear what’s causing that decline, which accelerated during the recession but long predates it. The aging of the baby boom generation may be part of the explanation, since people are more likely to start businesses when they are younger. The U.S. economy is also increasingly dominated by large corporations, suggesting deeper structural changes working against small companies. People have pointed to other explanations, from increasing licensure requirements in many industries to high corporate tax rates to a broader decline in innovation and productivity growth.

Whatever the reason, the decline has economists worried. New businesses are akey driver of job growth, responsible for more than 15 percent of new job creation despite accounting for just 2 percent of total employment. And they play a vital role in promoting innovation and productivity gains across the economy. In a recent report from the Brookings Institution, Ian Hathaway and Robert Litan wrote that the decline in entrepreneurship “points to a U.S. economy that has steadily become less dynamic over time.”

“Business dynamism is inherently disruptive,” they wrote, “but it is also critical to long-run economic growth.”

Some economists are less pessimistic, in part because of the way the government counts startups. These days the term “startup” calls to mind social networks and iPhone apps, but the Census Bureau’s data casts a much wider net, lumping tech companies like Airbnb and Uber in with barbershops and dry cleaners. That second group is much larger but also much less important from the standpoint of job growth and innovation.2 “The birth and death of small family businesses is one kind of ‘economic dynamism,’” economist Noah Smith wrote on his blog last week, “but not really the kind that leads to increasing living standards or technological progress.”

In other words, maybe the U.S. hasn’t seen a decline in the kind of fast-growing startups that economists care about most. It’s possible that this kind of entrepreneurship is doing fine and it’s just being hidden by the long and well-documented decline in family-owned businesses.

The available evidence, however, doesn’t seem to support that theory. For one thing, the decline in entrepreneurship is remarkably broad-based, not isolated to the industries such as retail where big corporations have edged out family businesses. According to the Brookings paper, every major industrial sector, every state and nearly every large city has a lower startup rate today than it did three decades ago…(read more)

FiveThirtyEight



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