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2 charts that show the very heart of the U.S. economy is in trouble

091912startup1

Entrepreneurs — and the innovation they generate — are the beating heart of the U.S. economy. Or at least they have been in the past.

But the heart of America’s economy isn’t doing so well these days. In fact, the sorry state of Startup Nation is just another example of how the supposed recovery is anything but.

This is all outlined a new report by economist Tim Kane of the Hudson Institute:

The state of entrepreneurship in the United States is, sadly, weaker than ever. There are fewer new firms being formed today than two years ago when the recession ended. As the BLS described quarterly entrepreneurship figures, “New establishments are not being formed at the same levels seen before the economic downturn began, and the number is much lower than it was during the 2001 recession.”

But the startup jobs rate has collapsed in recent years. In fact, the rate of startup jobs during 2010 and 2011, years that were technically in full recovery, are the lowest on record.

So why is entrepreneurship still declining in the United States? …  While this report documents a disturbing weakness in startup job creation, it does not explain the cause of decline. There is anecdotal evidence that the U.S. policy environment has become inadvertently hostile to entrepreneurial employment.

1. At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown.

2. The dominant factor may be new regulations on labor. The passage of the Affordable Care Act is creating a sweeping alteration of the regulatory environment that directly changes how employers engage their workforces, and it will be some time until those changes are understood by employers or scholars.

3. Separately, there has been a federal crackdown since 2009 by the Internal Revenue Service on U.S. employers that hire U.S. workers as independent contractors rather than employees, raising the question of mandatory benefits. New firms tend to use part-time and contract staffing rather than full-time employees during the startup stage. According to Labor Department data, the typical American today only takes home 70 percent of compensation as pay, while the rest is absorbed by the spiraling cost of benefits (e.g., health insurance). The dilemma for U.S. policy is that an American entrepreneur has zero tax or regulatory burden when hiring a consultant/contractor who resides abroad. But that same employer is subject to paperwork, taxation, and possible IRS harassment if employing U.S.-based contractors.

4. Finally, there has been a steady barrier erected to entrepreneurs at the local policy level. Brink Lindsey points out in his book Human Capitalism that the rise of occupational licensing is destroying startup opportunities for poor and middle class Americans. The quantitative impact of the shifting policies on startup jobs is in need of further study. There is a widespread sense that globalization of the economy exposes companies to new challenges by leveling the playing field for trade. There is no doubt a level playing field among economic institutions as well, where service-based employment can move quickly from one jurisdiction to another. By cracking down on employing Americans part-time, and mandating higher benefits, new American policies may be pushing jobs overseas. This is an issue policymakers must consider carefully when designing rules and regulations for the 21st-century economy

 

44 thoughts on “2 charts that show the very heart of the U.S. economy is in trouble

  1. “1. At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown.”

    WHAT “high taxes?” Taxes are as low as they have been in decades?

    The usual drivel. It’s that old “uncertainty.”

    • Obama and the Democrats have targeted successful people for punishment. Successful people do most of the investing, spending and hiring in this country. I wonder what Obama will do to us next year?

      Republicans support higher gov’t tax revenue thru a larger economy, but not higher taxes.

      Democrats support higher taxes to correct unfairness, but not more revenue.

      • If your premise was correct then Romney won’t wiggle out of sharing his tax returns. Obviously all those tax cuts he got during Bush and Obama years went in to job creation not Cayman accounts, right?

        The Republicans are right about the trickle part of tax cuts, but it is trickle out and not down. The money trickles out to savings accounts or as investment to countries like China (of course via blind trusts to avoid taking responsibility)!

    • Max–you don’t get it. Considering investing in a start up company today? TODAY’s taxes only matter if you have to sell assets to raise the investment capital. What you care about is what the capital gains tax will be when your investment matures–years in the future. Obama has made it clear that he really doesn’t care if high capital gains taxes hurt actual revenue–he somehow thinks that income earned over years and by taking risks should be penalized in the name of “fairness”.

      The capital gains and dividend taxes are lower at the federal level than they have been in a long time. They are not lower in CA–which is a big chunk of the start up world. NO OTHER tax is anywhere close to lowest.

      You want start up capital? Tell the investor what his tax rate is going to be in Obama’s second term.

      You want to kill off that sector? Just make the rate high.

      • Lets not forget the largest tax hike in U.S. history… Obamacare. There’s talk of increasing the minimum wage again, there are new fees and regulatory costs almost every month from the Fed’s, and new taxes, fees and regulations for the States and cities just trying to keep their heads above water because of out of control unions demanding my tax dollars. My business plan went out the window 2 years ago with all the “unknows” being piled on my new business. $100,000.00 went in to starting up my business and I cut my loses and went back to building airplanes as a contractor.

      • You have no idea what you are talking about.

        Investment does not change based on capital gains taxes. Lowering the rates in the Bush era had no real noticeable effects on the economy.

        That most start ups and start up investors are in CA where taxes are high evidences how wrong you are. You’re wrong in nearly every other way too.

        Try running a start up rather than speculating from the sidelines.

        Investors from VC are investing with the hope that their initial funds get at least a 10x return or a 100x return. They do this by investing in high-potential companies. Whether the tax is 15 or 20 or 25% is irrelevant.

        This is especially true because that tax rate would apply to all investments, not just start up investments.

        In fact, higher taxes may be better for start up investments, since in order to get the returns that investors want, they would have to invest in more start ups.

  2. Max, taxes aren’t “as low as they’ve been in decades,” at least in California: We have 10+% sales tax, high property taxes, the highest personal income tax rates in the nation, and a workers’ compensation system that is a lottery for disaffected employees. Sir, the country IS in trouble, and the evidence is staring you in the face–you just don’t want to admit it!

    • Numerous federal taxes are scheduled to increase on Jan. 1. Everybody knows….

      Democrats can’t comprehend how future consequences affect currrent decisions.

      Future debt affects current investment.

  3. “The dominant factor may be new regulations on labor.”
    I’d be interested to see another chart put alongside this one showing the number of regulations for each corresponding year. I’m guessing there would be a pattern.

  4. Business start-ups and expansion correlate with job creation — not gov’t spending or consumer demand or consumption.

    I work for a small business. We are looking for 2 permanent employees and can’t find anyone who’s qualified to be an employee for any company. We’re geting really discouraged and beginning to believe most people out there can get more free stuff from Obama than from a job.

    • Oh please. It’s not that you can’t find anyone who will work, it’s that you can’t find anyone qualified, according to your own statement. So your inability to find someone to hire has everything to do with skills and training, not that qualified people are choosing to get “free stuff from Obama”. But hey, don’t let reality get in the way of your fantasy. Actually training someone to do the job yourself is evidently too much trouble.

      • You obviously have never owned or run a business. If you had, you would know what Paul, and I, and many others, know. I have personally interviewed perfectly qualified job candidates, for good paying positions (no one in my company makes less than $20 an hour), only to have them ask that I pay them under the table, so they can stay on unemployment, or disability. So essentially they ask that I help them to commit fraud so they can keep getting the government freebies. When I refuse, they don’t want the job.

        Your post drips with attitude, as though you have any clue what you are talking about. Here’s a hint: you don’t!

        • The same folks may ask you to pay under the table to save on taxes. Of course your solution will be to get rid of the tax system.

          And the author of the original post should be discouraged because he thinks jobs do not correlate with consumer demand. If he is thinking of hiring people when there is no demand for his product, he will be out of business pretty soon!

  5. Obama is killing our economy, killing jobs, and destroying our nation with DEBt. Folks Obama has pushed us into a steep decline and we have very little time before it becomes permanent and we cannot recover. Nov is it!

    • Right, when Obama took the oath of president January 20, 1981, the Federal debt was less than a trillion dollars and less than 35% of GDP, but by the end of his first two of eight terms, the debt was more than three trillion dollars and over 65% of GDP.

      Reagan was the first president in a time of peace and high economic growth to increase the Federal debt burden, while all the presidents since WWII had sacrificed programs and called on citizens to sacrifice to reduce the Federal debt burden.

      Reagan instead resorted to borrow and spend because he was unwilling to continue asking citizens to sacrifice and wanted to hand out free lunches, while borrowing and spending to fund his pursuit of useless weapons – his “defense” initiatives funded with debt and tax cuts – he had to cut taxes to get the votes for big government spending – have been totally useless for the past decade plus of war. Missile defense was useless. The nukes were useless. The stealth bombers were effectively useless. The cruise missiles were useless. The supersonic fighters were useless. The tanks were useless. And the US spent less on military than it had for the 40s, 50s, 60s, and 70s compared to the commies, so a decade of reduced debt funded defense spending did not bankrupt the Soviet Union – today the Russians are awash in cash from their natural resources. Bottom line is the Reagan debt had no purpose other than to deliver a free lunch of stuff paid for with lower taxes.

  6. If the author ever started a startup he would not be using a stupid statistics like this, let alone write a full article around it. Ever heard of elance, taskrabbit, mturk, odesk or increasing productivity? You don’t need full time employees any more and entrepreneurs know that!

  7. As a small business owner, these statistics do not surprise me. Obama is destroying economic opportunity. By action, he has shown that his goal is not economic growth, but redistribution. And he has caused long term damage to our economy with two downgrades of our credit rating (unprecedented), adding over $5 trillion in debt, and creating a new entitlement program (Obamacare) that prevents job growth and adds additional financial burden.

  8. What else would you expect from a “president” who is extremely hostile to American business, and indeed, the very idea of American way of life.

  9. Uncertainty matters. The San Francisco Fed recently put out an economic letter attempting to quantify its impact, finding that it increased unemployment by 1-2% during the Great Recession.

    It can be found here: http://www.frbsf.org/publications/economics/letter/2012/el2012-28.pdf

    Here’s a key quote:

    “Our model estimates that uncertainty has pushed up the U.S. unemployment rate by between one and two percentage points since the start of the financial crisis in 2008. To put this in perspective, had there been no increase in uncertainty in the past four years, the unemployment rate would have been closer to 6% or 7% than to the 8% to 9% actually registered.”

  10. or perhaps, in the environment of permanently damaged and deteriorating demand, fewer people want to take a chance both to finance and to plunge.

    aggregate wages – aggregate savings = aggregate demand

    once the fraudulent debt goes away (negative savings) the reality of deindustrialization actually asserts itself and stubbornly refuses to go away in spite of QEX. Obama is not helping, because he is a political careerist serving vested interests that got us here in the first place. Romney is part and parcel of these vested interests, and very proud of it.

    • Romney is our last best hope. I do believe his intentions are honorable, he will help us avoid Obamacare, that will disable our ability to compete globally.

  11. The economy isn’t growing. Check this simply fact: We are in the 43 consecutive month of +8% unemployment. In the 60 years preceding this, there were only 39 such months .. in total.
    I don’t blame Obama for a mess he inherited. But any open-minded person must surely see that he has been ineffective in dealing with the issue.
    As an owner of three small businesses myself and having friends and associates who own and run small businesses this kind of message isn’t merely upsetting, it is confirming. I assure you that the number one reason the economy isn’t growing is because business owners are scared. In my personal sphere I have seen a loss of almost 40% of the jobs we provided prior to the 2008 collapse.
    We didn’t fire everyone over-night either. We assumed from long experience that the economy would bounce back. So we did what we have always done. We absorbed the losses. And we did it month after month, which stretched into years. But the economy didn’t come back. As our resources dwindled, we began to shed jobs.
    As business owners, we are sitting here keeping every resource we have left safe. We are not creating jobs; we are not investing; we are not growing. We are treading water. Those actions are risky, and with a government-centric socialist like Obama in control we are unwilling to take those risks.
    Let me be clear. Business owners are simply waiting for the next tax, the next regulation, the next increase in the federal debt ceiling.
    Do you non-business owners out there have any idea of what is going through our minds? Business is risky. A decision to start one or grow one is a decision to risk your survival. We do it because the benefits are worth the risks. It’s a cost-benefit equation. With government increasing the risks for us, and reducing the benefits, what do you think the results are?
    I know lots of business owners who are ready to just quit. On a side note there are a lot of doctors out there who are fed up with the government regulations and intrusion. I work with a large insurance company that deals with primary care physicians. Let me assure you that there are a lot of older doctors out there that are ready to though in the towel and retire early.
    Exactly how long do you think it will take for young people destined for medical school to realize that when they graduate at 30 with a family and a half a million dollars in school loans and are faced with working under the governments thumb in an economy that pay them less and less, that they should pursue other career options.
    To the media and politicians, ‘You didn’t build that’ is just another sound bite to banter back and forth. To those of us who actually create the economy, it is a confirmation that our fears are well and truly justified.
    Obama is unable to fix this problem. His philosophy is in fact opposed to the changes needed. In the short term, electing Romney and business-friendly representatives will let us bounce back. But make no mistake, what is needed is a reversal of direction.
    We have for many decades in this nation been faced with decisions that affect economic growth. Do we increase air quality even though it hurts business? Do we increase taxes even though it hurts business? Do we protect an animal even though it hurts business? Do we help a foreign industry even though it hurts business? Do adhere to a treaty even though it hurts business. Do we increase federal debt even though it hurts business? Do we carbon cap even though it hurts business? The answer was invariably yes.
    Each time were made a decision it was placing a straw on the economic camel’s back. Yet we were strong and there were reasons to do what we have done. But after long years of loading the camel’s back, its knees are now wobbling ready to collapse crushed under a million straws.
    What is needed is a reversal of the trend to make decisions that damage our economy.

    • Well stated Scott.

      Our country fought the Revolutionary war due to taxation without representation, now, with nearly half Americans paying no income tax, we have half of Americans voting with representation without taxation. This factor alone will cause our country’s demise.

  12. The one thing you are not considering is demographics. Baby boomers and the elderly business owners are retiring in record numbers. All the rules and regulations are just an extra reason to get out of business. And the problems with health care are a reason not to start a business.

  13. College grads can’t find jobs, so they do what Obama wants them to do and they go on welfare and have those employed pay the bill. We are becoming a nation of welfare and dependence under Obama.

  14. Who said that you can’t have the pie and eat it too?
    Obviously, everyone is blaming Obama, a low intellect puppet, and ignoring the actual culprits of the recession, aka the fed, imf, the worlds banksters brotherhood and their ilk.
    Americans are in deep pill-induced sleep, thanks to the enablers and their media minions. These crooks can surely full all the people all the time and they are robbing them blind more systematically since 2000.
    The enslavement of the goyim is underway…

  15. The use of this metric itself is flawed and nobody with any idea of economics would use it but the author is simply insulting readers by not even making an attempt to analyze data (like Fox News journalists)! The author does nothing to explain the drop from 11.2 to 10.8 from Clinton to Bush, despite record tax cuts! He does not support any of his assertions about the causes.

    • Foxy, you may have missed it, but neither Bill Clinton nor George W Bush are currently our president.
      I prefer to read articles that are about current issues policies not a rehash of past albeit better presidents performance.

    • Typical leftists economic analysis: (1) you think that the economy is affected by a single variable; and (2) that the effect of that variable is single dimensional.

    • Here’s a hint. There were three 75 cent tax minimum wage increases, in each July 2007, 2008, and 2009 thanks to Nancy Pelosi. That took the federal minimum wage up 45% in just 3 years. Note the fall off each of those years.

  16. If you compare the 1990′s to the first 10 years of 2000 startups were down 80%. No wonder job growth from startups is declining and will continue to decline. Until we change the tax code so that working class americans gain income instead of see their wealth decline than demand will continue to wane as it has gradually for 25 years now and small companies and startups will continue to face tough times.

  17. All this and more foretold in Ayn Rand’s seminal novel “Atlas Shrugged” more than 50 years ago. Every country collapses sooner or later when they replace REAL money with money backed only by government promises. I am 70 and hope that I die before the country dissolves into such a Great Depression that people will be starving and become violent! We have $222 TRILLION in debt and UNFUNDED mandates! No way to pay benefits coming soon! In the 1930′s 25% of Americans lived on farms and knew how to survive. Now it is 2%. Most have NO knowledge of how to garden, hunt, or any survival skills. The prepper movement is growing, but they are at risk from their neighbors who will be hungry! Many are moving to LOW population states away from cities and larger towns. America is NOT the only country in dire straits! I expect WW III soon! Then martial law will be declared. DHS and other Federal Agencies have weapons, etc. and they WILL use them on citizens who resist. Dark days coming in this decade!

  18. President Zero can go on all the bus tours he wants, setup & slay straw men left and right. Prance and Strut around the stage waving his arms and shouting his Teleprompter words to his Cult followers to his heart’s content.

    He can blame his problems on his predecessor, the Arab Spring, ATMs, earthquakes, tsunamis, red necks clinging to there bibles and guns and all others that disagree with The One.

    But lies and spin cannot change the facts.

    After raising American debt faster then all previous President combined and spending nearly a Trillion borrowed dollars rewarding Unions and Democrats supporter,s this Nation continues it race to a Third World Nation!

    The so-called Misery Index rose to 13.0 percent last month, a 28-year high. Almost 9.3 million Americans are now considered underemployed (defined by the Bureau of Labor Statistics as working part-time for economic reasons, such as unfavorable business conditions or seasonal declines in demand), up from just over 8 million in July.

    A staggering number of Americans, almost 26 million, are either unemployed, marginally attached to the labor force, or involuntarily working part-time—a number experts say is unprecedented.

    All of this when we continue letting in more legal Immigrants in to take our Jobs then all other Nations in the World combined while leaving our Borders wide open so any Criminals, Terrorist or Uneducated Third World parasites can walk across for the Plunder and Welfare provided by hurting American Tax Payer,s!

    While American Citizens cannot afford our own medical bills, or to educated our children or have more children we are paying the Medical bills, Breeding bills include, Educating their spawn, providing Welfare and prison cells for millions of Illegal Aliens that have invaded this Nation.

    This is Obama,s income redistribution at full bloom from broke American Citizens to every Third World Parasite and Criminal that walks across our Border!

    Tens of thousands American Families Homeless, 26 million American citizens unemployed & losing everything while millions of American kids living in poverty, but our Politicians allow the largest invasion in World history, at any Time, any place, by any means, as Millions of Criminals and Uneducated Third World Parasites march across our Borders to take our Jobs, drive our Standard of living to third world standards, overwhelm our schools, our hospitals, ER rooms, flood our prisons, cost us Billions in Welfare to provide medical, schooling, etc while destroying our culture and turning this Nation into the same type of Third World Slum they are fleeing!

    So why shouldn’t Americans be upset and hold our Corrupt/Treasonous/Lawless politicians accountable for their Treason in refusing to abide by our Constitution Article IV Section IV against invasion, refuse to enforce our Immigration Laws and refuse to honor their Oath of Office!

  19. What does the 26 cities over 250K and the greatest poverty level have in common?

    All are heavy unionized and all have been controlled by Democrats for many many years!

    Does this fact and the Blue States bordering on Bankruptcy penetrate the mental fog surrounding. the Liberal mind and their emotions that they use in place of thinking?

    Of Course NOT!

    Never have so many been oblivious to the obvious.

    They still think the Democrat Politicians are concerned about their Welfare.

    The same party and polities that reduced the black population into welfare bondage and the most dependable Democrat voters will work just as well for the rest of the population.

    Just reduced them to poverty and Depending on Welfare and you have a Democrat voter for life!

    President Zero and the Democrats are pursuing the same polities and spreading poverty for the rest of the Nation that have turned those cities and blue States like Calif., Illinois, New York etc. into basket cases and made them dependable votes for the Democrats!

    The more the Democrats can spread Poverty, Welfare and the Entitlement mentality the more Democrat voters they make and the closer they get to a Third World Socialist Food Stamp Paradise controlled Lock, Stock and Barrel by the Democrat party!

  20. Not mentioned at the anti-competitive tax subsidies given by States to big corporations to setup within a State which increase the tax burden on small businesses within the State to pay for the services the big corporation demand from the State and local governments.

    Of course, States see this as a case of stealing jobs from other States, paid for out of the pockets of small businesses and future small business startups because the small businesses are already in the State, employing just a few workers. If bringing in Honda creates 500 jobs, who cares if 50 small businesses fold throwing 200 people out of work, and 50 small businesses can’t afford to startup and create 100 jobs, the tax subsidies to Honda paid for by small businesses and workers was worth it for the net 200 jobs added.

    And the great thing is everyone can blame Obama for the decline in small businesses being created since 2000, because Obama gets blamed for the entire Bush economy as well as his own.

  21. “1. At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown.”

    What a load of rhetorical fertilizer! “Undoubtedly,” huh? Not doubted by anyone at AEI, of course. If taxes are a significant disincentive to start-ups, then why were they so strong during the high-tax-rate years of the Clinton administration?

    Second, as a small businessman in technology, I can assure you that most people starting a business hope to turn their ideas and talents into bags of money. They prefer the percentage they get to keep to be higher, of course, but it’s not a determining factor. Entrepreneurs worry more about the “big bite” taken by venture capitalists, than that of the taxman.

    Third, what about reduced household incomes, and consumers paying down debt, thereby reducing demand. Mightn’t THAT have a braking effect on starting new businesses?

  22. The startups are mostly down, because people’s equity in their homes got wiped out. Usually, a guy borrows against his home equity to get the cash he needs to start his small business.

    Fix the housing market, and you fix the economy… in about 10 years. Fix the economy, and you rapidly fix the housing market.

    Existing businesses will need to expand. Investors will have to change how they behave towards startups. They will have to be more tolerant of less capital by the entrepreneur, and they may have to take a more active hand.

    • I would suggest that start-up businesses are down due to the funding sources to new businesses who for the most part invested over the past 5 years in non real property but in market driven instruments now look at the next 24 months with great uncertainty. The fed keeps printing, the dollar responds downward, gold responds upward…bond returns will tank, equities having surged in recent months will stumble, reassess and stall….big time!. This simply is not a time to invest in a start-up, too much uncertainty, no stability. It need not be! Address debt first and concurrently jobs.
      First: deliver a plan to control wild spending, budget to show sincerity to rein-in uncontrolled spending which will go a long way to pull both political parties closer. Next deliver on a promise to reform the current tax code (reduce corporate tax-rate to international competitive rates 25-28%, this will reduce a business decision to invest overseas, identify three tax rates for individuals, eliminate most deductions, but leave in place for five years the home mortgage deduction, entitlements must be on the table: all using a bipartisan small group of recognized business and political leaders representing liberal…,real democrat…..real republican and patriot republican positions. Allow only four weeks to deliver because the real fixes are quite well known.
      Raise interest rates on consumer loans to 4-5 %, close the ‘O’ interest window to banks. Eliminate collective bargaining for all civil service positions by 2014. This would be a good beginning.
      djr

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