Pethokoukis, Economics, U.S. Economy

America’s entrepreneurial culture may be dying

Image Credit: Shutterstock

Image Credit: Shutterstock

Entrepreneurs start businesses that create lots of jobs and inject innovation into the US economy. Start-up America is our difference maker. Our edge.

But something seems to be going wrong. In another great note, “Where have all of the entrepreneurs gone?,” JPMorgan economist Mike Feroli highlights some disturbing trends with our entrepreneurial culture.

1. Net job growth is driven by new businesses. Existing  establishments tend to shed jobs. But according to the Labor Department’s new Business Employment Dynamics report, “the trend has clearly shifted. In 12Q3 opening establishments added 1.27 million jobs. In the last cycle this figure averaged closer to 1.5 million jobs per quarter, and in the 1990s the figure averaged 1.75 million per quarter.” Down, down, down.

2. Feroli notes that employment “births” — a subset of openings not including reopenings of seasonal businesses — are also weak. Employment births in 12Q3 as a percent of all employment held at 0.7% in 12Q3 for the fourteenth consecutive quarter. In contrast, this figure stood between 1.1% and 1.3% during the 1990s.
And some charts highlight the problem:
Credit: JPMorgan

Credit: JPMorgan

The economist concedes “it is difficult to diagnose the cause of the decline in establishment births” — especially since entrepreneurial activity appeared to be trending lower even before the crisis. I have previously blogged about a Hudson Institute report with similar findings.
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Hudson’s possible suspects for the slowdown: a) higher business taxes, b) Obamacare, c) an  IRS crackdown on US employers that hire U.S. workers as independent contractors rather than employees, and d) a steady barrier erected to entrepreneurs at the local policy level.
But whatever the cause of the entrepreneurial decline, two possible impacts: 1) A less productive and innovative economy, and 2) higher profits for big business thanks to fewer upstart competitors on the horizon.

27 thoughts on “America’s entrepreneurial culture may be dying

  1. As an entrepreneur myself, I can honestly say that this compelling evidence is not the least bit surprising. Being a small business owner, and perhaps more to the point being an “employer”, has huge downside risks that are absolute certainties, while the upside rewards are elusive under the best of circumstances.

    Couple this fact with the tax penalty that arises from being “Self Employed”, and it’s pretty clear that the “optimum” choice, from a pure economic perspective, is to just be an employee.

    I love my 9-year old business, but frankly it’s a lifestyle choice for me. I have no illusions of riding my business to great wealth. So, even though it works for me personally, I can’t say that I really recommend entrepreneurship. I wish that weren’t the case.

    • Great perspective, but wrong conclusion: you absolutely should recommend entrepreneurship – in a different country.

  2. Except that startups, as opposed to startup jobs, accelerated during the recession and remain higher than average, according to the Kaufman Foundation. http://www.kauffman.org/newsroom/entrepreneurial-activity-declines-as-jobs-rise-in-2012-according-to-kauffman-report.aspx

    This business formation is employment of last resort for older workers and blue collar workers, and tends to be sole proprietorships rather than employer firms. But what’s missing then is not favorable tax policy or regulatory relief but better business conditions.

    • “But what’s missing then is not favorable tax policy or regulatory relief but better business conditions.”

      Amazing how self-proclaimed libertarians like Todd cannot see how the first two items beget the last.

          • Todd said here about a month ago he considered himself to be a libertarian“…

            paul you confused todd, he thought that libertarian was a fancier version of the word liberal…

    • Todd, I’m not sure it’s fair to say that “startups accelerated during the recession and remain higher than average” because moving from 0.295% pre-recession to 0.324% post recession is such a tiny (probably statistically insignificant) change. And since 1996, the trend is far closer to flat-line than anything else.

      Also, while it’s true that “better business conditions” can potentially outweigh “favorable tax policy” or “favorable regulatory policy”, there is no need for “either/or” choices if the goal is creating more jobs.

      • “Where have all of the entrepreneurs gone?”

        Nowhere. More of them than ever, although as Kaufman notes business creation at the earliest stage is inversely proportional to job growth (necessity being the mother of invention.) 465000 startups in 2006 vs 514000 in 2012 and 558,000 in 2009. Puts a lie to the “productive class” eh paul? If tax policy fits in there, I can’t see where.

        And from the NFIB optimism study in March: “The net percent of respondents expecting the economy to improve was unchanged at -28%, a very depressed level.”

        So what was that about austerity being OK for the economy (kinda sorta)?

  3. An important factor is “regime uncertainty” as Robert Higgs of Independent.org terms it which scares investors from taking risks. As soon as the recession began tech folks I know saw angel investors close their wallets, and last I checked (not lately) angel and VC investment hadn’t recovered in inflation adjusted terms.. let alone grown to keep up with population. It takes time for those firms to grow to create more jobs even once that does loosen up. Banks tightened lending standards after the recession began, and some entrepreneurs get 2nd mortgages and other collateralized loans before jumping ship to start their own business, or get such loans from friend/family investors. Even existing businesses with great credit saw their credit lines shrink. Less risky startups sometimes would get some facilities and equipment loans, or rely on various other types of financing while cash flow is tight trying to get going like loans based on receivables, and they are hesitant to jump into a business if they won’t be able to get that. There is a flight to safety in general away from riskier investments. Government borrowing helps that, since if the government weren’t borrowing investors would likely be forced up the risk curve to make riskier investments and banks lower standards, rather than stuffing the money in a mattress.

  4. The government also has restrictions that try to limit angel investors to wealthy “accredited investors”. There are some work arounds, but for various reasons if there is the potential you will expand and take Venture Capital money in the future it is safest to only use accredited investors. Unfortunately:

    http://www.angelcapitalassociation.org/aca-public-policy-accredited-investor-definitions/
    ” The SEC was charged with setting detailed rules on accredited investor standards following the “Dodd-Frank Act”. The complicated law included a section that changed the net worth requirement for accredited investors – the standard for net worth remained at $1 million, but eliminated a person’s primary residence from the calculation of net worth. ”

    Much regulation and “crony capitalism” is aimed at raising the barrier to entry for innovative new firms. Existing companies would rather see their costs raised a little bit, even if they lose some customers, than lose far more if a better company comes in and takes half their market share. In markets restricted enough to be oligopolies or monopolies like in much of healthcare, the costs are simply passed on by all participants to their captive customer base knowing that they won’t lose many customers. Since profit tends to be a % of revenue, it actually increases their $ profit even if the % remains the same. That is a scam many healthcare providers and insurers use. They point to their % profit not being out of line with other industries, ignoring the question of whether the costs are inflated so their $ profit is artificially inflated due to government intervention limiting competition.

  5. Hudson’s possible suspects for the slowdown: a) higher business taxes, b) Obamacare, c) an IRS crackdown on US employers that hire U.S. workers as independent contractors rather than employees, and d) a steady barrier erected to entrepreneurs at the local policy level.
    But whatever the cause of the entrepreneurial decline, two possible impacts: 1) A less productive and innovative economy, and 2) higher profits for big business thanks to fewer upstart competitors on the horizon.

    Hudson missed the biggest problem for start-ups; restrictive IP laws that make it difficult to take risks developing products due to the porcupine defense used by large players and the opportunistic extortion practiced by trolling lawyers.

  6. Another innovative small business owner here, in a highly regulated industry. What’s killing our productivity is massive government regulation from all quarters, often duplicative and contradictory, and always obscenely time consuming. In our business, more than half our work time is spent complying with govt paperwork demands. Imposing the same licenses and paperwork requirements on micro businesses (<10 employees, <$1-5 million/year in sales) is one of the entrepreneurial killers. Our 2-person business is required to maintain 17 different federal, state, and local licenses. It is less stressful, more profitable, and more sane to be a government employee than to be an entrepreneur. The irony is that a govt job is only a net gain on the GDP in the first year. After that it is a net loss, because most regulatory paperwork is not productive work.

  7. It is death by a thousand cuts. The growth in regulation mostly effects small business at the margins as the sheer complication factor does its insidious work. Bureaucracy needs complexity to justify its existence and there is ALWAYS something that just NEEDS regulating whether useful or not. At the very least the growing complex of regulations can require the hiring of consultants to help navigate the rules and who best suited to be a consultant? Why, surprise,surprise, ex-bureaucrats already know the drill and stand willing to help!
    I’ll give a small example that illustrates the point. The EPA is just this summer implementing new regulations that require all farms to have a written plan dealing with fuel storage. If one stores more than 10,000 gallons in total one MUST have a plan written and approved by a certified planning consultant. Now this might sound reasonable enough as a way to deal with risk but it actually just adds complexity in service to a non existent problem. Fuel is expensive and the number of farmers who allow leaks and spills negligently is so close to zero as to be indistinguishable. There is NO history of large amounts of pollution from fuel and oil spills on farms and yet we just made life more complicated and gave very good paying jobs to hundreds of consultants across the country. Multiply this by thousands and you have a real problem.

  8. We run this nation in order to maximize tax revenue. We see our ‘purpose’ as redistributing our wealth to political constituencies. We are precisely destroying what created the wealth in the first place. The Democrats have created an economic smart bomb.

  9. Why would someone start a new business, if all that will happen is your new company will be sued in to oblivion by patent trolls and you’ll be taxed in to extinction to fund magecorporate bailouts and subsidies? In a country which has a withered infrastructure and where half workers is undereducated and/or morbidly obese?

    It is late 5th century Rome. This party will end badly, and very soon.

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