Economics, Pethokoukis

3 disturbing charts showing the alarming decline of US economic dynamism

Mercatus

Mercatus

Regarding the above chart, Keith Hall of Mercatus:

Data released by the BLS on Tuesday also highlights another concerning long-term trend holding back a more robust jobs recovery. Historically, the formation of new businesses is an important source of job growth in the U.S., and job creation through business creation was as high as 2 million new jobs a quarter in 1999. But that number has been steadily declining since then, and the third quarter of 2013 saw only 1.3 million jobs created by new business formation—an improvement from the end of recession but still below pre-2008 levels.

The subject of American business dynamism is one I’ve written a bit about. And as it happens, Brookings also is out with a report on the subject from Ian Hathaway and Robert Litan. This first chart from that report show that firm entry rate—or firms less than one year old as a share of all firms—fell by  nearly half in the thirty-plus years between 1978 and 2011.

Brookings

Brookings

This second Brookings chart “illustrates that job reallocation—a broad measure of labor market churning resulting from the underlying business dynamism of firm expansions, contractions, births, and closures—has been steadily declining during the last three decades, and appears to have accelerated in the last decade or so.”

050514dynamism3And the bottom line from Hathaway and Litan:

Overall, the message here is clear. Business dynamism and entrepreneurship are experiencing a troubling secular decline in the United States. Existing research and a cursory review of broad data aggregates show that the decline in dynamism hasn’t been isolated to particular industrial sectors and firm sizes.

Here we demonstrated that the decline in entrepreneurship and business dynamism has been nearly universal geographically the last three decades—reaching all fifty states and all but a few metropolitan areas.

Our findings stop short of demonstrating why these trends are occurring and perhaps more importantly, what can be done about it.

Doing so requires a more complete knowledge about what drives dynamism, and especially entrepreneurship, than currently exists. But it is clear that these trends fit into a larger narrative of business consolidation occurring in the U.S. economy—whatever the reason, older and larger businesses are doing better relative to younger and smaller ones. Firms and individuals appear to be more risk averse too—businesses are hanging on to cash, fewer people are launching firms, and workers are less likely to switch jobs or move.

They don’t offer a theory, but I do.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

6 thoughts on “3 disturbing charts showing the alarming decline of US economic dynamism

  1. And the reason for this is perfectly clear; the explosion of cheap leverage since 1995. Established companies can borrow more easily, and hence take advantage of this to wipe out their embryonic rivals.

  2. Three thougths:

    1) The huge outflow of jobs to countries that the U.S. does not have a Free Trade agreement with.

    2) High U.S. corporate tax keeping profits overseas and not used in the U.S.

    3) Government competition for funds, jobs and benefits.

      • Is it possible that without stock options tempting CEOs to get rich quick, Big Pharma would not have been fined $13 billion for flogging off-label prescriptions to docs (i.e. demonstrating a nonparasitic purpose for regulators)?
        For example, Johnson & Johnson “targeted elderly dementia patients in nursing homes, and paid kickbacks to physicians and to the nation’s largest long-term care pharmacy provider, Omnicare Inc.”

        http://projects.propublica.org/graphics/bigpharma

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