May 7 2014

Where Have All the Entrepreneurs Gone?

Patrice J. Lee

American entrepreneurship has hit a new low, according to a study from the liberal Brookings Institution. Businesses are failing faster than new ones are being created.

Entrepreneurship and small business are the back-bone of the American economy and have long afforded a way to realize the American dream. Business dynamism refers to the continuous life cycle of firms, including how they are born, fail, expand, and contract. As some jobs are created, others are destroyed, and others still are turned over. All of this contributes to our national economic productivity and growth.

The creation rates of new business has been on a decline since at least the late 1970s, but the Brookings study shows a that we have hit a new lows. From 2009-2011, the most recent three years of the study, businesses have seen a faster rate of collapse than creation. Firm creation stood at 8 percent in 2011, down from 11 percent in 2005 and 15 percent in 1978 (the first year this data was collected). Firm exits are at 9 percent which has been consistent over the past three decades.

Even though businesses aren’t failing at a particularly high rate the economic toll is especially bad because new businesses are not being created. Entrepreneurs are opting out of the risks to create new business. The question is what will the next three decades look like if this downward trend continues?

The report finds:

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.

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.

The Washington Post took a look at states and how business tax rates may play a role:

No immediate pattern emerges from the state-level geography, but one thing is worth nothing. For kicks I tried to correlate the drops in new businesses in each state with the states' scores on the Tax Foundation's 2014 State Business Tax Climate Index. There was no significant relationship one way or the other. For example, New York, which showed the lowest decrease in new businesses, actually scored dead last in the Tax Foundation's ranking. Wyoming had one of the largest declines, even though it ranked first in the Tax Foundation's report.

At the very least, the study findings strongly suggest that, when it comes to luring new businesses to a given state, there are more factors at play than just corporate tax rates.

Brookings comes to no conclusions about why businesses are failing or what incentives drive business creation. However, it should eye-opening to all Americans that small business which is the job creation engine for our economy has stalled out and is moving us backward.

We wonder why the economic recovery has seemed to leave jobs behind? This data suggests to me that it’s because we aren’t creating enough new business.

What the White House, Capitol Hill, governors’ mansions, and state houses across the country should focus on is finding the right incentives to induce business creation and reducing the regulations that create impediments to entrepreneurs.

As the study concludes, it takes government, educational institutions, entrepreneurs, investors, and foundations experimenting with ways to encourage new business formation.

The stakes are high and the study authors don’t hide the fact that if the decline persists, our economy will be at further risk.

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