A Deeper Look at Why Fewer People Are Starting Businesses
The Brookings Institute recently reported that entrepreneurship is at a three-decade low because of a long decline across the country. There has been enough buzz about the results that authors Ian Hathaway and Robert Litan decided to release a follow-up.
Although they don't yet have an answer to the question of why people would become less interested in starting businesses, rather than work for someone else, they are working on a paper on the topic. In the meantime, though, they wanted to address a number of rationalizations and excuses from those who have wanted to discount the results and pretend that everything is fine.
As a recap, for decades, the entrance of firms into the economy outpaced their exit, meaning a net increase in new businesses. The authors saw that as a proxy for entrepreneurial activity. Since at least 1978, the lines for entry and exit have converged. In 2008, they reached a watershed moment and crossed. Now the pace of firm creation continues to shrink, as does, apparently, the number of entrepreneurs.
Retail and Services
Some critics have claimed that the shift of the economy toward retail and services industries combined with well-known consolidation is the reason for the apparent drop. Hathaway and Litan dismissed that on two grounds. One is that the reduction of firm creation is happening across all industries. The other is if you back out retail and services from the overall numbers, firm creation falls even faster. The sectors turn out to be big net firm creators that pulled up the average. Without them, it would have been worse.
Another criticism is that when it comes to the economy and job creation, certain firms count more than others. More specifically, the argument is that high-growth firms are the important ones, and if others aren't being formed, who cares? But, the authors counter, it's next to impossible to know at the outset which new companies will become the ones that generate the majority of jobs and activity. For example, it turns out that venture backing isn't a good predictor of importance. In any year, the "large majority ... making it to the Inc. 500 list of fast-growing firms in any given year ... never received VC money." In general, the economy needs many companies first to start so that some of them will wildly succeed.
Policy and Politics
Forget the partisan agendas, as well. The decline has been pretty steady for more than 30 years, whether there was a Democrat or Republican in the White House. The issue isn't personal income tax either, because marginal rates have dropped since 1981. If taxes were the real issue, you'd have expected firm creation to have increased. There is some chance that regulation could be a factor, but even that is complicated. For example, the Affordable Care Act might act as an impetus because people might be less bound to a job to keep their health insurance.
So far it's three easy explanations down and the real ones to come. Rationalizations aren't going to work in this case.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.