The Most Disturbing Economic News I've Heard of This Decade.

[Cutlass]

May 15, 2014 at 11:00 AM

Beyond Silicon Valley, Declining Entrepreneurship

TV’s celebrating Silicon Valley startups, but across the country entrepreneurs are now struggling behind bigger, older businesses. We’ll ask why.

http://onpoint.wbur.org/2014/05/15/small-business-jobs-regulation-entrepreneurship

The pride of the American economy from early days was the idea that anyone could jump in, start their own business and make things happen. And for a long time, American entrepreneurship drove the US economy and American dreams. It still does in Silicon Valley and other hot spots. But nationally, the numbers are down. American entrepreneurship is sagging. That’s bad for innovation, for jobs, for dreams. Is it red tape gumming up the works? Is it giant companies – Wal-Mart etc. – blocking the way? This hour On Point: American entrepreneurship in decline. We’ll ask why.

From Tom’s Reading List

Brookings: Declining Business Dynamism in the United States: A Look at States and Metros — “We show that dynamism has declined in all fifty states and in all but a handful of the more than three hundred and sixty U.S. metropolitan areas during the last three decades. Moreover, the performance of business dynamism across the states and metros has become increasingly similar over time. In other words, the national decline in business dynamism has been a widely shared experience.”

The Atlantic: The Mysterious Death of Entrepreneurship in America – “The story of American entrepreneurship begins with a tale of two definitions ofentrepreneur. When the press imagines the modern entrepreneur, our minds turn to tech—coders, hackers, hoodies, apps, Silicon Valley (the show), Silicon Valley (the valley). And it’s true: This sliver of entrepreneurship has grown, by all sorts of measures, for example by venture-capital funding:”

Entrepreneur: Why Americans Don’t Want to Start New Businesses — “If you truly believe in more jobs, in better wages and broader prosperity, you need Americans to innovate, to take risks, and put their capital at work to create new businesses. You should be rooting for their success, since the more money they make, the more profits they have to reinvest in their businesses. That reinvestment invariably creates jobs, which creates wealth for others.”

Also:

US economy is the least entrepreneurial in decades
Published time: May 07, 2014 16:23

http://rt.com/usa/157424-brookings-report-entrepreneurism-dynamism/

Entrepreneurism in American has been on the decline for at least 30 years, a new report suggests, and for the first time in three decades the number of business “deaths” in the United States exceeds that of “births.”

The report, published on Monday this week by economists from the Brookings Institute, examines business dynamism in America — or how the process by which firms are continually born, fail, expand and contract — during the years 1978 through 2012.

“Research has firmly established that this dynamic process is vital to productivity and sustained economic growth,” Ian Hathaway and Robert E. Litan wrote for the think-tank, adding, “Entrepreneurs play a critical role in this process, and in net job creation.”

“But recent research shows that dynamism is slowing down,” they continued. “Business churning and new firm formations have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued.”

Indeed, the economists’ research indicates that for the first time since the US Census Bureau began examining firm entry and exit rates in the US during the late 1970s, more companies are failing then being formed.

What’s more, though, is that this trend is nothing new, relatively speaking, and is evidenced across the board: according to Hathaway and Litan, business dynamism in America has been on the decline for decades, and is noticeable from coast-to-coast and in all 50 states.

Only lately, however, have business “deaths” exceeded “births,” the economists wrote, albeit only slightly. Nevertheless, neither Hathaway nor Litan are exactly sure what could be done to reverse that trend.

“Productivity growth has been fairly decent, roughly around 2 percent," Litan told The Daily Ticker this week. "But in order to really get high growth in the future ... we're going to need a lot faster rate of new firm formation and more willingness by employers and individuals to move from areas or from jobs that are not growing to areas in the economy where jobs are growing."

One way that could be accomplished, his report suggests, is to make it easier for job-hungry immigrants to enter the US to gain legal employment. Nevertheless, Litan added to the Daily Ticker that, despite extensive researcher, the economist said it’s “very puzzling” that American dynamism is on the decline.

“Perhaps the best and most immediately effective way to do this is to significantly expand the numbers of immigrant entrepreneurs granted permanent work visas to enter and remain in this country,” the report reads. “Allowing foreign graduates of US schools who concentrate in the so-called STEM fields (science, technology, engineering and math) to remain in the United States to work for other enterprises is also an imperative, especially given the historical pattern indicating that immigrants are twice as likely to launch businesses as native-born Americans.”

“That is scary,” Entrepreneur.com writer Ray Hennessey chimed in, “because we already know that there are signs that American worker is too discouraged to get a job, with the labor force participation rate at the lowest level since the Carter Administration.”

And as RT reported earlier this week, nearly 102 million working-age Americans in fact do not have work — and most of them are not even looking.

With regards to why jobs aren’t as easily obtainable, however, the Brookings economists are still looking for an answer.

“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,” the report continues. “But it is clear that these trends fit into a larger narrative of business consolidation occurring in the US 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.”

Isn't Entrepreneurship at an All-Time High? Nope. Not Even Close
BY Erik Sherman @ErikSherman
According to the Brookings Institution, the data show that the U.S. is losing its entrepreneurial spirit--and has been for decades.

http://www.inc.com/erik-sherman/brookings-us-entrepreneurship-declining.html

Ever feel that being an entrepreneur is like having a membership at a big club? Heads up: The roster is getting smaller. According to a new Brookings Institution study, entrepreneurship has reached at least a three-decade low across virtually all of the country.

The paper doesn't pretend to understand why this trend has occurred--and beware of any impulse you may have to say, "Of course!" However, there are clear implications for those trying to run their own businesses. Some are good in the short term; many are bad in the long. It does mean that entrepreneurs have to look at a shifting landscape that could change the way they create and grow companies.
By the Numbers

Rather than try to measure psychological attitudes towards entrepreneurship, researchers Ian Hathaway and Robert Litan (the latter formerly a vice president of research and policy at the Ewing Marion Kauffman Foundation, which studies and fosters entrepreneurship) looked at some hard numbers.

One set was the difference between the rate at which new businesses were started and closed, based on U.S. Census data. The graph below shows the pattern:

Business entries mean companies that were less than a year old, expressed as a percentage of total businesses. Exits are the percentage of firms that went out of business for whatever reason.

For decades, the entrance of firms outpaced their exit, meaning a net increase in new businesses. The authors see that--reasonably, it seems--as a proxy to an inclination toward entrepreneurism. But since at least 1978, the lines have converged, albeit slowly. In 2008, they reached a watershed moment and crossed.

The math is simple: More firms leaving than arriving means a shrinking percentage of business is being controlled by entrepreneurs. And notice that the exits were relatively steady. It was the creation of new firms that has sagged.

The second set of data supports a conclusion that entrepreneurship faces a major challenge. Job reallocation--"a broad measure of labor market churning resulting from the underlying business dynamism of firm expansions, contractions, births, and closures"--has also been declining for decades. As people increasingly stay put, fewer are moving to other employment, including new ventures.

You might explain the second figure as a result of a tighter job market, a more conservative approach by employees, or general concern about the future. But put them together and you have a picture of people shying away from risk and not betting their future on a new business.

This also isn't an issue of a slump in some parts of the country. According to the report, the results are fairly even across every state and nearly all of the 366 metropolitan areas examined.
The Bottom Line

The implications for entrepreneurs are generally sobering:

The authors conclude that there is a general atmosphere of consolidation in which older, larger businesses are doing increasingly better than new ones.
An additional observation you could make is that as things contract, the general support network that had been available to entrepreneurs is likely doing the same. That includes the availability of mentors, partners, and investors.
With lowering levels of entrepreneurship in the country, chances are that other countries could provide greater competition, often at lower labor rates, creating increased pressure on U.S. entrepreneurs.

According to the authors, the country needs to consider strong actions, because of the importance of new firms and entrepreneurs in the economy. They suggest allowing more foreign entrepreneurs to receive permanent work visas, letting foreign students in STEM fields to remain and work (particularly as they are twice as likely as native-born Americans to start businesses), and have state and local organizations and governments try new ways to encourage entrepreneurship.

Welcome to the future, ladies and gentlemen.

Last updated: May 8, 2014

Here's the Brookings .pdf http://www.brookings.edu/~/media/re...eclining_business_dynamism_hathaway_litan.pdf

 

[Cutlass]

So why is this disturbing? Because for that same time period we've had nothing but government after government trying to be 'business friendly'. Almost no one gets elected to high office anymore except on a pro-business platform. And yet the rate at which Americans are creating new businesses has collapsed by half. Most new job creation comes from new business creation. As does most new wealth creation. The most fundamental part of the US economy which has made the US such an economic dynamo is dying off. Or being killed off.

 

[El_Machinae]

This is really interesting. I'll give it a better read later. I've recently discovered Stanford University's playlist, and two of their courses are Developing Mobile Apps with Web Technologies Energy Seminar and Entrepreneurship Through the Lens of Venture Capital.

As well Dragon's Den recently showed up on Canadian Netflix, and I found it very inspirational. It's worth people's time, if only to get people's minds peculating with ideas.

I mean, entrepreneurship is only a portion of wealth creation, but all indicators have it being a wildly important one for both economic growth and for job creation.

 

[Kozmos]

Isn't it like 80% of new business fail within 5 to 10 years? It's a big ass gamble usually for more stress and very rarely great success.

 

[Cutlass]

While it's true the failure rate is high. That's always been true, so shouldn't have changed how many people give it a shot anyways.

 

[Berzerker]

Didn't read much of it but one of the gripes with immigration policy I've heard is that foreigners who come here for schooling gotta leave when they're done

unless they work for someone else

now, dont it look like the business community wrote that law?

they lay claim to new talent from abroad and eliminate the competition they'd create by starting their own businesses

another factor are the regulations making it harder to start and run new businesses

hell, in the land of Texas they wont let Tesla sell cars thru dealerships like other car companies

what kind of BS is that?

I dont think that can be called capitalism, just sounds like corrupt politicians protecting the hands feeding them $$$

on a sidenote, I see Democrats giving Obama credit for reduced deficits while complaining about Republican spending cuts

they both suck, their stupidity and corruption are a drag on the economy

“Perhaps the best and most immediately effective way to do this is to significantly expand the numbers of immigrant entrepreneurs granted permanent work visas to enter and remain in this country,” the report reads. “Allowing foreign graduates of US schools who concentrate in the so-called STEM fields (science, technology, engineering and math) to remain in the United States to work for other enterprises is also an imperative, especially given the historical pattern indicating that immigrants are twice as likely to launch businesses as native-born Americans.”

hmm...foreign graduates cant get sponsored by existing businesses? I thought that was how they could stay in the country.

...nevermind

 

[dutchfire]

So why is this disturbing? Because for that same time period we've had nothing but government after government trying to be 'business friendly'. Almost no one gets elected to high office anymore except on a pro-business platform. And yet the rate at which Americans are creating new businesses has collapsed by half. Most new job creation comes from new business creation. As does most new wealth creation. The most fundamental part of the US economy which has made the US such an economic dynamo is dying off. Or being killed off.

Pro-business means pro existing business, not pro-start up. Companies that haven't been founded yet usually don't contribute to campaigns.

 

[Narz]

This is disturbing but hardly the most disturbing thing, IMO.

Since I'm here, I'm curious how other nations are fairing in this regard, is this a universal phenomenon?

 

[timtofly]

@ OP

It does not help when the demand for products or services ceases to exist.

 

[Azale]

This will be blamed on repressive taxation, welfare spending and labor agitation, as it always is.

 

[onejayhawk]

So why is this disturbing? Because for that same time period we've had nothing but government after government trying to be 'business friendly'. Almost no one gets elected to high office anymore except on a pro-business platform. And yet the rate at which Americans are creating new businesses has collapsed by half. Most new job creation comes from new business creation. As does most new wealth creation. The most fundamental part of the US economy which has made the US such an economic dynamo is dying off. Or being killed off.

The last small business friendly President was RR.

J

 

[Cutlass]

The last small business friendly President was RR.

J

Name one thing RR did that wasn't hostile to small business.

 

[El_Machinae]

Additionally, that graph doesn't seem to support that hypothesis.

 

[KMRblue1027]

Additionally, that graph doesn't seem to support that hypothesis.

It directly contradicts it. I don't know how one can come to such a conclusion.

 

[El_Machinae]

It doesn't wildly contradict it, there's a definite uptick and eventual downtick. The idea of there being an actual influence is just not supported by the graph.

 

[Cutlass]

There are no definitive conclusions to the why in the paper. Some people spoke to partial why's of what's going on. One of them being that antitrust laws were weakened during the Reagan years, and not much enforces since. That means more barriers to entry for new firms caused by existing firms.

 

[onejayhawk]

Additionally, that graph doesn't seem to support that hypothesis.

You think W?

Clinton and Bush had some upward movement, but the only spike was Reagan's. Of course he had a negative spike as well. Clinton had the .com boom.

The 80s and 90s were both known for consolidation, sometimes hostile. Bill Gates ate a lot of start ups.

J

 

[onejayhawk]

There are no definitive conclusions to the why in the paper. Some people spoke to partial why's of what's going on. One of them being that antitrust laws were weakened during the Reagan years, and not much enforces since. That means more barriers to entry for new firms caused by existing firms.

Liability is a big issue. Either a start up buys insurance, often mandated, accepts exposure. One is expensive. The other is potentially fatal. Regulatory and tax compliance could be an issue. Just about anything paperwork related is easier for a big company.

J

 

[Harv]

I count 9 presidential terms in the graph. 5 of them are Republican (2 of Reagan and 3 of Bush) and 4 of them are Democrat. (2 of Clinton, and 2 of Carter / Obama)

The downward trend is hard to dispute and I have not found a graph that shows this data earlier. It is hard to pin the blame on either political party at first glance.

Liability is a big issue. Either a start up buys insurance, often mandated, accepts exposure. One is expensive. The other is potentially fatal.

This is an issue. Tort reform lacks political will. Besides, it ranks pretty low on today's hot issues.

This will be blamed on repressive taxation, welfare spending and labor agitation, as it always is.

You forgot education.

How about culture? Have American people simply become less inclined to start a business?

 

[hobbsyoyo]

You forgot education.

How about culture? Have American people simply become less inclined to start a business?

Wealth has been concentrating in the hands of the ultra wealthy at an alarming rate. Maybe it's not that Americans are less inclined to start businesses but are less able. Contrary to popular opinion, the ultra wealthy don't start a lot of new businesses, especially when you consider the amount of wealth they have on hand. To use an analogy, just because you make 1000x more money than normal people doesn't mean you buy 1000x more goods and services.

Obviously, the analogy doesn't quite fit as the ultra wealthy do in fact create new businesses, but not in anything close to the proportion of the amount of capital they have access to.