Is American Entrepreneurship in Trouble?

“Sadly, the annual rate of new business creation is about 28 percent lower today than it was in the 1980s, according to our analysis of the U.S. Census Bureau’s Business Dynamics Statistics annual data series.  Getting the U.S. economy back on track will require a much higher annual rate of new business start-ups.” ~ Edward Prescott and Lee Ohanian

Since emerging from the Great Recession seven years ago, the U.S. economy has grown at an average annual rate of just 2.2 percent – more than a percentage point slower than the post-WWII average of 3.5 percent.

In an economy the size of the U.S. economy, percentage points matter. Had the economy grown at 3.5 percent since emerging from recession in 2009, GDP in 2016 alone would have been nearly $1.5 trillion greater. Over a 25-year period, the difference between 2.2 percent growth and 3.5 percent growth is an additional $110 trillion in economic output.

Alarmingly, the Congressional Budget Office (CBO) has projected that the economy will grow over the medium- to longer-term at a subpar pace of just 2-2.5 percent, “well below the average seen over the past several decades.” Recent Obama Administration budget proposals have also forecast growth of just 2.3 percent, “markedly slower than the average growth rate of real GDP since 1947.”

Many private sector economists agree. A survey earlier this year by the National Association for Business Economics found that respondents had lowered their growth outlook to just 2.2 percent this year and 2.4 percent next year. Former Treasury Secretary Larry Summers has referred to the U.S. economy’s sub-par post-recession performance as “secular stagnation.”

In a Wall Street Journal Op/Ed from February of 2014, Nobel laureate economist Edward Prescott and his colleague Lee Ohanian explain that the economy’s anemic performance in recent years is due in large part to a plunge in productivity growth, caused by a dramatic decline in the rate of new business formation:

“The remarkable productivity growth that has enabled the U.S. to become the wealthiest country on earth has slowed considerably in recent years.  The productivity of U.S. workers has grown at an average annual rate of about 2.5% since 1948, but has averaged only about 1.1% since 2011 – less than half the historical rate.  The most recent period of rapid productivity growth in the U.S. – and rapid economic growth – was in the 1980s and ‘90s and reflected the remarkable success of new businesses in information and communications technologies, including Microsoft, Apple, Amazon, Intel, and Google.  These new companies not only created millions of jobs but transformed modern society, changing how much of the world produces, distributes and markets goods and services.

Sadly, the annual rate of new business creation is about 28 percent lower today than it was in the 1980s, according to our analysis of the U.S. Census Bureau’s Business Dynamics Statistics annual data series.  Getting the U.S. economy back on track will require a much higher annual rate of new business start-ups.”

On May 5, 2014, the Brookings Institution released a paper by economists Robert Litan and Ian Hathaway which demonstrated that new business formation had fallen to a 30-year low – and that this decline is occurring in all 50 states, in all but a handful of the 360 metro areas examined, and across a broad range of industry sectors, including high-technology.

The chart below, taken from the Litan-Hathaway paper, shows that the rate of new business formation (new firms as a percentage of all firms) has been in steady decline for more than three decades, and in recent years has fallen below the rate of business failure. In other words, in recent years more businesses have been failing in American than launching.

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Given the critical role start-ups play as the principal source of disruptive innovation, productivity growth, economic growth, and job creation, and expanding economic opportunity, such circumstances are nothing short of a national emergency.

Despite the importance of new businesses to innovation and economic growth, to date Washington policymakers have largely omitted consideration of entrepreneurs and start-ups from economic and regulatory policy discussions.  Too few policymakers in Washington, or at the state and local level, understand, or are even aware of, the unique nature, importance, vulnerabilities, and policy needs of start-ups.

The omission of entrepreneurship from economic policy discussions is of tremendous concern because thriving entrepreneurship and the growth it propels are a major part of the solution to a number of our nation’s most serious, politically difficult, and, in some ways, mutually reinforcing economic challenges, including:

  • persistently high underemployment;
  • high and rising long-term debt;
  • stagnant middle-class incomes;
  • widening income, wealth, and opportunity inequality.
  • The highest poverty rates since the late 1960s; and,
  • record numbers of American dependent on government programs like food stamps and disability insurance.

While complete solutions to such complex challenges require progress on a number of fronts, there is little doubt that our ability to address these and other socio-economic problems would be greatly enhanced by faster economic growth. Growth at or above the post-WWII rate of 3.5 percent on a sustained basis would produce the jobs necessary to re-employ millions of Americans still on the sidelines, the opportunity necessary to accelerate socio-economic mobility, the rising real wages needed to narrow the income gap and reduce poverty, and the tax revenue necessary to narrow budget deficits and substantially reduce the nation’s long-term debt.

It should also be emphasized that being the world’s innovation leader is not America’s birthright – we have to continue to earn that distinction in the face of increasingly intense competition. Today’s entrepreneurs have a world of options to choose from regarding where to innovate, start their businesses, and create jobs. As AOL co-founder Steve Case pointed out at an Aspen Institute event in 2014:

“A half century ago Detroit was the most innovative, entrepreneurial center in the country, arguably the world, because at the time the most innovative technology was the car…You don’t want to get cocky or complacent like Detroit did and think you can rest on your laurels. You constantly have to reinvent yourself.”

If the United States is to remain a global innovation leader – and if the U.S. economy is to generate the growth, jobs, wealth creation, tax revenue, and opportunity necessary to address our most significant challenges – enhancing policy circumstances entrepreneurs and the new businesses they launch must be a national priority.