Maybe we’re not “‘Shark Tank’ nation” after all. The incredibly popular reality television series, which features budding entrepreneurs pleading for backing from wealthy investors (the “sharks”), seems to define us. We’re a nation of hungry go-getters, eager to start our own business on the way to becoming multimillionaires. Everyone wants to strike it big.
There’s a huge gap between perception and reality. Just recently, the Census Bureau released its latest figures for business start-ups, and they paint a picture strikingly at odds with the conventional wisdom. Instead of a boom in business start-ups, there has been a long-term decline. In 2015, start-ups totaled 414,000, “well below the pre-Great Recession average of 524,000 startup firms,” as the Census Bureau puts it.
To be sure, the slump reflects the lingering adverse effects of the recession. Venture capital firms, which provide funds for new businesses, “are more risk-averse,” says economist Robert Litan. But that’s not the whole story. A 2014 study by Litan and Ian Hathaway found that the start-up decline dates back to at least the late 1970s, affects all major industries and has been present in 365 out of 366 metropolitan areas. What’s going on?
The answer is important not only because it alters our national self-image but also because it affects the economy’s job-creation capacity. Business start-ups are constantly priming the employment pump with new jobs. If start-ups continue to decline, overall job creation may suffer.
Take 2015 – the subject of the Census Bureau report – as a case in point. Net job creation totaled 3.1 million, the Census Bureau says. But that figure emerged from a more confusing process: the addition of 16.8 million jobs minus the loss of 13.7 million jobs. Moreover, of the 3.1 million new jobs, roughly four-fifths (2.5 million) were created by start-ups, the Census Bureau reports.
As these numbers indicate, many companies were hiring and firing. But the two often canceled each out. Consider companies aged 1 to 5 years old. In 2015, they created 2.11 million new jobs and lost 2.32 million jobs, for a net loss of 212,000. Without the impetus provided by start-up jobs, total employment growth might have been much slower.
Although we tend to think of start-ups as high-tech – the next Google or Facebook – most new firms are more mundane: plumbers, electricians, restaurants and the like. The breadth of the start-up slowdown suggests that the underlying causes do not apply to just one industry or company age. Still, there is no agreement as to causes.
Slower population growth is one pressure, says Litan. Cities and regions are expanding less rapidly than in the past and don’t need as many new hairdressers, construction companies, health clubs and doctors’ offices. Regions dominated by a few big employers may also have fewer start-ups. People lack a “start-up culture,” says Litan. They depend too much on the mega-employer. Growing market power of existing firms is a newer theory. “You’ve got rising market power,” Marshall Steinbaum, an economist from the left-leaning Roosevelt Institute, told the New York Times. “In general, that makes it hard for new businesses to compete with incumbents.” This has long been true, but in the past, it hasn’t prevented start-ups from displacing powerful industry leaders.
Published in Daily Times, October 1st 2017.