Are America's Entrepreneurs an Endangered Species?

February 13, 2014

A new report by the Kauffman Foundation finds that America’s economy is becoming less dynamic, dampening the country’s growth prospects at a time when its fiscal challenges are becoming more entrenched.

Dynamism rests on a churning, heaving market for jobs and entrepreneurial opportunity. Rates of new business formation are not encouraging by this measure.

The per-capita entrepreneurship rate is telling, since it shows that the pace of startup creation has slowed even as the number of people and new businesses has risen. It reflects a trend of stagnant business creation that began in the late 1980s and hardened following the Great Recession.

The authors predict a small uptick in dynamism thanks to the growing popularity of urban startup accelerators. I don’t doubt the benefit they bring to those cities, and we should encourage their development. What’s telling though is the concentration in economic dynamism in these urban areas. Perhaps economic measures may grow as a result, but they’ll mask a changing geography of opportunity.

One note of concern is the declining contribution that new companies are making to job creation. As a recent NBER study found, “Companies younger than ten years old accounted for 37% of the overall decline in net job growth during that period [2006 to 2009], while only accounting for
22% of employment.” The entrepreneurship rate among new high-tech firms in particular has declined from a high of 60% in 1982 to 38% in 2011, which is worrying since, as Kauffman finds in a related study, “surviving young high-tech businesses add jobs at a rate twice that of all surviving young firms.”

Kauffman sees a long-run decline in business dynamism, which in turn is undermining the degree of churn in the labor market. Of all the economy’s vital signs, churn may be one of the most essential—and often overlooked. It tracks the degree to which workers are jumping from job-to-job, boosting their wages and bettering the economy’s efficiency. And as one research paper finds, workers are now staying put and are doing so usually in slow growth companies. This lost dynamism particularly affects young people, since moving from firm-to-firm allows them to build their skillset and better harness their talent.

There are still signs of plenty amidst the stagnation. New technologies, from driverless cars to the Internet of Things, offer tremendous opportunities for entrepreneurs. Successful tech startups today are quite simply awash in capital. And as evidenced by the nascent maker movement, entrepreneurs are now able to manufacture and monetize products that were previously available only to larger firms.

Kauffman suggests a number of business-boosting policies, from immigration reform to regulatory clarity. But what stood out to me was the group’s call for better data on entrepreneurship.

Good policy decisions cannot be made on the basis
 of poor or nonexistent data. While there has been a tidal change in data available on entrepreneurship from national statistical agencies in the last decade, there remains room for improvement. For example, the lack of hard data on firm financing over the last decade means that we have little ability to gauge the impact of the worst credit crunch in generations on the financing of small and young companies.

Our inability to get a handle on these basic measures of entrepreneurship is worrying. Data collection by the Census Bureau as well as state and local agencies could be greatly improved. Yet this shortcoming is only one part of a much bigger problem. We can’t seem to effectively measure the growth of the digital economy, as James Surowiecki of The New Yorker recently pointed out:

Our main yardstick for the health of the economy is G.D.P. growth, a concept devised in the nineteen-thirties by the economist Simon Kuznets. If it’s rising briskly, we know that the economy is doing well. If not, we know it’s time to worry. The basic assumption is simple: the more stuff we’re producing for sale, the better off we are. In the industrial age, this was a reasonable assumption, but in the digital economy that picture gets a lot fuzzier, since so much of what’s being produced is available free. You may think that Wikipedia, Twitter, Snapchat, Google Maps, and so on are valuable. But, as far as G.D.P. is concerned, they barely exist. The M.I.T. economist Erik Brynjolfsson points out that, according to government statistics, the “information sector” of the economy—which includes publishing, software, data services, and telecom—has barely grown since the late eighties, even though we’ve seen an explosion in the amount of information and data that individuals and businesses consume. “That just feels totally wrong,” he told me. …

New technologies have always driven out old ones, but it used to be that they would enter the market economy, and thus boost G.D.P.—as when the internal-combustion engine replaced the horse. Digitization is distinctive because much of the value it creates for consumers never becomes part of the economy that G.D.P. measures. That makes the gap between what’s actually happening in the economy and what the statistics are measuring wider than ever before.

It’s hard to focus on growing a part of the economy that we can’t effectively measure. America’s institutions and policies should reflect the reality of the 21st Century economy, which in turn requires knowing what that reality is in the first place.

Kauffman’s report is a positive step toward understanding what’s at stake in the years ahead. An economy that’s more dynamic and thriving is one that offers greater opportunity and mobility to an America that desperately longs for it.