Jordan Weissman, associate editor at The Atlantic, points to a concerning economic trend: For the past 30 years, new businesses have made up a steadily shrinking portion of U.S. companies, generating a declining number of new jobs. 

The decline has accelerated since the recession and may be hurting the recovery. According to a report by the Hudson Institute:

  • New companies added 2.34 million jobs in 2010 – down from an average 3 million a year dating back to 1977.
  • Since 2009, there have been an average of 7.8 start-up jobs per 1000 Americans – down from 11.2 in the Clinton administration.


A Long Term Trend

The Hudson report erroneously suggests that new regulations, such as healthcare reform and uncertainty about taxes may be discouraging start-ups from hiring. That bogus partisan argument is without merit, as Weissman points out:

Looking at the long-term trends, though, it seems that the change we’re witnessing is much bigger than anything the Obama administration might be responsible for.

According to the Census Bureau’s Business Dynamics Statistics, which track all new firms with more than one employee, as shown in a graph from a Ewing Marion Kauffman Foundation report, there has been a steady decline since the late 1980s:

  • start-ups made up more than 12% of U.S. companies in 1980
  • Today, they’re less than 8%.
  • Start-ups declined sharply during the late 80s, late 90s, and late 00’s.
This is a trend that Washington Monthly calls The Slow-Motion Collapse of American Entrepreneurship. They trace the decline back even further – to the 1970s:

The problem with this picture, however, is that it does not account for the fact that between 1977 (the first year the Census captured this “employer business” data) and 2009 the working-age population in the United States increased by 75 million people. If we adjust for this expansion, a much darker picture emerges. New business formation in America is revealed to have actually fallen dramatically over the last generation.

In 1977, Americans created more than 35 new employer businesses for every 10,000 citizens age sixteen and over. By 2009, however, Americans were annually creating fewer than 18 such businesses, a 50% drop.

And as the start-up rate has fallen, so has their contribution to employment – from as high as 4% of all jobs in the Reagan era, down to 3% in 2006 and 2% today.


Factors in the Decline

Industry specific factors: In 2000, the construction sector generated more than 61,000 new firms, down to 17,000 in 2010 due to the real estate bust.

The success of national chains: No surprise here. Each new mom and pop restaurant or grocery store is counted as a start-up. New Walmart or McDonald’s openings are not because the government considers these  “establishments” – a new expansion for an existing chain. So, while Census data shows that new fast food restaurants and big box stores grew by about 50% from 1983 to 2006 (in green in the chart below),  the annual number start-ups (in red) only increased by around 36%.


Job creation also shifted towards establishments. The result:

  • start-ups steadily generated around three million jobs per year.
  • New establishments went from 4 million to 6 million 2006.


Ironically, a Stabilizing Influence

Start-ups either grow up fast and add many jobs or flame out quickly and increase unemployment. So, as the U.S. start-up rate has slowed, fewer new jobs have been created, but fewer jobs have been lost to bankruptcies and layoffs. As shown in the chart below from the University of Maryland economist John Haltiwanger this gradual job stabilization trend was, however, interrupted by the recession: Haltiwanger_Job_Creation_Destruction.png

A Stable Economy is Not a Dynamic Economy

The problem? Young companies that transition from the start-up phase to growing enterprises tend to be more productive than old, established companies. As Weissman sums it up:

They give the economy a new injection of life, and the fewer that are created, the less of that energy we get. And we were losing that energy well before the recession.

What Explains the Decline?

Since the Great Recession did not begin this steady decline that began at the time of the Reagan Administration and has spanned both Republican and Democratic administrations, how can it be explained?

Taxes?  No. While some might point to high taxes, tax rates have generally decreased during exactly the period when entrepreneurship rates have been in decline.

Regulation?  No. While poorly conceived government regulation can make it hard for entrepreneurs to do business, it’s hard to hold regulation responsible for this dramatic decline in entrepreneurship. In many respects it is now easier than it has been in decades to start a new business. The Internet has greatly simplified the tasks of tracking regulations and interacting with regulators, and many states now offer one-stop incorporation services.

Technology? No. This is another common explanation for the decline in entrepreneurship. While it is true that over the last generation, digitization has displaced many independent businesses—as in travel agencies, bookstores, and record stores, and that technology also creates opportunities to consolidate many smaller businesses into giant concerns—as when Amazon creates a nation-spanning virtual book sales monopoly, technology is not likely a sufficient explanation for a decline of this magnitude. To the contrary, many start-ups have been in high-tech fields, and many of the new digital technologies—like automated bookkeeping programs and wireless credit card readers—have made it far easier for other small operators to get into business.

Barry C. Lynn and Lina Khan write in Washington Monthly have put their finger on two key causes that originated during the Reagan Administration.

Shortage of Financing: This is one of the most common complaints among small business entrepreneurs. Since only a tiny fraction of start-ups have access to venture funds, the vast majority of entrepreneurs have always had to rely primarily on personal savings and contributions from family and friends. In today’s economy, stagnant wages and skyrocketing health care and higher education costs mean that fewer and fewer average families have the savings needed to invest in a small business.

The Consolidation Trend:  The consolidation in the banking industry that began in the 1980s means that few bank officers  have “the leeway and local knowledge to lend to established local businesses, much less new ventures,” and difficult economic times in which  large banks come under great pressure both from Wall Street and regulators exacerbates this. Lynn and Khan provide the example of Bank of America, which made 312 SBA-guaranteed loans to local businesses in Maryland in 2007. In 2010, it made two.

But the consolidation trend has not been limited to the financial sector. As Lynn and Khan point out it began in earnest when the Reagan administration dismantled antimonopoly laws:

The single biggest factor driving down entrepreneurship is precisely the radical concentration of power we have seen not only in the banking industry but throughout the U.S. economy over the last thirty years. This revolutionary remaking of almost every economic activity in the nation was set in motion in 1981, when officials in the Reagan administration all but suspended traditional enforcement of America’s antimonopoly laws, a change in policy then adopted by every subsequent administration. Since then, regulators have done almost nothing to stop the great waves of mergers and acquisitions, with the result that control over most major economic activities is now more consolidated than at any time since the Gilded Age.

The effects have been nowhere more dramatic than in those sectors that have always been most congenial to individual proprietorships, like retail, services, farming, and small manufacturing. These were the activities most affected, for instance, by the type of “roll-up” strategies pioneered by financiers like Mitt Romney’s Bain Capital. In the case of the office-supply retailer Staples, Bain’s investment helped propel the company from a one-store operation to a 2,000-store international behemoth. Similar plays resulted in Home Depot capturing a vast proportion of the nation’s hardware business, in Best Buy capturing a vast proportion of America’s electronics business, and in Macy’s capturing a vast proportion of all department store sales. Just one company, Wal-Mart, now controls upward of 50 percent of some lines of grocery and general merchandise business—commerce that a generation ago was divided among tens of thousands of families.

Indeed, the decline of small business documented here appears to confirm that the great social experiment undertaken a generation ago—when we allowed our government to cease enforcement of our antimonopoly laws—has had a devastating effect not only on our democracy but also on the ability of ordinary Americans to build their assets and move up the socioeconomic ladder through enterprise.


Recognizing the Causes: Not only has the radical concentration of power in the U.S. economy over the last thirty years dismantled antimonopoly laws, but it has created a concerted agenda of corporate personhood that originated with Nixon appointee Justice Lewis Powell Jr. As part of this trend, the middle class has been hollowed out by union busting that began during the Reagan Administration. In the last 32 years, as union membership has rapidly declined, the income of the wealthiest 5% of families has grown eight times faster than the income of the bottom 20%, and the US is now 5th in the World in Income Inequality

At heart, I think most informed observers recognize that a top heavy economic structure that undercuts the viability of the working classes is unhealthy. These trends are interrelated, and, ironically, innovation – long the purview of start-up enterprises, is seen as a way out.

Recognizing the Solutions: As I wrote here, economists say that a real key to regaining lost ground for the middle class, is cultivating large numbers of jobs in new and growing industries like green technology and health care, and providing unfettered access to higher education so middle- and lower-income Americans can train for these careers. According to Will Marshall, president of the Progressive Policy Institute think tank:

What we need is a policy conducive to innovation and entrepreneurship. You need the energy of invention just as we saw in the late 90s. We need another spurt of innovation-fueled growth.

Clamor for Change: The role of government in creating the problem is clear, and that means that government reform must be a part of the solution. The only way to reverse an activist corporate agenda that created the problem is to turn to a consumerist agenda.  Occupy Wall Street correctly diagnosed the problem, but their voices were quickly marginalized. How such a change will occur is unclear, but it is clear that it will take a more educated and activist public to recognize the roots of the problem and pressure to reign in the stranglehold of large corporate interests over the economy.