Entrepreneurship is falling in America but maybe it isn't so bad
Since the 1980s and the 1990s, the United States has benefited immensely from the widespread creation of startup businesses. These businesses, throughout the years, have injected dynamism and vibrancy into the economy, ensuring a sustained increase in yearly jobs and economic growth that has ultimately helped America to retain its competitive edge in the global economy. While this certainly has been true for the last three decades, the economy has witnessed a significant slowdown in the number of startups that have been operating in the country. This begs the question, “why is the slowdown particularly important and should we, as a nation, be worried?”
According to recent economic data, the percentage of private companies that are less than one year old, which is indicative of a new business, has been on a slow decline. Compared to the 1980s, when the creation of new startups was at 12%, relative to existing ones, today the number has dropped to roughly 8%. While this decrease in the number of new startups may not seem particularly significant, especially for most individuals who are not concerned with the intricacies of the economy, it signals a worrying trend that we must be cognizant of. Whether or not we are concerned with such matters, it will inevitably affect each and every one of us due to its closely linked relationship with the overall health and vitality of the economy.
Firstly, while the drop-in percentage points over the last 35 years happened to be only 4%, this actually translates to hundreds of thousands of jobs and companies not being created. To put this into context, this means that throughout the last few decades the pace at which jobs are created in the United States economy has undergone a significant slowdown compared to previous decades such as the 80s and 90s. We aren’t just talking about a few thousand jobs; we are talking in the range of 10s of millions. In other words, had the United States witnessed the same amount of growth of startups as it did in the 1980s, then we would be seeing almost 2 million more jobs a year in addition to more than 200,000 additional companies being created every year.
Lastly, this reduction in entrepreneurship is worrisome because of the way that it exposes some of the general weaknesses of the United States economy. It signals many different underlying problems to the economic and business environment of the country in that people are either less willing to undertake risk in opening a new business or that they are just no longer capable of doing so. Given the fact that a vast majority of jobs are created by these types of private firms, this does not bode well for the future of economic growth.
While it is one thing to point out the relative drop in entrepreneurship in the United States, we should also look at the reasons as to why this trend has been occurring in recent times. One of the most obvious reasons for the decrease in entrepreneurship in the United States is the fact that the country is undergoing a significant demographic shift. Many of the people who are most associated with entrepreneurship and business creation, for example, happen to be the demographic that we refer to as Baby Boomers. This demographic is slowly retiring and is taking its business acumen with it. As a result, millennials are just beginning to take over the reins from the Baby Boomers which means that in the next decade or so it is likely that this reversal in new startups will begin to climb, rather than continue to decrease.
Demographics is but one aspect in the explanation of this recent phenomenon, however. We must also be aware of the general business environment itself, given that the United States has suffered from the Great Recession less than 10 years ago to this date. In other words, there is still a sense of apprehension in the business community given the fresh wounds to the global economy. Growth is still weak, compared to nearly every other era in American history, so it is no wonder why people are less willing to engage in entrepreneurship and create their own business. By investing in a business individuals are risking a substantial amount of capital, so by investing in a market that is still susceptible to economic shocks they are placing themselves at, what some may see as, an unnecessary risk for failure.
Some economists at Goldman Sachs accredit the amount of economic regulations in the economy as a reason for why some people are less enthusiastic to invest in business creation. The argument is that the high level of regulations makes it harder for business owners to maintain and operate their businesses because of the complexities involved as a result of the many rules and fees that they must abide by. By making entrepreneurship easier, so to speak, it would encourage more people to engage in it in the first place. There is also the issue with the lack of credit availability for people who are applying for loans and other forms of credit to enable them to create a business. In recent years, it has become harder for people to secure credit lines due to a variety of factors, most prominently the general state of the economy where banks are less willing to deal with high-risk lenders i.e. fledgling entrepreneurs.
While this next point may seem somewhat tangential, stay with me for a second. While we briefly covered the general Baby Boomer vs Millennial dynamic, let’s also have a quick look at who the entrepreneurs in this country are. According to Kauffmann.org, the demographic makeup of American entrepreneurs is fairly diverse. The chart below shows the change in demographics from the year 1996 to 2015:
As one can see, the number of African Americans, Hispanics, and Asian Americans who are starting businesses in the United States has grown considerably within just the last decade. Why exactly is this important? The United States is becoming increasingly reliant upon the skills and contributions of people of color so this entails with it great consequences. As people of color’s role begins to grow in contemporary society this means that the United States will have to adapt. The United States must come to the realization that it can no longer marginalize people of color given that they play such a large role in the development of the country.
Though the level of entrepreneurship has been steadily decreasing since the 1980s, we should expect a gradual reversal of this trend given that millennials are taking over the former positions that Baby Boomers were traditionally in charge of. Spearheading the charge, young people of color have developed into the engine of growth for the country, making their presence in society well known. This signifies how important it is to ensure that all people in society are included into society because of the many social and economic benefits that follow. The sustained growth of the United States depends on this.