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The Decline of American Entrepreneurship – Over regulation, over inspection, insufficient legal system, monopolization of the economy, monopolization of media, over taxation.

June 8, 2014   ·   0 Comments

If the government has the ability to pull it self out of debt by printing ever more and more FIAT money the result is as described in the header – another negative aspect of the US empire of the Petro Dollar – it’s very difficult to get off the needle.

 

 

Photo: Scott Eells/Bloomberg

Supporters of a vigorous free enterprise system argue the United States is in danger of losing its entrepreneurial edge. Now a recent study by researchers at the Brookings Institution, which reveals a long-term trend of declining American entrepreneurship, lends new credence to the argument.

The study, “Declining Business Dynamism in the United States,” finds that entrepreneurial activity has slowed over the last three decades, with more businesses now being destroyed than created.  

Brookings researcher Robert Litan and economist Ian Hathaway examined two measures of business dynamism—the entry of new firms to the marketplace in a given year and job reallocation—from 1978 to 2011. They discovered that entrepreneurship has been in long-term decline across a range of sectors and geographic regions, with a precipitous drop since 2006.

Part of that drop can be attributed to the recession of 2007-2009, but there’s still little evidence of an entrepreneurial rebound in the current sluggish recovery. In fact, for 2011, the report found that “business deaths now exceed business births for the first time in the thirty-plus-year history of our data.”

Litan and Hathaway point to the measures they studied as markers of the “creative destruction” process needed to develop new innovations, force productivity gains, disrupt markets and match workers with firms more effectively.

Just think of how the changes in, say, information technology and personal computing have upended the technology market in recent decades, when longtime market leaders have found themselves facing stiff competition from innovative upstarts. That led to the development of new technologies, greater productivity and job creation.

“In other words, a dynamic economy constantly forces labor and capital to be put to better uses,” Litan and Hathaway write. “But recent evidence points to a U.S. economy that has steadily become less dynamic over time.”

And that “steady, secular [i.e., not cyclical] decline in business dynamism” is a negative indicator for long-term economic growth.

Why is Entrepreneurship in Decline?

In the immediate short term, a recent study by the Ewing Marion Kauffman Foundation suggests, a modest decline in entrepreneurship reflects changing labor market conditions. Many entrepreneurs who may have started their businesses out of necessity during the downturn—say, a downsized professional who picks up a few consulting contracts, or a laid-off factory worker who starts a home repair business—may return to traditional workplaces as the job market mends. But the longer-term picture of declining business dynamism, as the Brookings study finds, is less sanguine.

The Brookings study doesn’t go so far as to speculate as to reasons for the decline in entrepreneurship, but there are several possible culprits. The consolidation of businesses in some sectors likely plays a role, as does the nation’s changing demographics (an aging population may have less tolerance for entrepreneurial risk).

Part of the problem, too, is that government policy is heavily weighted against entrepreneurship. The rapid expansion of government regulation in recent decades, and tax policy that complicates business development and growth, have certainly played a role as well, economic policy analyst Anthony Kim of the Heritage Foundation suggests.

“High tax rates and a tax code that is burdensome for both individuals and businesses clog America’s economic arteries, hindering vibrant entrepreneurial growth,” Kim writes. “Last year, Congress and President Obama instituted 13 tax increases, including raising the top federal individual tax rate to 43.4 percent. America has the highest corporate tax rate among industrialized nations and further challenges business competitiveness in the international marketplace by taxing the foreign earnings of its businesses.”

For smaller and start-up businesses, the costs of compliance with punishing regulatory and tax regimes can be crippling.

Is There a Remedy to the Decline?

Litan and Hathaway suggest a couple of possible policy changes that might stem the decline, including expanding the pool of high-skills visas (because immigrants launch businesses at a higher rate) and greater government support for entrepreneurship.

Those are good places to start, but Brookings researchers overlook the salutary effect of getting government out of the way, through reforming burdensome regulations and an unwieldy tax code. The uncertainty posed by Obamacare’s numerous mandates, rules and taxes may also be weighing down the creation of new firms.

And as Megan McCardle notes at Bloomberg View, the trend spells bad news for the health of the overall economy.

“An economy with fewer small businesses is one with fewer potential entry points into the middle class, and it is potentially also one with less flexibility,” McCardle writes.

President Obama seems to recognize the need to support entrepreneurship, but five years into his administration, that support tends to be rhetorical at best.

For example, in October, the president announced in a video message presented at the Global Entrepreneurship Summit in Malaysia that he would create a team of “ambassadors for entrepreneurship,” composed of U.S. business leaders charged with promoting entrepreneurial activity. That initiative may be good PR for the administration, and it certainly won’t hurt.

But it won’t be sufficient to stem the decline in American entrepreneurial activity. In reality, America doesn’t need ambassadors for entrepreneurship—it needs more entrepreneurs. But the Obama Administration’s unwillingness to move forward with policy proposals to promote free enterprise, like regulatory and tax reform, means the decline is likely to continue. 

US Chambers of commerce.

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