Business formation is at historic lows. The reasons defy simple explanations.
John Maynard Keynes famously said, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
In other words, we need to take economic research, however dry, seriously.
This week, researchers at the San Francisco Fed put out a paper seeking to explain the historic slowdown in business formation in the United States. In 2014, the most recent year for which data are available, startups were at a 40-year low.
The Fed researchers gamely sought the answer in productivity, fixed costs and availability of the workforce, among other things. Their study concludes, “Policies to stimulate business formation are likely to be more effective if they include strategies that expand the labor supply. Increasing the workforce could not only raise the supply of available entrepreneurs but could also raise the demand for more businesses.”
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Yet this ignores two large pachyderms in the room: The intense consolidation of industries through mergers and the rise of cartels and giant companies with commanding market power and ability to undersell competitors.
This phenomenon, enabled with mostly nonexistent antitrust and fair trade enforcement since the Reagan era, has clear-cut thousands of companies from the economy. Such firms weren’t only the crown jewels of countless cities and towns, they also supported battalions of small vendors (including startups) that served their needs. They were also incubators for talent, as some executives left these mother ships and went out to set up their own companies.
The market power of giants such as Amazon, Walmart, Intel, the too-big-to-fail banks, the airline cartel — pick your industry — make it impossible for many an entrepreneur to ever get a foothold. Sure, Amazon provides an online marketplace for some; I’m skeptical this makes up for all the practical, local brick-and-mortar operations that could never get started.
Beyond this, we may be stuck in Robert Gordon territory. The Northwestern University economist has theorized that the economy is slow because it lacks such revolutions as the harnessing of electricity, invention of the automobile and the rise of the internet. The more recent smartphone phenomenon falls far short of its predecessors, certainly in creating jobs. And considering most app makers bring in little money, it doesn’t increase incentives for business formation.
To be sure, some would argue that government regulation is behind the slowdown. Yet regulation also creates jobs and niches for vendors to help companies with compliance, cleanup and technological responses to, say, pollution. It provides incentives for startups in such sectors as clean energy. States and cities with more stringent regulations usually have stronger economies (which is not to say that one can’t strangle the golden goose). After President Richard Nixon created the EPA in 1970, business formation remained robust for years.
This argument is far from settled. But as for raising the labor supply and potential entrepreneurs? Give us universal healthcare and more people might make the leap.
Today’s Econ Haiku:
The Trump family
It’s Moscow on the Hudson
Wall Street in the red