Tuesday, May 8, 2012

Have we run out of new ideas? The case of startups

My old University of Georgia classmate Bob McTeer recently posted this to his blog: What key indicators have traditionally signaled a healthy, robust economy that is vital and independent of monetary injections or government subsidy? I would vote for entrepreneurialism, which the government can’t do much to promote except stay out of the way. If that is the case, then it is telling that new business startups have been at a record low Reuters reported on May 2. WASHINGTON (Reuters) - The pace at which new businesses are created in the United States dropped to a record low in 2010, a troubling development for an economy that is struggling to achieve higher growth rates necessary to reduce high unemployment. The latest Census Bureau data, published on Wednesday, showed the startup rate fell to an all-time low of 7.87 percent from 8.10 in 2009. The figures are based on a survey conducted by the Census Bureau's Center for Economic Studies and the Ewing Marion Kauffman Foundation, a nonprofit organization that focuses on entrepreneurship. The startup rate peaked at 13.02 percent in 1987. Startups are critical contributors to job creation, and the declining trend could help explain the economy's sluggish recovery from the 2007-09 recession. "There are a lot of questions as to why the economy has been slow coming out of the recession, and it is possible that some of that could be explained by the decline in the trend of startups and new firms in the U.S. economy," Javier Mirada, principal economist at the Center for Economic Studies, told Reuters. Well Dr. Mirada is wrong. The slow recovery cannot be explained by the slow pace of startups. Quite the contrary, perhaps Dr. Mirada is too young (or too old) to remember 1987. But 1987 was a year of slow growth with slower growth forecast for 1988. There was a Black Monday in October 1987 which was the largest single day decline in the Sow since the Great Depression and the country was still reeling from the previous year's recession. Yet in the face of all this, new startups were at a record high. Why? Well one of the reasons was that the 1985 recession was accompanied by record layoffs of white collar workers displaced by technological advances. One of the results was that these college educated workers started their own companies. Why is that not happening now? My guess it is because of the ever increasing burdens of regulations on small businesses and the uncertainties surrounding costs of healthcare and taxes.

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