Killing startups, killing the economy

One of the arguments that us free market types make is that regulation, bureaucracy, and taxes with high transaction costs disproportionately hurt small businesses. Big established companies have their own bureaucracies to deal with government bureaucracies, but (as I can attest) the new entrepreneur usually struggles to make sense of all the regulation.

Over the past three years, there are fewer new companies creating fewer jobs — and not enough to replace companies that have died — according to a major article Friday in the Wall Street Journal:

Few Businesses Sprout, With Even Fewer Jobs
By Justin Lahart and Mark Whitehouse

Fewer new businesses are getting off the ground in the U.S., available data suggest, a development that could cloud the prospects for job growth and innovation.

The stats were grim. The WSJ charts showed that new firm creation peaked in 2005, but the past three years have had net job losses.

The article quoted the latest econometric research on job creation, which shows that (depending on the phase of the economic cycle) most or all of the net jobs created in the US economy come in the first five years of a company’s life. After that, established businesses (large and small) are a net wash.

Several of these studies have been publicized (and funded) by the Kauffman Foundation. One example was the study by John Haltiwanger, Ron Jarmin and Javier Miranda using data of the U.S. Census Bureau’s Business Dynamics Statistics. They found that from 1980–2005, firms less than five years old accounted for all net job growth in the United States. The WSJ article quoted Haltiwanger as saying the young firm job creation process “isn't working very well now.”

The data get worse: the firms that are being formed are creating less jobs. Some of this is the offshoring that has become common for (“born global”) startups born this century. However, it’s clear that scarcity of capital is impairing growth and particularly job growth.

Last month, I heard Prof. Haltiwanger deliver a keynote at a Kauffmann-founded workshop held at the Federal Reserve Board of Atlanta. (I was there to present my own research on uncertainty and small business success). The picture presented by Haltiwanger and others at the conference was consistent with other anecdotal evidence and the WSJ article: firms are not being created and those that are being created are much more cautious about hiring.

None of the studies yet prove what the root cause is of this weak expansion and job creation: lack of demand, lack of credit, increased costs caused by healthcare reform. But I think the data is relatively congruent: until new firms start being created and grow, there won’t be the jobs needed to get unemployment back down to single digits.