A Shortage of Entrepreneurial Energy

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Two reports shine a light on at least one development that's been weighing on the U.S. economy: a shortage of entrepreneurial energy.

As Real Time Economics reports in "Recession Caused Sharp Decline in Start-Ups," Americans have been less willing than in the past to go for individual business gold:

The recession caused a sharp decline in new business start-ups, intensifying job market losses and potentially putting future economic growth at risk.

The Census Bureau on Wednesday said that 403,765 new firms were started in the 12 months ended March 2009, down 17.3% from a year earlier and the fewest on records that begin in 1977.

New businesses are an important source of new jobs — without them, there would be no job growth at all. Indeed, the new Census data show that one of the reasons that the job market declines were so severe in the recession was the dearth of start-ups. Firms less than a year old employed 2.3 million people in March 2009 whereas as a year earlier start-ups employed 3 million people.

In past recessions, start-ups didn’t take nearly as large a hit as they did in the downturn that began at the end of 2007, notes John Haltiwanger, a University of Maryland economist who has worked extensively with the Census start-up data. Even in the deep recession that ended in late 1982, start-up activity held up fairly well. “Start-ups weren’t immune, but the guys in the garages were going to try to do what they were going to do no matter what,” said Mr. Haltiwanger.

At the same time, the owners and managers of the businesses that have sprung up have been more than a little reluctant to beef up payrolls, as CNNMoney reports in "Job Creation Rate Hit 29-Year Low During Recession":

Job creation was much weaker in the Great Recession than in previous downturns -- partly because startups were harder hit this time around.

The rate of job creation among all types of firms hit a 29-year low from March 2008 to March 2009, according to a report released Wednesday by the Kauffman Foundation.

And at startups, the job creation rate sank a whopping 34% between 2006 and 2009, the Kauffman report found. In earlier downturns, startups saw much more modest declines.

Of course, more established firms also experienced drops in job creation, but they weren't as dramatic as at newer firms. Among firms of all ages, the job creation rate fell 25% from 2006 to 2009, according to Kauffman.

A healthy economy needs to constantly create jobs to replace ones that are being lost. In the recent recession, the problem wasn't just layoffs, but that not enough new jobs were being added.

While it's hard to say for sure what has happened to the American entrepreneurial spirit, it's a good bet that some or all of the following have played a role:

• Enduring and widespread economic uncertainty (contrary to what Washington and Wall Street would like us to believe);


• Diminished credit availability (especially for small businesses);


• Government stimulus programs that favor big business;


• Relative strength in overseas markets (which tends to favor larger firms with established export operations); and, perhaps most importantly,


• An preponderance of involuntary entrepreneurialism (especially among older, more risk averse individuals).

Regardless, it all adds up to an economy that is some way away from being in a sustainable recovery.

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