Category Archives: National Economy

Where are the start-ups? – Part II

The U.S. Census Bureau reports that the total number of new business startups and business closures per year -- the birth and death rates of American companies -- have crossed for the first time since the measurement began6 years ago the number of business start-ups fell below the number of business failures, and it has yet to recover.  This leaves us a stunning 12th among developed nations in terms of business startup activity.

So argues Jim Clifton, Chairman and CEO of Gallup, who cites data that show 20 million of the oft-reported 26 million businesses in America are inactive.  Only a small % of the remaining 6 million are responsible for job growth:

Of those, 3.8 million have four or fewer employees — mom and pop shops owned by people who aren’t building a business as much as they are building a life. And God bless them all. That is what America is for. We need every single one of them.

Next, there are about a million companies with five to nine employees, 600,000 businesses with 10 to 19 employees, and 500,000 companies with 20 to 99 employees. There are 90,000 businesses with 100 to 499 employees. And there are just 18,000 with 500 employees or more, and that figure includes about a thousand companies with 10,000 employees or more. Altogether, that is America, Inc.

A common misconception lumps together “lifestyle” companies and high-growth start-ups. Job growth comes mostly from new businesses that grow rapidly, not the more common short-hand of “small businesses.” The jobs created by high-growth companies, busy inventing products and services (and sometimes industries), dwarf those lost in the ongoing employment churn experienced by small businesses. The net result is remarkably stable cumulative job creation from start-ups despite their high failure rate.

Mr. Clifton also writes that “Entrepreneurship is not systematically built into our culture the way innovation or intellectual development is.”  Very true, as this podcast from AEI argues in even greater detail.  The entire wide-ranging podcast is worth a listen. A few highlights:

  • The economy needs more than a narrow rebound in tech entrepreneurship, especially since the current rebound has been accompanied by an uptick in “hardening” or consolidation as early firms are gobbled up before they boom.
  • Using job creation as a measure is problematic because fewer people work for Twitter or Facebook than their previous equivalents – by the nature of what they produce. Michael Spence divides the US economy between the one that competes globally vs. the local market (tradeable vs. non-tradeable). The former generates national wealth but will employ fewer and fewer people; however, that’s what sprinkles money around the non-tradeable localities. “Not everyone can work at Google or Apple.”
  • Innovation can be costly for individuals and firms in the short run, but is the key to wealth in the long run. E.g., productivity enhancements in low-tech/low-wage firms, consolidation that drives out less efficient mom&pops, and innovation that pushes stale incumbents out.

High profile firms such as Google and Facebook (hardly start-ups, anymore) enjoy outsized awareness because they’re personal and omnipresent, and belie the fact that the data show declining business dynamism overall and for start-ups specifically.  No one knows at the outset which high growth firms will explode and disrupt – so we need “more shots on goal.”

For every Facebook there are hundreds of other early-stage companies who receive financial backing and grow nicely. The economy is not built on a series of towering home runs that clear the fence no matter how strong the wind is blowing into the park. Winning takes singles, doubles, walks, anything that advances runners and scores runs. Over-regulating (or over-taxing) early-stage investment activity is like building a pitcher-friendly park and keeping the infield grass long: you better plan on low-scoring games.

Christmas 1964 vs. 2014

We hope our readers and their families are enjoying the holidays, some time together, and maybe even a few of the high-tech toys found at the bottom of the accompanying picture.

This  comparison of Christmas 1964 vs. 2014 (courtesy of AEI) shows there is no comparison thanks to “the magic and miracle of the marketplace.”

(An) American consumer or household spending $750 in 1964 would have been able to purchase the 21-inch color TV/entertainment center from the Sears Christmas catalog pictured above (includes phonograph and AM/FM radio). An American consumer spending that same amount of inflation-adjusted dollars today (about $5,600) would be able to furnish their entire kitchen with 5 brand-new appliances and buy 7 state-of-the-art electronic items for their home. And of course, even a billionaire in 1964 wouldn’t have been able to purchase many of the items that even a teenager can afford today, e.g. laptop computer, GPS, iPhone, digital camera.

As much as we might complain about a slow economic recovery, the decline of the middle class, stagnant median household income, rising income inequality and a dysfunctional Congress, we have a lot to be thankful for, and we’ve made a lot of economic progress in the last 50 years as the example above illustrates, thanks to the “magic and miracle of the marketplace.”

Xmas comparison

The “miracle” has a name – productivity – and it works its “magic” while swimming upstream against those that fight it.  It’s constantly improving products, reducing costs for everyone, and creating the new technologies and conditions that make other before-their-time ideas suddenly viable.

It’s a good thing to keep in mind the next time productivity is made the boogeyman for job losses.  As the old story goes, you can employ more workers if you give them spoons instead of shovels (or bulldozers).

Just as important:  as $5,000 computers become $500 tablets the resulting surplus capital becomes a source of both (a) demand for even more new products and (b) investment for new ideas and entrepreneurs.

Inventions That Didn’t Change the World

Inventions That Didn’t Change the World” sounds like a book-length version of our Vintage Future series.

inventions-that-didnt-change-the-world-2-638Author Julie Halls comes to the defense of such Victorian era oddities as “an improved pickle fork” and “an elastic dress and opera hat.”

Trifling or otherwise, these designs provide a fascinating insight into the social history and technology of the period.  Some seemingly inexplicable inventions make sense within their historical context.”

It’s not hard to imagine our great grand children chuckling at more than a few of the apps created in our present “historical context.”

But as this review points out, all that stupid experimentation and unexpected discovery may seem pointless, and, in hindsight, laughable; but one could say it had a pretty important side effect:  progress.

Though human ingenuity reaches back into the dimmest past, the intensive production of inventions only began in the past few centuries…

In a Darwinian mood, one might contemplate these trusty devices as living fossils of invention, the flotsam left behind during the evolution that finally brought us smartphones. As one realizes in reading Ms. Halls’s book, the 19th century really invented invention itself, not just the production of occasional new devices but the unremitting, self-reinforcing stream of novelties that generated our present expectation of innovation as the normal state of affairs. We have become so accustomed to this process that we may forget to wonder when and how it gathered steam (literally and figuratively). Whatever may be the fate of any particular innovation, for good or for ill, we may never leave the age of invention.

“We challenged that dogma, and it was incorrect.”

ed-at003_winter_j_20141205170433The Weekend Interview in Saturday’s WSJ – “The Oilman to Thank at Your Next Fill-Up” – provides an absorbing look at the “shale revolution” and touches on several of our favorite themes:  iterative collaboration, how to fail the right way, the incremental, adaptive ways by which success is achieved, and even the role of luck – although we’d describe it a bit more favorably as “serendipity.”

The pioneering company featured prominently in the article is EOG Resources, a former division of Enron discarded in 1999 when that company “decided to jettison tangible assets as they evolved into a trading company.”  By 2007 – one year after the last remaining piece of pre-bankruptcy Enron had been sold off – the former red-headed stepchild had become an industry leader.

(That particular charming detail brings to mind one of our very first posts, Built to Flip or Built to Last, in which we mused about an alternate history in which Hewlett and Packard sat in their garage, sipping lattes, saying to each other, “If we do this right, we can sell this thing off and cash out in 12 months.”)

Flush with success, EOG looked at their innovation and thought: we’re doomed.

“About 2007,” (CEO) Mr. Papa recalls, “I looked around and said, EOG has found so much shale gas, but there are a whole lot of other companies that have found vast amounts of shale gas. All the other companies were ecstatic, and their whole business strategy was, ‘We’re going to find more shale gas.’ I stood back and said this probably doesn’t bode well for natural-gas prices in North America.”

So rather than cling to their initial intuition they tried something impossible:

If gas prices would remain depressed due to a glut, as in fact they would, Mr. Papa’s insight was that perhaps oil, as well as gas, could also be coaxed from shales. Oil molecules are several times as large as gas molecules, and “because the flow paths through these shales are very small, very narrow and restrictive, the general feeling was that you could not produce oil from shales commercially.”

Mr. Papa and his team suspected this was “an apocryphal old wives’ tale,” and no one had “really done the work to prove that conclusively. So we challenged that dogma, and it was incorrect.”

EOG maintains no central research-and-development department. “Our R&D was just applied R&D,” Mr. Papa notes. “We went out there, drilled some wells, and the first eight or nine were unsuccessful. We got improvements, improvements, improvements, until we finally ended up hitting the right recipe for success.” EOG’s decentralized technical operations and “minimum bureaucracy” encouraged engineers to experiment well by well.

Late in 2006, EOG showed that shale oil was feasible in the Bakken. This discovery meant that EOG could switch to oil, with production flipping to 89% liquids (mostly crude) this year from 79% gas in 2007. More to the point, by proving everyone else wrong—again—Mr. Papa changed the domestic industry as other companies chased his achievement. To the extent that U.S. shale oil is transforming world-wide markets, he deserves a lot of the credit.

EOG is a great example of a contrarian definition of entrepreneurship:   see economic value where others see heaps of nothing, combine the self-confidence to defy conventional wisdom with the determination to overcome obstacles, and distinguish yourself more by the ability to achieve the impossible than the originality of your thinking.  They’re also a great example of stupid experimentation:

(A)t the creative frontier of the economy, and at the moment of innovation, insight is inseparable from action.  Only later do analysts look back, observe what happened, and seek to collate this into categories, abstractions and patterns.

More generally, innovation appears to be built upon the kind of trial-and-error learning mediated by markets.  It requires that we allow people to do things that seem stupid to most informed observers — even though we know that most of these would-be innovators will in fact fail.  This is premised on epistemic humility.  We should not unduly restrain experimentation, because we are not sure we are right about very much.

Mr. Papa adds that, in retrospect, they “misjudged the upward slope of technological progress” and undershot by a factor or two or three times what the effect would be on total U.S. production:

Where we sit today with shale is the same place a petroleum engineer sat in the 1940s with a conventional sandstone reservoir,” Mr. Papa says. The best recovery rate then was 10% to 15%, leaving the rest underground, much like shale now—but since has climbed to 40% or 50%. The technology doesn’t yet exist for shale to yield similar shares, but Mr. Papa is confident that over the next 10 years it will emerge, “which basically means we’re going to double or more the amount of oil we’re going to recover. . . . Technology is always going to find a way to unlock each increment of resources.”

Mr. Papa discounts what could be considerable political risks to the energy boom, like some carbon tax or a federal takeover of fracking oversight. On the latter, he thinks the business is well regulated by the states and “there’s been a million frack jobs performed in the U.S. with zero documented cases of damage to the drinking-water table. For my set of statistics, those are pretty good odds.”

As for everything else that might come out of Washington, Mr. Papa says: “It’s my belief that for likely the next 40 or 50 years, we’ll continue to be in a hydrocarbon-powered economy, the main drivers of which are natural gas and crude oil. . . . You have to rely on the logic of the American people and our legislators to say, look at the economic benefits. The benefits are so obvious that an objective person would question whether we want to impose punitive regulations that will diminish what’s accrued.”

Mr. Papa reels off a few examples: A new burst in employment, business investment and GDP. Self-sufficiency in natural gas “for probably the next 50 years” and a two- or threefold competitive price advantage over Europe and Asia, leading to a revival of in-sourced manufacturing. A state and federal tax-revenue bonanza. Diminishing the importance of Persian Gulf and Russian energy dispensations in foreign policy.

Mr. Papa observes that these disruptive gains confounded the zodiac readings of the experts. The gains were driven by smaller, independent, nimbler companies, risking their own capital on potential breakthroughs across mainly state and private lands without federal subsidies.

“If you want to point to a success of private enterprise, and how the capitalist system works for the benefit of the total U.S. economy,” he says, “I can’t come up with a more glowing example.”

Thanksgiving: the forgotten entrepreneurial tale

Every child in America learns of the hardships endured by the Pilgrims as they established Plymouth Colony.  Some lucky ones even learn how the Pilgrims found salvation via private property, division of labor, and capitalism.  The luckiest ones of all learn about capital preservation when a venture capital investment fails.

mayflower3

Mayflower with shallop – William Halsall, 1882

When a group of Puritans known as “Separatists” fled England they first settled in the Netherlands, where they took menial jobs and over time grew to miss their native culture.  They lacked the resources for a passage to North America, so they sent two entrepreneurs from their congregation to London to seek financial backing – a successful merchant named John Carver and Robert Cushman, a “wool comber of some means.”  While those two were in London, an ironmonger (a dealer in metal utensils, hardware, locks, etc.) from that city named Thomas Weston was visiting one of Carver’s in-laws in the Netherlands and learned of the Pilgrims’ need for funds.

Whether we call that serendipity or opportunistic networking, it resulted in Weston putting together an investor group to back the voyage.  Weston and his London Merchant Adventurers put up 7000 pounds and also recruited experts to assist with the enterprise:  roughly 50 additional settlers with the vocational skills to help build a colony in the new world.  These “non-Separatists” crammed aboard the Mayflower with the Separatists and together became known as the Pilgrims.

What happened to that £7000 investment, you ask?  Here is the story as told at encyclopedia.com

Weston and his fellow investors were dismayed when the Mayflower returned to England in April 1621 without cargo. The malnourished Pilgrims had been subjected to “the Great Sickness” after the arrival at Plymouth, and the survivors had had little time for anything other than burying their dead and ensuring their own survival. Weston sold his London Merchant Adventurer shares in December, although he did send a ship, the Sparrow, in 1622 as his own private business venture.

The Pilgrims attempted to make their first payment by loading the Fortune, which had brought 35 additional settlers in November 1621, with beaver and otter skins and timber estimated to be worth 500 pounds. The ship was captured by French privateers and stripped of its cargo, leaving investors empty-handed again.

A second attempt, in 1624 or 1625, to ship goods to England failed when the Little James got caught in a gale in the English Channel and was seized by Barbary Coast pirates. Again the London Adventurers received nothing for their investment. Relations, always tempestuous between the colonists and their backers, faltered.

Facing a huge debt, the Pilgrims dispatched Isaac Allerton to England in 1626 to negotiate a settlement. The Adventurers, deciding their investment might never pay off, sold their shares to the Pilgrims for 1,800 pounds. Captain Smith, of the failed Jamestown venture, felt the London Merchant Adventurers had settled favorably, pointing out that the Virginia Company had invested 200,000 pounds in Jamestown and never received a shilling for their investment.

By our back-of-the-envelope calculation, the investors got back 26% of their invested capital.  If only they’d kept their long-term perspective…

On a more serious note, that outcome fits into the first category of entrepreneurial failure listed in Fail the Right Way and reflects well on those involved:

1. Liquidate all assets, investors lose most/all money: 30-40%
2. Not realizing the projected return:  70-80%
3. Falling short of initial projections: 90-95%

With “failure” this common, he urges executives to distinguish between business failure and personal failure.  It’s vital to not let the former, which can be a valuable learning experience, pressure you into the latter, which can become a career-damning ethical lapse:

Although the original backers did not get the return for which they’d hoped, the endeavor ultimately succeeded thanks to the intrepid settlers who displayed many of the noble traits found in entrepreneurs:  flexibility (they had to settle further north than intended), persistence (through brutal hardships), the value of good partners (Squanto and the Wampanoag tribe), and the courage and optimism necessary to accomplish the impossible and stupid.

All great and honorable actions are accompanied with great difficulties, and both must be enterprised and overcome with answerable courage.

– William Bradford, 2nd, 5th, 7th, 9th & 11th Governor of Plymouth Colony

Our business – like every business – has its ups and down, but we have much to be thankful for.  Much.   So we’d like to take this opportunity, here at NVSE, to give thanks for the trust and patience of our Limited Partners, the initiative and dedication of our entrepreneurs, the support provided to them by the many friends in our network, and the nation that offers the freedom to pursue happiness.  We love our work, have been blessed with terrific successes and honorable failures, and get to do it all with great people in beautiful weather.   God Bless you and your families – we hope you have a wonderful Thanksgiving.

Where are the start-ups?

The entrepreneurship rate, defined as the number of new firms in a given year as a share of all firms, has been in persistent decline for decades (15% in the late 1970’s, 8% in 2012).  It has been punctuated by tech surges – but those decline after a time lag (e.g., the dotcom boom/bust).  However one defines high-growth firms, their share of the economy is declining.  So argues this excellent AEI podcast about job creation, innovation, productivity, and national wealth.

High profile firms such as Google and Facebook (hardly start-ups, anymore) enjoy outsized awareness because they’re personal and omnipresent, and belie the fact that the data show declining business dynamism overall and for start-ups specifically.  No one knows at the outset which high growth firms will explode and disrupt – so we need “more shots on goal.”

As we once wrote:

There’s a heroic assumption propping up that line of thinking:  that there will always be a nicely growing economy, with plenty of opportunity, and no shortage of entrepreneurs.  We believe it is not safe to assume that entrepreneurs will continue to risk their wealth and careers, expend the energy, and make the enormous sacrifices required to build a business no matter how big a bite the taxman takes out of their eventual reward.  It’s fine to say investors will look for the best opportunity regardless, but if there are fewer entrepreneurs there will be fewer opportunities, and the economic pie will start to shrink…

“Terrific” ideas will still find willing investors, but what about all the not-obviously-terrific-but-still-really-good ideas?  For every Facebook there are hundreds of other early-stage companies who receive financial backing and grow nicely…  The economy is not built on a series of towering home runs that clear the fence no matter how strong the wind is blowing into the park.  Winning takes singles, doubles, walks, anything that advances runners and scores runs.  Over-regulating (or over-taxing) early-stage investment activity is like building a pitcher-friendly park and keeping the infield grass long:  you better plan on low-scoring games.

Hathaway believes over-regulation is a significant problem; particularly, how specific regulations impede firm entry and protect incumbents.  What we said in our response to a WSJ editorial about tax rates and early-stage investing is equally true of regulations:

[Large companies like] Costco may grow more slowly but will weather whatever tax regime is in place. However, small private companies (who create virtually all the new jobs in the country) lack a large company’s ability to shift income and lobby Washington, and they won’t fare so well.

(UPDATE:  As if on cue… today’s WSJ reports that Google has just become the country’s biggest political donor, knocking off heavily-regulated Goldman Sachs. – ed)

He also spends some time on the importance of the entrepreneurial ecosystem, the “networks and community, the dark matter, the softer things.”

The bottom line, whether it’s taxes, regulation, or institution-building:  some forms of activity promote economic growth and ought to be encouraged.

The entire wide-ranging podcast is worth a listen.  A few other well-said points:

  • The economy needs more than a narrow rebound in tech entrepreneurship, especially since the current rebound has been accompanied by an uptick in “hardening” or consolidation as early firms are gobbled up before they boom.
  • Using job creation as a measure is problematic because fewer people work for Twitter or Facebook than their previous equivalents – by the nature of what they produce.  Michael Spence divides the US economy between the one that competes globally vs. the local market (tradeable vs. non-tradeable).  The former generates national wealth but will employ fewer and fewer people;  however, that’s what sprinkles money around the non-tradeable localities.  “Not everyone can work at Google or Apple.”
  • Innovation can be costly for individuals and firms in the short run, but is the key to wealth in the long run.  E.g., productivity enhancements in low-tech/low-wage firms, consolidation that drives out less efficient mom&pops, and innovation that pushes stale incumbents out.

 

The roots of unhappiness

A new working paperMW-CN870_happy__MG_20140718112128 from the National Bureau of Economic Research says NYC is the Most Unhappy City in America.

The study includes a national map of happiness in which it’s easy to see that our region is the most happy and its pockets of (relative) unhappiness are happier than other region’s least-happy pockets.  The researchers claim to have struggled to establish any patterns in the data:

The trio [of researchers] found that significant differences in happiness levels persisted even after they controlled for factors such as income, race, and other personal characteristics. The differences in happiness are significant, but not huge.

We have our own theories, expressed occasionally here, most recently in April 2013:

New evidence from the dismal science confirms what social science has already shown: the love of taxes is the root of unhappiness.

The original social science, from the December 2009 issue of Science, indicated that states with the highest taxes also have the least happy residents.  Residents of high tax states not only have less money to spend on other things that make them happy, they don’t enjoy many benefits in exchange for all their hard-earned tax dollars.  Roads, schools, and crime are no better (and in many cases worse) while their state governments borrow even more and spend disproportionately on public employee pensions and entitlement programs.  Their needs ignored at the expense of entrenched special interests, taxpayers get unhappy.  And then they get out.

From this one might argue causation; high taxes = unhappiness.  While we are certainly sympathetic to that point of view, we also have to wonder if it runs vice-versa, or at least cuts both ways: unhappy people like to raise taxes.

We are… happy.  And happy to report that’s true for our region as well.  NVSE readers already know that the Southeast’s advantages extend well beyond the matter of taxes and include lower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

Not all innovation is alike

innovationJames Pethokoukis at AEI makes a distinction between “efficiency innovation” and “empowering innovation.”  The former can contribute to a polarized job market, while the latter is the necessary ingredient for a vibrant economy and improved living standards:

Not all innovation is alike.  Incumbent firms replacing man with machine is a kind of innovation that may lift corporate profits and boost stock prices without necessarily broadly raising prosperity.  Such technological advancement and efficiency is already contributing to polarized employment markets in advanced economies.  Jobs are created at the top for high-creative workers and at the bottom for high-touch workers.  But jobs in the middle— especially those involving routine, repetitive, and rules-based tasks—are automated away.  In other words, the executives and janitors at a bank keep their jobs, but tellers get replaced by ATMs.

But there is another kind of innovation, termed “empowering” innovation by business consultant Clayton Christensen.  This is the sort of innovation generated by fast-growing startups offering new products and services.  Empowering innovation is a job creator, not a job destroyer—though some jobs may shift from uncompetitive incumbents to these aggressive new challengers.

Both sorts of innovation have their place, of course. But right now efficiency innovation may be destroying jobs faster than empowering innovation creates them.  So what is the key to generating greater levels of empowering innovation? Competition—and the more the better.  As economist Joseph Berliner once put it:

(T)he effect of competition is not only to motivate profit-seeking entrepreneurs to seek yet more profit but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products.

Vibrant economies need plenty of fast-growing startups to generate empowering innovation and to also push incumbents themselves to become more innovative.

And if incumbents can’t compete, government needs to let them fail.  Free and frequent entry and exit of firms is critical.  Government has to make sure tax, regulatory, and spending policy is neither impeding the creation of new startups nor giving incumbents an unfair advantage.

Some politicians think “innovation policy” means spending taxpayer money on promising young firms favored by bureaucrats.  Rather, innovation policy means ensuring that the status quo is continuously challenged by upstart rivals and threat of failure.  Those are the keys to the Schumpeterian “gales of creative destruction” that drive innovation, which in turn drives long-term economic growth and improvement in living standards.

National prosperity is generated by the start-ups who innovate and challenge entrenched incumbents.  Anyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation.  Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth.  Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides. Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies… and then face the next generation of innovators.

 

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What California can learn from Texas

When a state’s manufacturing base is escaping, and its citizens are agitating to break up, that state is no stranger to bad news.  AEI’s Carpe Diem blog reports:  Texas has created one million more jobs than California since the end of the Great Recession.

texascalifjobs

What’s different about Texas and California that would explain why one state (Texas) has added more than one million net new jobs since 2007, while the other (California) has created almost no new net jobs over the last six and-a-half years? Let’s start by pointing out that one of those states — Texas — is pro-energy (i.e. fossil fuel energy), it’s a right-to-work state, it has no state income tax, its electricity prices are significantly lower because it doesn’t have a renewable energy mandate, and its regulatory burden on businesses is much lighter. In other words, Texas has created a pro-business and pro-growth environment that has helped to nurture the creation of more than one million jobs since December 2007. Meanwhile, California has created an increasingly anti-business climate with some of the highest state tax and regulatory burdens in the country, which along with sky-high industrial electricity prices (83% higher than in Texas), have stifled business and job creation, with almost no net job gains in more than six years.

Related stories:

Lost: $1 trillion

Today’s Wall Street Journal reports:  since 2005 productivity has declined 8% off its long-run trend, which has meant $1 trillion less in business output.  The reason?  Fewer start-ups.  From Behind the Productivity Plunge:  Fewer Start-ups

Lagging productivity growth is an enormous problem because virtually all of the increase in Americans’ standard of living is made possible by rising worker productivity. In our view, an important factor contributing to declining productivity growth is the large decline in the creation of new businesses. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. (The data is the Census Bureau’s Business Dynamic Statistics.) The decline affected nearly all business sectors.

Steven Malanga coined the term startupicide – “suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns” – which gets sprayed on every business, large and small.  At the margins those factors clearly affect the viability of new businesses and new projects.  Here’s how we once put it, discussing just one of the four ingredients:

For Costco (one example) to build a new store, a 40% tax rate on the income will require much higher sales expectations for the store than if taxes were 30%, or 20%, or 0%.  It’s the same analysis regardless of who is making the investment decision: rich angel investor, venture capitalist, Fortune 500 CFO.  When taxes are higher, fewer stores get built and fewer companies get started.

The WSJ piece continues:

New businesses are critical for the U.S. economy to grow because a small fraction of today’s startups will become tomorrow’s economic heavyweights. Most of today’s workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy. Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding.

If history is any indication, many of today’s economic heavyweights will ultimately decline as new businesses take their place. Research by the Kaufman Foundation shows that only about half of the 1995 Fortune 500 firms remained on the list in 2010.

That’s the funny thing about those large companies:  they all have birthdays, either as start-ups themselves or as spin-offs from other companies (who were once start-ups).  Many of them are born during very bad times – as long as the entrepreneurial incentives, and entrepreneurial optimism, remain intact.

Over half the companies on the Fortune 500 were started during a recession or bear market.  The patents for the Television, Jukebox, and Nylon were granted during the greatest period of job destruction in our history:  The Great Depression.  (Although we can’t confirm any patent information on the chocolate chip cookie, it too was invented at the same time.)  This is precisely the creative destruction that makes our economy an engine of innovation and wealth creation.

That $1 trillion in forfeited economic output demonstrates that a growing economy, with plenty of opportunity, and no shortage of entrepreneurial activity (at start-ups and within firms) should not be taken for granted.

 

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