We may have a “senile economy,” says economist Robert Litan of the Brookings Institution. That’s senile as in old, rigid and undynamic.
We are taught otherwise. Americans are reared on the notion that we’re the most entrepreneurial of peoples – and many success stories seem to prove it. There’s a long legacy from Thomas Edison to Mark Zuckerberg. Our economy is constantly kept young by the “next new thing.”
Litan dissents. What’s happening now, he says, is that the economy is increasingly dominated by older firms tied to proven products and familiar business methods. Litan is not just blowing smoke. In a new study, he and Ian Hathaway measured the age of American businesses. They were astonished by what they found: From 1992 to 2011, the share of U.S. firms that were 16 and older jumped from 23 percent to 34 percent.
“Like the population, the business sector of the U.S. economy is aging,” they write. The trend “has occurred in every state and metropolitan area, every firm size category, and in each broad industrial sector.”
Even more startling, they argue, is the main source of this aging: a sharp drop in entrepreneurial activity. They define entrepreneurship as the number of startups – new firms ranging from plumbing to biotechnology.
From 1978 to 2011, startups fell from about 15 percent of all firms to 8 percent; the slide was gradual until the 2008-09 financial crisis, when it accelerated. By these numbers, the economy’s rejuvenation from below is weakening; though conspicuous, the Internet’s influence is exaggerated.
Other studies reach similar conclusions. Shrinking entrepreneurship is hurting job creation and productivity, write economists Ryan Decker and John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau in The Journal of Economic Perspectives.
Start with jobs. From 1980 to 2010, U.S. employment increased an average of 1.4 million annually, report the economists. Over the same period, employment gains by startups averaged 2.9 million annually. By this math, startups accounted for more than the total gain in U.S. employment.
That’s probably not true, because many of those jobs later disappeared. Most new firms fail within five years. Still, many surviving startups grew rapidly and generated much of the gain in total employment. Companies five years and older don’t much increase overall employment, note the economists. Some older firms add jobs, others subtract them; on balance, gains seem modest. The economy needs the employment boosts of startups.
Something similar is happening to labor productivity. (Productivity is economists’ jargon for efficiency and is measured as output per hour worked.) Higher productivity supports higher living standards. Competition among firms, write the economists, raises productivity. More efficient firms drive out the less efficient. One study attributes 35 percent of productivity gains to this “churning” of firms; the fall in startups dampens these improvements.
All this is consistent with an economic recovery characterized by weak investment, low productivity gains and mediocre employment growth. Older firms serving mature markets have limited opportunities for increased investment and hiring. With some market power, they may also cling to outdated and costly practices. Just recently, Procter & Gamble Co. – the consumer brand giant that makes Tide, Pampers and Crest – said it might eliminate dozens of poorly performing brands and concentrate on big winners.
What happened to all the entrepreneurs? Good question.
“We do not have an explanation,” write the University of Maryland and the Census Bureau economists. Neither does Litan. “One theory is that the cumulative effect of regulations,” he says, discriminates against new businesses and favors “established firms that have the experience and resources to deal with it.” What allegedly deters and hampers startups is not any one regulation but the cost and time of complying with a blizzard of them.
Economist Haltiwanger says the falloff in entrepreneurship changed character after 2000. Before, it was “concentrated in sectors like retail trade and services” and, in part, reflected “mom and pop retail firms being displaced by large … firms like Wal-Mart” – a productivity-enhancing shift. Since then, the decline has spread to high-tech sectors and even successful startups create fewer jobs than before.
None of this is reassuring. It challenges the conventional wisdom that the Internet’s relentless advance attests to the economy’s underlying vitality. Old-line companies will either change or be replaced by new tech-savvy companies. This may be wishful thinking that conceals deeper forces holding the economy back. We need to discover what they are and what, if anything, might be done about them.