It is well known that Kauffman Foundation research has helped unveil a decrease in the per capita startup rate in the American economy, a trend even predating the Great Recession. In the search for possible explanations for this decline and for ways to reverse the trend, the United States House of Representatives Committee on Small Business, Subcommittee on Contracting and Workforce held a hearing on September 11, 2014.
As a senior fellow at the Kauffman Foundation, I was invited to join Chad Moutray, chief economist at the National Association of Manufacturers, John Dearie, executive vice president at the Financial Services Forum, and John Deskins, director of the Bureau of Business & Economic Research at West Virginia University in providing testimony before the U.S. House of Representatives Committee on Small Business, Subcommittee on Contracting and Workforce. The hearing titled The Decline in Business Formation: Implications for Entrepreneurship and the Economy was convened by Chairman Richard Hanna along with Ranking Member Meng.
As all of the opening statements acknowledged, it is not small businesses, but rather new and growing businesses that drive the great bulk of new job creation in the United States. The young startups that thrive are the ones bringing wealth-creating or quality of life-improving innovations to consumers, and more and more lately, also addressing our most important social, economic and environmental challenges. As John Dearie said in his testimony: “Were it not for new businesses, there would be no net new job creation in most years…. [I]f the policy target is job creation, new business formation is the bull’s-eye.”
But, the data speaks loud and clear about a worrying trend: In the late 1970s, about 15 percent of all businesses were new, while today that percentage hovers around 8 percent. More recently, even high-growth ventures (e.g. those in the high-tech sector), entered a period of decline.
In addressing this, policymakers are going to have to tread carefully as they decide which policy levers to pull and which programs to implement. The data must be analyzed in context, as Dane Stangler reminded us in an article for Washington Monthly. For example, solid data on entrepreneurial activity is only available through 2011. Early indicators of more recent data point to a less pessimistic outlook: a potential entrepreneurial recovery out of the Great Recession.
From a demographic and longer-term perspective, policymakers should also consider that over the next two decades, we will have a record number of people in their 30s and 40s, which happens to be the documented peak age for entrepreneurship. Moreover, this wave of potential entrepreneurs has been exposed to an unprecedented amount of entrepreneurship programs.
Of course, for this window of opportunity to yield higher rates of new business creation, smart public policy is needed, as I have written about often in this blog, looking at different versions of the Startup Acts. Interventions may also be needed in not so obvious policy areas, such as non-compete agreements, which have been found to pose a considerable amount of risk to entrepreneurial ecosystems; or the level of student debt burden, which may act as a deterrent to risk-taking. Georgetown University has, for example, launched the “Startup Stipend” program to help graduating seniors make the choice to pursue an entrepreneurial opportunity without the anxiety of student loan debt.
Other policy tools known to influence startup rates are visas for immigrant entrepreneurs, a long-awaited yet politically-trumped policy tool. According to estimates by the Kaufman Foundation, if the startup visa proposed in the Startup Act 3.0 bill goes through, it could help create 1.6 million jobs in the United States over the next 10 years.
In terms of entrepreneurship support and training programs, the field is developing so fast, we should let independent private sector evaluation happen first before turning to government for more help. Some countries, like Italy, have proposed legislative frameworks to implement certification criteria for accelerators and incubators as an example. In the United States, we don’t know enough yet about how best to support or shape this aspect of the entrepreneurial ecosystem, and so any regulation to “support” programs could actually suppress growth.
Congress would be wiser to address the burden of growing federal regulation on entrepreneurial activity by exploring options such an automatic sunset of major rules after a set amount of time. Chad Moutray testified that manufacturers believe strongly that regulation is in need of improvement noting there is no appreciation for the accumulated regulatory picture. “Regulations are allowed to accumulate with no real effort to evaluate or clean up the outdated and obsolete rules already on the books. It is imperative that policymakers and regulators understand the cumulative burdens that their rules are placing on businesses and enact policies that minimize those costs that do not contribute to the realization of regulatory objectives,” Moutray told the subcommittee.
Other government actors, like the Securities and Exchange Commission (SEC) will also influence the likelihood of a positive scenario to play out in coming years. We hope the intentions of expanding the pool of startup investors in the Jumpstart Our Business Startups (JOBS) Act will not been lost in the long road the SEC has taken to design specific rules for equity crowdfunding.
I am not confident there is enough political will to act on the recommendations of the witnesses soon. However, it was enough for me to walk away from a Small Business Committee hearing where all the members present acknowledged the importance of new firm formation alongside the traditional focus of supporting incumbent small businesses. After all, it was in many respects one data point (namely that almost all net new jobs over the past 25 years came from firms less than five years old) that opened up Washington five years ago to developing a separate public policy toolbox for helping more new firms form and scale. While getting things done in Washington is not easy for either party, we can only hope that a renewed focus on program evaluation and new firm data leads to smarter evidence-based policies that all our decision makers can publicly support.
For those interested in my full testimony see, here. For more examples of how data is busting more myths, I recommend this quick sketchbook by Dane Stangler – http://www.kauffman.org/multimedia/sketchbook/kauffman-sketchbook-myth-busting-entrepreneurship