American Economy Hamstrung by Vanishing Startups, InnovationBy
A lack of business dynamism has lowered long-term growth rate
Fed researchers find startup deficit hurting U.S. efficiency
The puzzle of slow U.S. growth that’s bedeviled Federal Reserve Chair Janet Yellen has some roots in a shortfall of good ole American entrepreneurship.
The issue is a lack of new ventures and the jobs they create. The dearth of startups is an important factor behind a decade-long productivity slump, say researchers at the Fed, the Joint Economic Committee of Congress and the National Bureau of Economic Research.
The number of employees at companies that have been around for less than five years slumped to a record-low 9.1 percent of the workforce in 2013, the latest data available, or about half the share during the peak in 1987, according to research by John Haltiwanger, an economist with the University of Maryland and NBER. While newer figures aren’t available, ”other indicators suggest startups have still not recovered by 2015,” he said.
“Gazelles -- rapidly growing startups -- are especially important to growth in GDP, productivity and jobs,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Productivity growth -- or a lack thereof -- will take on greater importance in coming months if the labor market tightens further and growth picks up. Fed officials debated the issue at their last policy-making meeting in late April, with some arguing that slow productivity might merit faster interest-rate increases.
In a January staff report, New York Fed researchers wrote that the “startup deficit” was hindering the economy’s “structural transformation,” or shift from less productive or failing firms to growing, better-performing ones. Employment outside of manufacturing would have grown faster without the drag, they found.
“High-tech startups, critical for innovation and productivity growth, were rising before 2000 but have been sharply declining ever since,” St. Louis Fed economists wrote in an April commentary. “These negative trends might lower labor productivity and, in turn, wages and labor force participation.”
Fed officials have lowered their estimate of the economy’s long-term growth rate, the pace that will keep inflation at around their 2 percent goal, because of slowing productivity. In March, their estimate was 1.8 percent to 2.1 percent. Five years ago, they put potential growth as high as 2.8 percent.
“Business and labor dynamism have fallen since the 1990s,” Congress’s Joint Economic Committee found in a May report. The “startup deficit” accelerated after 2000, though the exact reasons aren’t fully understood.
By contrast, entrepreneurs were “a major source of innovation and productivity growth for the economy as a whole in the 1980s and 1990s,” according to Haltiwanger and co-author Steven Davis, a University of Chicago business professor.
Atlanta-based SalesLoft helps clients manage phone calls and e-mails so they, in turn, can handle more customers. “Companies increase productivity and efficiency with software,” said 34-year-old founder Kyle Porter.
The company was able to raise $10 million in venture capital in March 2015, and its sales tripled to $7.5 million last year, said Porter. “We see nothing but growth.”
At QASymphony, “there’s tremendous productivity improvement,” said Dave Keil, chief executive of the five-year-old computer-software testing company in Atlanta that promises customers savings of as much as 40 percent.
Yellen has repeatedly cited low productivity as potentially hurting living standards, noting the 2007-2009 recession may have hurt investment, spending on research as well as financing of startups. Workforce skills and infrastructure may also play a role, she said in a speech last year in Rhode Island.
Around 400,000 new businesses are started each year, though just 45 percent survive the first five, with the others failing or being acquired, according to the Kauffman Foundation in Kansas City, Missouri, which promotes entrepreneurship. A typical firm might now grow to around nine employees by its fifth year, a slower pace than prior decades.
“Startups have been disproportionately responsible in U.S. history for disruptive innovations that have really driven productivity growth -- telephone, computers, software, autos, airplanes, air conditioning, internet search,” said Robert Litan, adjunct senior fellow at the Council on Foreign Relations.
The collapse in new business formation has been widespread, with 59 percent of U.S. counties suffering a decline in the number of businesses from 2010 to 2014, according to a report this month by the Economic Innovation Group. From 2002 to 2006, prior to the last recession, 37 percent of counties saw a decrease.
Just 20 counties generated half of new businesses from 2010 to 2014, the report found.
The reasons for the decline are wide-ranging. Potential entrepreneurs may have less access to capital, including the ability to tap home equity following the collapse in housing in the wake of the recession. Some lenders have tightened requirements for small-business loans. Additionally, millennials, many swamped by large amounts of student debt, have been less inclined to create their own firms.
Licensing requirements and regulatory policy have added barriers to startups.
“People are not taking risks in the economy the way they normally would,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York. “The regulatory environment has gotten a lot tougher and the tax structure less desirable for investment.”
The decline in startups isn’t the only explanation for the weakening in efficiency. Some economists say technological improvements are difficult to measure, understating the actual growth in productivity. Moreover, weak business investment and the replacement of retiring baby boomers with less experienced workers may be contributing to the slackening, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
Santa Fe, New Mexico, entrepreneur Andrew Halasz sees opportunity in the aging of the population, citing his company’s radio frequency-identification device that helps hospitals use equipment more efficiently.
“If there is an industry that needs productivity and efficiency, it’s health care,” said Halasz, co-founder of VIZZIA Technologies.
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