Why Is Entrepreneurship Declining?

Jonathan Adler of The Volokh Conspiracy addresses evidence that entrepreneurial activity is declining in the United States, noting that

The number of employer firms created annually has declined significantly since 1990, and the numbers of businesses created and those claiming to be self-employed have declined as well.

Adler continues:

What accounts for this trend? [The author of the cited analysis] thinks one reason is “the Wal-Mart effect.”

Large, efficient companies are able to out-compete small start-ups, replacing the independent businesses in many markets. Multiply across the entire economy the effect of a Wal-Mart replacing the independent restaurant, grocery store, clothing store, florist, etc., in a town, and you can see how we end up with a downward trend in entrepreneurship over time.

That may be true. It seems to me that another likely contributor is the increased regulatory burden. It is well documented that regulation can increase industry concentration. Smaller firms typically bear significantly greater regulatory costs per employee than larger firms (see, e.g., this study), and regulatory costs can also increase start-up costs and serve as a barrier to entry. While the rate at which new regulations were adopted slowed somewhat in recent years at the federal level (see here), so long as the cumulative regulatory burden increases, I would expect it to depress small business creation and growth.

Going further than Adler, I attribute the whole sorry mess to the growth of government over the past century. And I fully expect the increased regulatory and tax burdens of Obamanomics to depress innovation, business expansion, business creation, job creation, and the rate of economic growth. As I say here,

Had the economy of the U.S. not been deflected from its post-Civil War course [by the advent of the regulatory-welfare state around 1900], GDP would now be more than three times its present level…. If that seems unbelievable to you, it shouldn’t: $100 compounded for 100 years at 4.4 percent amounts to $7,400; $100 compounded for 100 years at 3.1 percent amounts to $2,100. Nothing other than government intervention (or a catastrophe greater than any we have known) could have kept the economy from growing at more than 4 percent.

What’s next? Unless Obama’s megalomaniac plans are aborted by a reversal of the Republican Party’s fortunes, the U.S. will enter a new phase of economic growth — something close to stagnation. We will look back on the period from 1970 to 2008 [when GDP rose at an annual rate of 3.1 percent] with longing, as we plod along at a growth rate similar to that of 1908-1940, that is, about 2.2 percent. Thus:

  • If GDP grows at 2.2 percent through 2108, it will be 58 percent lower than if we plod on at 3.1 percent.
  • If GDP grows at 2.2 percent for through 2108, it will be only 4 percent of what it would have been had it continued to grow at 4.4 percent after 1907.

The latter disparity may seem incredible, but scan the lists here and you will find even greater cross-national disparities in per capita GDP. Go here and you will find that real, per capita GDP in 1790 was only 3.3 percent of the value it had attained 201 years later. Our present level of output seems incredible to citizens of impoverished nations, and it would seem no less incredible to an American of 201 years ago. But vast disparities can and do exist, across nations and time. We have every reason to believe in a sustained growth rate of 4.4 percent, as against one of 2.2 percent, because we have experienced both.