Business startups looking ‘like a death spiral,’ analyst says

05/21/2014 6:59 AM

05/21/2014 2:41 PM

Where has America’s entrepreneurial mojo gone?

Business startups, which are historically the key source of new jobs, are at their lowest point in 30 years. They’re occurring so sparingly that U.S. businesses are now dying faster than they’re being born.

The news is “shockingly bad” and “starting to look like a death spiral,” political blogger and small-business advocate Jean Card said on U.S. News’ Thomas Jefferson Street Blog.

It “runs totally counter to the narrative” of America’s entrepreneurial embrace with TV shows like “Shark Tank,” added Ben Casselman, chief economics writer for FiveThirtyEight.com.

The trend, dissected in recent reports from the Brookings Institution in Washington, D.C., and the Kauffman Foundation in Kansas City, sounds alarms about the economy.

“It’s a real worry,” said Robert Litan, a former Kauffman economist now at Brookings. He co-authored the Brookings report that found the decline in new business formation spreads across all states, nearly all metropolitan areas and each sector of the economy.

“It didn’t matter where you’re from or what industries. They’re all down,” Litan said.

And unless the trend reverses, he added, America may continue to face the same frustratingly slow economy and job market that has lingered since the recession.

Why worry?

Economists aren’t especially worried about business failures. These are no more common than usual.

They’re more concerned about what has been a 30-year steady slide in business startups. Over that time, the pace of startups has been cut nearly in half, according to Brookings, with a “precipitous drop” beginning in 2006.

The number of startups crossed below the number of failures sometime after the financial crisis, so that beginning in 2009, more companies were failing than being started.

Economists behind the recent studies say all the reasons behind the long decline in startups remain unknown. But contributing factors may be shifts in banks’ lending habits away from small businesses, mounting regulatory burdens in some industries and the greater effort needed to make products and get them on store shelves.

Card, formerly with the National Federation of Independent Business, wonders whether something has changed culturally.

“Why are people less interested in taking the risks to start a business?” she said.

Touted cures target those concerns and more, including immigration policies that would help America tap into the above-average entrepreneurial bent of those who come to the U.S. in search of opportunity.

The data defy the political attraction entrepreneurs have gained. Kansas, for example, eliminated state taxes on personal business income last year, hoping to spur more residents to start businesses and lure owners in other states to move there.

Import startups

Litan sees one group particularly willing to take the risks to start new businesses: immigrants. He pushes for “liberalizing U.S. entry of high-skilled immigrants.”

In particular, it would help to grant permanent work visas to foreign graduates of U.S. universities in science, technology, engineering and math.

Kauffman’s latest Index of Entrepreneurial Activity said immigrants were almost twice as likely to start businesses in 2013 as were native-born Americans. Over the past 18 years, Latinos, Asians and other immigrants accounted for rising shares of entrepreneurs, largely because of population growth but also because of higher rates of business creation.

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