Where Have All the Entrepreneurs Gone?

Last month, in an event that went largely unnoticed, President Obama appointed 11 new ambassadors for global entrepreneurship.

The eager purveyors of the American way are responsible for inspiring and helping fledgling business owners in the U.S. and abroad to become part of the “next generation of entrepreneurs.”

As someone who believes deeply in the power of a healthy and dynamic private sector to build strong economies, lift people from poverty and create broad prosperity, I’m delighted that the president is looking to export what is surely one of our nation’s greatest assets: our entrepreneurial spirit.

But as we work to inspire and encourage innovators on other continents, we cannot ignore that business dynamism — the process through which businesses begin and fail, create, destroy and transfer jobs — has taken a nose dive at home.

And the economic implications are huge.

It may come as a shock, but entrepreneurism has actually been in danger for decades, although it has fallen off a cliff in recent years.

Census data from 1978 to 2011 (the latest year available) show that while the number of business deaths has held relatively steady for the last 30 years, the number of businesses being created is trending downward.

In 2006, that downward trend went from gradual to precipitous, a sharp decline that a recent analysis by the Brookings Institution called “disturbing.”

Americans established fully 27 percent fewer businesses in 2011 than they did five years prior.

And around 2008, the number of businesses exiting the market actually exceeded the number of firms opening their doors.

It’s easy in a state like Texas, where the economy is humming along, to think the trend is isolated; it’s not. Texas’ new-business entry rate from 2009-2011 was almost 36 percent lower than it was from 1978-1980, although the exit rate was largely unchanged. And multiple studies confirm that the decline is universal, affecting every sector of the economy.

As the Brookings study explains, an economy in constant churn “forces labor and capital to be put to better uses,” thereby catalyzing innovation and spurring new enterprises. And “when business dynamism is spiraling,” says small-business writer Jean Card, “when small firms” — the historic driver of new employment — “are not creating jobs, economic recovery cannot be complete.”

This might help explain the inertia that is holding our current recovery captive, and it also hints at other concerns, raised by columnist James Pethokoukis: “Without competition from new companies, old ones will pursue only the sort of ‘efficiency innovation’ that makes production cheaper. …” That means they will do things like automate and cut employment, and the consequent lack of job competition could cause wages to stagnate, even decline.

Similarly, decreased dynamism allows “established players” to “win through lobbying what they can’t achieve in the marketplace,” also known as crony capitalism, which further solidifies the downward cycle of indifference to innovation and economic decline.

Yes, all of this is very troubling and solutions will not come easily, but finding and implementing them before the trend lines dip further is imperative.

Politicians will argue about the causes; those on the right will point to a suffocating regulatory environment that creates barriers to entry. Those on the left will finger increasing economic inequality. Increasing student loan debt, declining productivity and deeply embedded structural barriers will also get some well-deserved blame.

There is little doubt that all of these causes play their role in our floundering business dynamism, and each must be addressed.

It will take a comprehensive and bipartisan approach to turn the tide, one that seeks to simplify the tax code, takes a less punitive approach to small-business regulation and yes, one that pursues immigration reform that increases visas for immigrant entrepreneurs and encourages them to remain in the United States — at least that’s a start.

So while I’m all for promoting entrepreneurial diplomacy abroad, it’s time for a little economic nation-building at home.

This article appeared in print on page 10 of the May 27th, 2014 edition of Hamodia.