What’s the big deal about entrepreneurship? And why should any of us be concerned if entrepreneurship, according to at least one key measure, seems to have been on the decline over the last few years?
Quite simply, entrepreneurial activity and innovation are central to economic growth, especially in the United States. Indeed, entrepreneurship and innovation rank as clear competitive advantages for this nation in the global marketplace.
Entrepreneurship and innovation, supported by private capital and credit, are the means to new goods and services, as well as efficiency and productivity gains. At it’s most cutting edge, entirely new industries are created. Just think about how personal computers, coupled with broadband communications, have changed business and life in recent decades.
All of this translates into faster GDP growth, higher incomes, increased choices and lower prices for consumers, and new jobs.
So, entrepreneurship is a very big deal. But what about that concern mentioned earlier?
Every business, no matter how big today, was at onetime a start up. The story often is about an innovative person deciding that self-employment is the best choice for entrepreneurial success. Others, perhaps due to job losses and few options, are more reluctant in their choice of self-employment. Either way, though, self-employment often is the starting point in the entrepreneurial process for many. Sometimes the result is failure. At other times, a business is established that provides supplemental income. Or, self-employment can become a substantive and valuable career, or eventually a success that turns out to be a complete game changer for an industry or the entire economy.
Unfortunately, the recent trend in self-employment has been down, and that’s troubling for the economy today and into the future.
The Bureau of Labor Statistics offers two sets of data on self-employment — unincorporated and incorporated.
The unincorporated numbers date back to the late 1940s. That data reveal some long-term trends. For example, from 1948 to 1970, the unincorporated self-employed declined steadily and notably. This trend then markedly reversed, with the clear trend upward to 1994. That was followed by a slight, uneven move down through 2002. Some growth then resumed through 2006.
But since, the trend has been clearly negative. For example, the number of unincorporated self-employed fell (on a seasonally adjusted basis) from 10.68 million in December 2006 to 9.17 million in September 2011. That’s a decline of 14 percent.
The recent story is not all that different for incorporated self-employed. The data here only goes back to 2000. From the recession of 2001 to 2008, incorporated self-employed showed solid growth. But since then, the trend, again, has been negative. For example, the number of incorporated self-employed declined from 5.78 million in September 2008 to 4.95 million in September 2011 — another drop off of 14 percent.
What’s different in these recent declines is that they run against the usual historical trend. Looking back, when a recession hits, the number of self-employed either continues to expand, as people who lose their jobs turn to self-employment, or if the number of self-employed takes a hit, they start growing along with and aiding the recovery.
Unfortunately, the deep recession — dated from December 2007 to June 2009 — and the subsequent dismal recovery has experienced neither pattern. Instead, self-employment has dropped relentlessly throughout.
Why has this period been different? A few key reasons come to the forefront.
The severity of the recession — one of the deepest and longest since the Great Depression — took its toll throughout the economy, including on entrepreneurial activity. At the same time, though, the severity of the recession should have pointed to a strong snap back in entrepreneurship and growth. But other factors made sure that has not been the case.
The housing-mortgage-credit mess that came to a head in the late summer of 2008 made it far more difficult for entrepreneurs to get credit needed to start up and sustain businesses. Home equity borrowing, which is important for many entrepreneurial ventures, seemed to disappear. Credit card financing, also a big option for start-ups, declined dramatically, with new government regulations also contributing to the contraction in this line of financing.
That points to the final major problem, i.e., tremendous public policy costs and uncertainties that have discouraged risk taking. Major policy steps over the past four years have generated significant questions and costs for entrepreneurs and investors. These include hyper-regulation (including on the health care, financial, labor and energy fronts); increased taxes; threats of higher future taxes due to a dangerous and historic expansion in government spending and debt; and loose monetary policy resulting in higher inflation and a continued risk of increased inflation looking ahead.
If we want to rekindle our entrepreneurial fires, then a very different foundation is needed. In effect, government needs to get out of the way by reining in the size of government, deregulating, and substantially and permanently reducing tax burdens, while monetary policy gets back to fighting inflation and credit markets are freed up from misguided regulations and political preferences as to how credit gets allocated.
If entrepreneurship continues to be undercut, then the U.S. economy will be sentenced to a persisting under-performance for the foreseeable future.
Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.