Say it isn’t so. The little engines that could, which are small businesses across America, may be on a slight demise. Economists say big businesses like Amazon, Google, and Facebook are hurting entrepreneurship and creating a startup slump in America, according to a report in The New York Times. Let’s look at the numbers. In 2015, some 414,000 new businesses were created, according to the Census Bureau.
While that’s a slight increase from the previous year, it’s still far less than the 558,000 companies formed in 2006, the year before the recession hit. Economists say that this could be one of the reasons the slump is kind of under the radar in explaining certain aspects of the economy, such as tame expansion, sluggish growth and less than stellar wage increases. “We’re still in a start-up funk,” said Robert Litan, an economist and antitrust lawyer who has studied the issue. While the previous recession accounts for some of the demise, it isn’t everything.
A microcosm of this exists presently in New York City. What once was predominantly mom and pop stores on street corners in Manhattan, are now taken up by nationally known brands such as Starbucks, Jamba Juice, Pret a Manger, Walgreens and other big companies. New York has approximately 230,000 small businesses, and no one is really sure what may help. People are upset because so many small businesses seem to be closing.
Taxes, subsidies and other support programs have been suggested to help. However, for the most part, New Yorker’s aren’t complaining. There are thousands of restaurants and stores, both independently and corporate owned, providing better quality products, faster services and at a lower cost than ever before in American history. That is how a capitalistic economy works.
The implications of a slump in start-up businesses has several ramifications. As we know, small business advances innovation and job creation, and often is a path to upward mobility by low-income individuals. A pessimistic note is offered by John Dearie, the president of the Center for American Entrepreneurship. “Everybody loves entrepreneurship, but they’re not aware it’s in trouble. If new businesses are the engine of net new job creation, and if new businesses are the engine of innovation, and new business creation is at 30-year lows, that’s a national emergency.”
Perhaps most significant, start-ups play a critical role in making the economy as a whole more productive, as they invent new products and approaches, forcing existing businesses to compete or fall by the wayside. The start-up decline might defy expectations in the age of Airbnb and Uber, but the trend is backed by multiple data sources and numerous economic studies.
So what is behind the decline? Economists theorize a number of issues, including the aging of the baby boomer population, who are retiring and often not handing down their business to family. The decline in local community banks and the increased regulation on those banks have caused lending to become difficult for an entrepreneur.
Regulation on business itself is difficult to comply with when you are a small company, lacking a compliance department. In and of themselves, these issues do not necessarily have a causal effect on start-ups. Circumstantial evidence suggests that the concentration of large businesses across most industries is having deleterious effects. According to economists at Princeton and University College London, companies are increasingly able to demand prices well above their costs, which according to standard economic theory would lead new companies to enter the market. Yet that isn’t happening. Why you ask. Ian Hathaway, an economist who has studied the issue suggests that the market is not truly competitive, that existing companies have found ways to block competitors. Do the names Amazon, Google, Facebook et al come to mind?
Editor’s note: If one is looking for political reasons, one might look for the effects of 8 years of Obama, and in the longer term the education system not encouraging independence or self reliance. Entrepreneurship is hard. Even with dedication and hard work most business startups fail. Does the younger generation have the guts to do this anymore?