Entrepreneurship Is an Economic Bright Spot

chris-edwardsCHRIS EDWARDS, CATO INSTITUTE

Recent economic news has been mixed with supply chain bottlenecks and high inflation on the one hand, but solid growth on the other. Another bright spot is entrepreneurship. Since the summer of 2020, the number of U.S. business startups appears to have soared.

The chart below shows Census Bureau data for the number of actual and estimated business formations or startups. Business formations plunged at the start of the pandemic, but then reversed course and have risen to levels not seen in more than a decade. As the chart shows, the recession a decade ago hammered entrepreneurship and appeared to have permanently downsized startup activity. So the recent data is surprising good news.

The chart data is for employer businesses, meaning firms that hire at least one worker other than the owner. It is based on the first instance of payroll tax liabilities. The Census also tabulates business applications based on requests for employer identification numbers (EINs), and then uses that data to project future business formations, as discussed here.

On the chart, the number of startups is estimated to have jumped 21 percent between December 2019 and December 2021. Regional data show that the jump was 29 percent in the South, 20 percent in the Midwest, 16 percent in the Northeast, and 15 percent in the West.

 

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Why has the number of startups risen? One factor is hardship. People laid‐​off during downturns may turn to entrepreneurship to earn income. Also, when downturns cause some businesses to close, it creates space for new businesses to fill the void. Many restaurants closed during the pandemic, but that has opened the door for new restaurants to try their luck.

Another factor is that fast‐​changing economic conditions and technologies create opportunities for startups to meet new demands. The pandemic has shaken up the economy, creating new needs in industries such as internet, healthcare, and transportation. John Haltiwanger notes that the startup spike has been strong in nonstore retail, personal and business services, trucking, and food services.

What are the policy implications of the chart? Generally, governments should stay out of the way and let entrepreneurs keep our economy growing and innovating. The Census estimates include startups that are not necessarily in operation yet, and new tax or regulatory impositions could cause entrepreneurs to shelve their plans. I discuss startups and taxes here, and startups and regulations here.

Rising inflation and supply chain problems could also undermine the startup surge. America’s entrepreneurs need price stability from the central bank and regulatory flexibility from governments to allow them to solve logistical problems. Governments could enhance flexibility by privatizing infrastructure such as seaports and airports.

Past startups such as Amazon, Tesla, and Apple have become some of the nation’s most important companies. And millions of past startups populate every American neighborhood as small businesses. Let’s keep the startup train rolling and avoid policy actions that could stall the entrepreneurial engine room of the economy.


Chris Edwards is the director of tax policy studies at the CATO Institute and editor of www.DownsizingGovernment.org. He is a top expert on federal and state tax and budget issues. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.


Used with permission. Cato Institute / CC BY-NC-SA 4.0