Features

July/August 2012 The Slow-Motion Collapse of American Entrepreneurship

The experts tell us new business start-ups will save the American economy. So how come there are fewer and fewer of them?

By Barry C. Lynn and Lina Khan

This drop in the number of self-employed citizens relative to the overall working population is also captured by the Bureau of Labor Statistics, which isolates nonfarm workers. The BLS survey asks workers if they are employed by a private company, a nonprofit organization, or the government, or are self-employed. Self-employed workers are further separated into those who have incorporated their businesses and those who have not.

According to the BLS, the number of Americans who are both self-employed and not incorporated has fallen significantly as a share of the working-age population, from 461 per 10,000 in 1990 to 359 in 2011. This decline—more than 22 percent—reversed a long trend in the opposite direction during the 1970s and ’80s. The BLS data shows a somewhat different picture when it comes to self-employed persons who incorporate their businesses. As a share of the working-age population, their ranks grew 35 percent between 1989 and 2008, before dropping off sharply in 2009. Yet this increase in incorporation may be evidence not so much of rising entrepreneurship as of existing unincorporated one-person firms deciding to change their legal status—to take better advantage of new limited liability laws in many states, for instance, in order to cut their tax bills.

Even if we accept this number without question, however, the total share of the self-employed dropped steadily over the last two decades. In 1994 there were roughly 663 self-employed (incorporated and unincorporated) for every 10,000 working-age Americans; by 2009 this number was down to 606, an 8.5 percent decline.

If anything, there’s good reason to believe that this decline in entrepreneurship is even steeper than government data shows, thanks to what appears to be systematic miscategorization by the government of what counts as a true independent company. Since the 1990s, large companies have increasingly relied on temporary help to do work that formerly was performed by permanent salaried employees. These arrangements enable firms to hire and fire workers with far greater flexibility and free them from having to provide traditional benefits like unemployment insurance, health insurance, retirement plans, and paid vacations. The workers themselves go by many different names: temps, contingent workers, contractors, freelancers. But while some fit the traditional sense of what it means to be an entrepreneur or independent business owner, many, if not most, do not—precisely because they remain entirely dependent on a single power for their employment.

Consider, for instance, how FedEx Ground has long treated the men and women who drive its trucks. The company obligated the drivers to lease FedEx trucks, to wear FedEx uniforms, and to deliver FedEx packages along routes assigned by the company. Then the company insisted on classifying the drivers as independent contractors, a status that enabled FedEx to protect itself against unionization and to avoid paying benefits.

Over the years, FedEx Ground’s treatment of its drivers was the subject of protracted—and highly public—legal battles. Yet the Census Bureau never made any attempt to adjust government statistics to distinguish these drivers (and the legions of other similarly “independent” workers who depend entirely on a single employer) from the upstart entrepreneur who designs a new sports shoe or opens a new restaurant or founds a biotech firm. Since 2010 FedEx Ground has moved away from the independent contractor model, and the company now requires its drivers to register as corporations. Even those drivers who might have been counted as wage and salary workers before are now counted as independent small businesses.

The conclusion is clear. We see a sharp decline in entrepreneurship across the board, among new employer firms and one-person shops. And at least when it comes to employer firms, this decline traces back more than thirty years, to the late 1970s. The drop-off in entrepreneurship in America, in other words, is big, and it is fundamental.

So what explains the steep decline in American entrepreneurship? Some might point to high taxes. Yet tax rates have generally gotten lower during exactly the period when entrepreneurship rates have been in decline. Others would finger oppressive regulation. And certainly there’s little doubt that poorly conceived government regulation can make it hard for entrepreneurs to get ahead or just to stay in business. In one recent example, a county health inspector in California threatened to shut a twenty-year-old farmers market because the nearest restroom was 220 feet away, rather than the 200 feet stipulated by law.

Yet it’s hard to hold “regulation” per se responsible for the dramatic decline in entrepreneurship we’ve witnessed over the last generation. Indeed, from a regulatory point of view, in many respects it is now easier than it has been in decades to start a new business. Not only has the Internet simplified the tasks of tracking regulations and interacting with regulators, but many states now offer one-stop incorporation services.

Another common explanation for the decline in entrepreneurship is technology. Over the last generation, digitization has displaced many independent businesses—think travel agencies, bookstores, and record stores. Moreover, technology creates an opportunity to combine many smaller businesses into a few giant concerns—as, for instance, when a single online retailer like Amazon takes advantage of the fact that the Internet destroys all traditional geographic constraints to create a nation-spanning book sales monopoly. Yet here again, on balance, it’s hard to blame technology for a decline of this magnitude. For one thing, many of the most celebrated start-ups in recent decades have been in high-tech fields. More important, many of these new digital technologies—like automated bookkeeping programs and wireless credit card readers—have made it far easier for other small operators to get into business and to keep going.

Two other possible explanations for the decline are harder to dismiss.

Perhaps the most common complaint among small business entrepreneurs is a shortage of financing. While the rise of the venture capital business might give the impression that financial support for entrepreneurs has never been easier to obtain, the truth is that only a tiny fraction of start-ups have access to venture funds. To get their businesses up and running, the vast majority of entrepreneurs today tend to rely at first, as they always have, on a combination of personal savings and contributions from family and friends. But with family balance sheets ravaged by stagnant wages and skyrocketing costs for health care and higher education, fewer and fewer average families have the savings needed to invest in a small business.

Barry C. Lynn and Lina Khan collaborated on this article. Lynn directs the Markets, Enterprise, and Resiliency Initiative of and is senior fellow at the New America Foundation. Khan is a program associate for the Markets, Enterprise, and Resiliency Initiative at New America.

Comments

  • thewarthatkilledachilles on July 11, 2012 6:46 AM:

    Gee , if R Reagan was the enabler that crushed freedoms , like independent Americans , with his precedent setting , and followed , decision to allow monopolys the freedom of people , maybe he was an even better puppet of oligarchs than we ever knew (and by golly we knew) . After all it was the wise men who said Corporations are people , we just need people to become tougher and less exensive , then we might 'can' all the noise and play it on September fourth .
    Yippee !

  • clarence swinney on July 11, 2012 9:17 AM:

    we miss expert governance
    CLINTON PRAISE-WITH PLEASURE
    GDP--rose from 6300 to 11,600
    NATIONAL INCOME-5,000 to 8,000 Billion--took 20 years to grow 2500B before Clinton
    JOBS CREATED--over 22 million--record by far
    AVERAGE WEEKLY EARNINGS--$360 to $478
    AVERAGE WEEKLY HOURS WORKED--never hit 35.0--hit that� mark 4 times in 80's
    UNEMPLOYMENT--from 7.2% down down down to 3.9%
    WELFARE TO WORK�11,533,710 on federal roll in 1996 and 3,880,321 in 2007.
    MINIMUM WAGE--$4.25 to $5.15
    MINORITIES--did exceedingly well
    HOME OWNERSHIP--hit all time high
    DEFICIT--290 Billion to whoopee a SURPLUS
    DEBT----+28%---300% increase over prior12 years
    FEDERAL SPENDING--+28%---80% under Reagan- who da true conservative?
    DOW JONES AVERAGE--3,500 to 11,800� all it's history to get to 3500 and Clinton zooms it
    NASDAQ--700 to 5,000---all of it's history to get to 700 and Clinton zooms it
    VALUES INDEXES-- almost all bad went down--good went up in zoom zoom zoom
    FOREIGN AFFAIRS--Peace on Earth good will toward each other---Mark of a true Christian--what has Bush done to Peace on Earth?
    POPULARITY---highest poll ratings� in history during peacetime in� AFRICA, ASIA AND EUROPE even 98.5% in Moscow--left office with highest gallup rating since it was started in 1920's.
    STAND UP FOR JUSTICE--evil conservatives spent $110,000,000 on hearings and investigations and caught--- ONE--- very evil man who took a few plane rides to events.
    BOW YOUR HEADS--Thank you God for sending us a man of Bill Clinton's character, intelligence, knowledge of governance, ability to face up to crises without whimpering and a great leader of the world.
    THANK YOU GOD FOR THE GOOD TIMES THE CLINTON YEARS.


  • clarence swinney on July 11, 2012 9:19 AM:

    Miss Charlie P.
    Why cannot we pay 3800 out of 14000 income And not borrow 901B in 2013 budget

  • clarence swinney on July 11, 2012 9:22 AM:

    Tax The Rich is needed
    10% own 73% Net wealth, 83% Financial wealth and get 50% income.
    50% get 87% individual income
    pay 13-15% tax rate

    Will we learn?

  • mnemos on July 11, 2012 2:03 PM:

    I definitely see the point about lack of financial services for small businesses. I don't see why you discount the effect of regulations. In general, regulations are becoming less burdensome for large businesses with compliance departments - which does not include any small entrepreneurs. For small businesses who don't have compliance departments it is becoming completely unmanageable. Twenty years ago people set up private day care businesses when they saw a need in their lives and community. Now the undertaking is too large for many to consider due to regulations. Five years from now, I'll need a new optometrist, since my current optometrist has looked at the new Obamacare regulations and realized that it won't be worth it for her to keep working. Mergers can be a response to weakening anti-monopoly rules, but they can also be a reaction to excess regulation. Scale helps mitigate the impact of regulation. When the federal government decides to revise a set of regulations for hardware stores, Home Depot has a compliance person spend 80 hours reviewing it for all of their thousands of stores. The "Corner Hardware Store" doesn't have anyone who can spend the 80 hours to review it since they have only one store. In the end 100 "Corner Hardware Store"s go out of business, where Home Depot just had to pay a few thousand dollars and got rid of more competition. Regulations are often characterized as "keeping big business in line". Often the truth is big business doesn't care - they have lawyers to make sure they won't be limited by the regulations, it will eliminate small business competition and it will raise barriers to entry for new competition. This disrupts the cycle of business creation. If you have an idea, you can develop it and sell it on a small personal scale, but as soon as you want to develop it into a business you have to face the regulatory monster - so your choices are to sell the idea to a big business, keep it at a personal level, or let it die.

  • John Steinsvold on July 13, 2012 10:43 PM:

    An Alternative to Capitalism (if the people knew about it, they would demand it)

    Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.

    I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:

    http://evans-experientialism.freewebspace.com/steinsvold.htm

    John Steinsvold

    �Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein

  • d brown on July 15, 2012 9:16 PM:

    I believe that most of the wonderful entrepreneurial activity was from big corporations outsourcing their union work. I know for a fact, that one start up here was owned by the wives of the local managers of a very big corporation. They fired all the union workers they could and and contracted the wive's company to do the work cheaper. I read that much of the boom in new businessmen activity at the time was the same kind of thing. Not doing anything new. Just fewer workers doing it for less.

  • Mario on July 17, 2012 6:41 PM:

    The assertion of american entreprenuer on the decline may be true. Then it implies, that the industry of american entrepreneurship is on the decline. What will happen to the investors, venture capitalists, investment bankers and the businesses the caters to entreprenuers?

    An interesting question to ask is how does this affect the industry as a whole? Are there enough new businesses to sustain investors in decades to come? Will investors be on the decline as well?

  • Cynthia Simpson on July 18, 2012 3:12 PM:

    I think this article and the segment introducing it on C-Span's Washington Journal, 7.18.12, should be required reading/watching for all members of Congress, The Wite House and the American people. It is a numbers exercise, examining the condition of entrepreneurship since the 70s in America. It isn't a pretty picture but it does put some of the hyperbole regarding small businesses in the spotlight. We need some paradigm shifts or we are in bigger trouble than we think.

  • William Neil on July 19, 2012 8:27 PM:

    Very interesting article, thanks very much, especially the clarification of all those independent entrepreneurs, willing or not, at Fed Express.

    I covered much of the same very difficult data, with a perspective a bit to the left of the authors here almost a year ago: "When Market Man Consigns the Common Man to the Dustbin of History" here at:

    http://www.ourfuture.org/blog-entry/2011073029/when-market-man-consigns-common-man-dustbin-history

    The conclusion that I reached was that over time, and including all the ins and out of different data sets concerning what is a small business and who is self-employed and so forth, that the number of entrepreneurs was not growing in any dramatic way and remained fairly constant with much churning, meaning small businesses failed and new ones started.

    Despite all the prominence given to small entrepreneurs in the society, and many government dolars at the federal and state level devoted to help them, it may just be, despite their importance, that there is a saturation point in a given society for new business ideas and products, that about 17-20% of the workforce will be engaged this way.


    My perspective, not the common one, was that they will also be dependent on the financial well being of the rest of society, "the 80%," who will be their customers. If they're broke, even good entrepreneurs with new products and ideas will struggle.

  • Ellen on July 25, 2012 3:06 PM:

    This is quite a thought-provoking article. Thank you.

  • James K. on October 22, 2012 1:46 AM:

    Well, banks learned how to capitalize profits and socialize losses. James K.