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

The effects of the radical consolidation in the banking industry that began in the 1980s are equally dramatic. Relatively few bank officers today have the leeway and local knowledge to lend to established local businesses, much less new ventures. This is especially true in bad times, when big institutions come under great pressure both from Wall Street and regulators. In Maryland, for example, Bank of America made 312 SBA-guaranteed loans to local businesses in 2007. In 2010, it made two. Consolidation also concentrates the power of a few financial institutions over small businesses, and radically raises the risk that entire funding systems can collapse all at once. The near breakdown of CIT Group in early 2009—averted only by a last-minute deal with bondholders—would have cut more than a million small businesses off from some of the most important forms of day-to-day business financing.

The single biggest factor driving down entrepreneurship is precisely the radical concentration of power we have seen not only in the banking industry but throughout the U.S. economy over the last thirty years. This revolutionary remaking of almost every economic activity in the nation was set in motion in 1981, when officials in the Reagan administration all but suspended traditional enforcement of America’s antimonopoly laws, a change in policy then adopted by every subsequent administration. Since then, regulators have done almost nothing to stop the great waves of mergers and acquisitions, with the result that control over most major economic activities is now more consolidated than at any time since the Gilded Age.

The effects have been nowhere more dramatic than in those sectors that have always been most congenial to individual proprietorships, like retail, services, farming, and small manufacturing. These were the activities most affected, for instance, by the type of “roll-up” strategies pioneered by financiers like Mitt Romney’s Bain Capital. In the case of the office-supply retailer Staples, Bain’s investment helped propel the company from a one-store operation to a 2,000-store international behemoth. Similar plays resulted in Home Depot capturing a vast proportion of the nation’s hardware business, in Best Buy capturing a vast proportion of America’s electronics business, and in Macy’s capturing a vast proportion of all department store sales. Just one company, Wal-Mart, now controls upward of 50 percent of some lines of grocery and general merchandise business—commerce that a generation ago was divided among tens of thousands of families.

Indeed, the decline of small business documented here appears to confirm that the great social experiment undertaken a generation ago—when we allowed our government to cease enforcement of our antimonopoly laws—has had a devastating effect not only on our democracy but also on the ability of ordinary Americans to build their assets and move up the socioeconomic ladder through enterprise. The loss of job creation that comes with the hollowing out of America’s entrepreneurial sector also goes a long way toward explaining why American businesses were creating fewer and fewer jobs even before the Great Recession hit. The founding generation was right: as America’s entrepreneurs go, so goes America’s prosperity and democracy. If we are ever to recapture the promise of this land, we must first break down the great powers that crush the individual citizen’s initiative and ability to create and build what is new and better.

[Return to The Future of Success in America]

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.


  • 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
    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 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.

  • 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:


    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:


    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.