Where Have All The Small Businesses Gone?

My column this week in Forbes is about the declining rate of entrepreneurship and startups in the US.

A recent study by the Beauru of Labor Statistics confirmed a potentially disturbing trend — that the number of new startup businesses in the United States has declined since 2006, and the number of jobs created by those startups has been in decline for over a decade.

This is not just a result of the recent recession.  These declines pre-date the current recession, and besides, startup activity has always held up well in past recessions as unemployed workers try entrepreneurship as a path back to prosperity.

There are likely a myriad of economic and demographic reasons for this decline, but certainly the growth of government power in the economy must be seen as a major contributor.  Government intervention in commerce nearly always favors large companies over small, even if that was not its specific intent, for a couple of reasons:

  1. Increasingly complex and pervasive regulations on everything from labor practices to salt content tend to add a compliance cost burden that is more easily born by larger companies
  2. Large, entrenched competitors are becoming more facile at manipulating government to create barriers to competition from upstart companies with different business models.

The role of government in throttling entrepreneurship has been evident for years, in the enormous differentials between US and European business startup rates.  Historically, the US has had entrepeneurship rates 3-4 times higher than in the large European industrial countries, due in large part to the barriers these latter countries place in the way of business creation.  But the US, with its current bi-partisan drive towards a corporate state, may soon be engaged in a race to the bottom with these other countries.

I go on to discuss each of these two points in more depth.


  1. Don:

    Good article. This is one of the reasons I've avoided well established markets for my ventures: with the establishment comes regulation, and I'm not starting a business to spend all day filling out paperwork and trying to figure out ways to outsmart the army for bureaucratic drones.

  2. Steve:

    There could be any number of reasons why there is this change including:

    Demographic changes - Aging population is less likely to start new businesses
    Margin compression - without question things like the Internet have lead to compressed margins as there is more pricing transparency
    Technology changes that give national players greater ability to compete locally. Amazon.com has had a material impact on local businesses
    Greater Capital intensity of business - The pie chart of capital, labor and materials has made businesses less labor intensive and more capital intensive making it harder for businesses to get the necessary resources to get started.
    Globalization - Local businesses are competing with international players with dramatically different cost structures

    I honestly don't think that additional regulation stops a business from starting because it is not what a would be entrepreneur thinks about, or even knows about, when the start up. Those factors usually come into play down the road and are a surprise for the uninitiated!

  3. Quizikle:

    Just to push some cultural/political buttons...

    From the Concise Encyclopedia of Economics:
    "As an economic system, fascism is socialism with a capitalist veneer."
    "Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest” — that is, as the autocratic authority conceived it."

    Tried to start my own business. Had to spend more time on paperwork than actually running the business. No more.

  4. Eric Hammer:

    That's just the problem Steve: you almost can't know what regulations you are going to run into when you try to start a new company until they knee cap you. Then you spend months and months trying to figure out how not to break the law, and as likely as not just give up in favor of getting a regular job and eating that quarter.

    The licensing especially is an issue. In PA you have to take ~1200 hours of training to get licensed to cut hair. You can get a PhD in less time. Further, only about 2-400 of those hours are actually directly hair related. A third of the time is spent on makeup application, and the balance on things like administering Botox injections. You only want to cut hair? Too bad. The Botox bit is especially silly, since no plastic surgeon is going to let you administer to their patients without further training anyway. So why bundle it?

  5. Bob Smith:

    "So why bundle it?"

    Incumbent protection. It's fairly likely incumbents were grandfathered in without having to take that training.

    I've been looking into getting a commercial mortgage lending license in Arizona. Arizona is one of the few states that licenses commercial lenders. It is not sufficient to show you know the law by passing the test, though of course you must do that too. It turns out I cannot get such a license without 3 years prior experience working for a mortgage lender. Basically, the law requires I give my competition the benefit of 3 valuable years of my life, and prevents me from taking advantage of current market conditions.

  6. joshv:

    Seems this presents a business opportunity. Create a regulatory management agency that contracts its services to small businesses. This agency then becomes an expert in all 50 states with how to negotiate the regulatory maze. They can form the sorts of long term relationships that grease the wheels, and if they get big enough, they can even lobby to make things simpler for them (and thus cheaper for their clients).

    In effect Quicken already does this. Even though I am a single person corporation, I subscribe to their automated Quickbooks payrolls service. They do all the tax filings for me every time I pay myself. Worth every penny.

    Of course the existence of entities like Quicken makes it easier for state legislators to excuse complex new regulations with the wave of a hand "Everybody subscribes to a computerized payroll service anyway, they'll just program this new law into their software and it won't bother anyone"

  7. Orion:

    >Technology changes that give national players greater ability to compete locally. Amazon.com has had a material impact on local businesses<

    True, but this works both ways. Niche businesses can reach national and international markets far easier and cheaper. Hence the term world wide web. A niche business selling branded mainstream items-not gonna work too well though.

  8. jt:

    As Coyote's own example demonstrates, regulatory uncertainty tends to have a disproportionate impact on labor-intensive businesses, especially those whose employees are at the low end of the skill spectrum. Of course, these are *exactly* the businesses we need to encourage to generate more jobs. Sigh.

  9. Eric Hammer:

    "“So why bundle it?”
    Incumbent protection. It’s fairly likely incumbents were grandfathered in without having to take that training."

    Not only that, but consider that the trade schools also get to force people to pay for training in areas they possibly have no interest in. Why only sell 400 hours to each of 3 different groups of people, when you can have the legislature pass a licensing requirement and charge all 3 for 1200 hours? (Other than morality and the possibility of being strung up, that is.)

  10. Matt:

    I have to wonder where the BLS gets its numbers from. A lot of new startup businesses don't do anything that a federal agency would notice until it's time to file their first tax returns. Does the BLS have access to our Schedule C forms? I suspect not. And "filed a schedule C this year, but didn't file one last year" is the only definition of "new small business" that can be relied on to count most actual new small businesses.

    My guess is that entrepreneurship isn't dying...it's just being driven, wherever possible, into what might be thought of as an underground form. Not necessarily doing anything that outright breaks the law, but deliberately staying as low-profile and inconspicuous as possible, to avoid government scrutiny and the regulatory oppression that goes with it.