Why Amer­ica stopped be­ing a startup na­tion

The Pak Banker - - OPINION - Noah Smith

FOR years now, econ­o­mists have been warn­ing that some­thing seems very wrong with the fun­da­men­tals of the U.S. econ­omy. We think of the U.S. as a dy­namic coun­try of en­trepreneurs and in­de­pen­dent busi­ness own­ers, but this is a lot less true than it used to be. As econ­o­mists Ryan Decker (now of the Fed­eral Re­serve Board) and oth­ers have demon­strated, the rate at which new busi­nesses start up in the U.S. has been in de­cline. Up un­til 2000, most of that de­cline was the re­sult of big chain stores and restau­rants push­ing out lo­cal mom-and-pop busi­nesses. But since the turn of the cen­tury, high-growth com­pa­nies are also form­ing at lower rates. The Sil­i­con Val­ley startup boom we read about in the news is the ex­cep­tion, not the rule.

What is the rea­son for this trou­bling trend? Many ex­pla­na­tions have been pro­posed, but one fa­vorite the­ory on the freemar­ket right is that govern­ment has been chok­ing off en­trepreneuri­al­ism with a thicket of regulation. For ex­am­ple, Ryan Streeter, di­rec­tor of the Cen­ter for Pol­i­tics and Gov­er­nance at the Univer­sity of Tex­as­Austin, writes: This story is se­duc­tive, be­cause it fits with lib­er­tar­ian and con­ser­va­tive dis­trust of govern­ment. Regulation is also easy to blame be­cause there are so many dif­fer­ent kinds, and be­cause so many govern­ment rules are ob­vi­ously pro­duced by lob­by­ing and political in­flu­ence-ped­dling. In fact, if free-mar­ket types were ever to shift their fo­cus from tax cuts to dereg­u­la­tion, that Ma­son Univer­sity pro­vides some ev­i­dence that re­buts Streeter's the­sis.

The strin­gency of regulation is hard to mea­sure, so Gold­schlag and Tabar­rok make use of RegData, a rel­a­tively new data­base of reg­u­la­tory strength cre­ated by the Mer­ca­tus Cen­ter, a lib­er­tar­ian-lean­ing think tank. RegData is cre­ated by go­ing through the Code of Fed­eral Reg­u­la­tions and count­ing the num­ber of times words such as "must," "may not," and "pro­hib­ited" are used. Th­ese re­stric­tivesound­ing words are then matched to var­i­ous in­dus­tries to which they ap­ply, us­ing ma­chine­learn­ing tech­niques. It's an in­ge­nious way to turn some­thing qual­i­ta­tive (fed­eral laws) into a quan­ti­ta­tive mea­sure.

Gold­schlag and Tabar­rok find that regulation has in­creased quite a lot in most in­dus­tries, es­pe­cially in man­u­fac­tur­ing: But cor­re­la­tion doesn't equal cau­sa­tion. If the in­crease in regulation is caus­ing the de­crease in dy­namism, we would ex­pect that in­dus­tries where the for­mer has been greater to have ex­pe­ri­enced more of the lat­ter.

When Gold­schlag and Tabar­rok run the num­bers, how­ever, they find no mea­sur­able re­la­tion­ship be­tween ris­ing regulation and de­clin­ing dy­namism at the in­dus­try level. Sec­tors where rules have be­come in­creas­ingly strin­gent have seen de­clines in startup rates that are no greater than sec­tors in which the level of regulation has been lit­tle changed.

The au­thors look within the man­u­fac­tur- ing sec­tor, where regulation has in­creased the most, and they find the same thing. Man­u­fac­tur­ing in­dus­tries that are more heav­ily reg­u­lated than in years past have had roughly the same rates of new busi­ness for­ma­tion: Nor are changes in job cre­ation and de­struc­tion -- other mea­sures of an in­dus­try's dy­namism -- cor­re­lated with the changes in reg­u­la­tory strin­gency.

It's im­por­tant to note that Tabar­rok him­self is a fa­mously lib­er­tar­ian-lean­ing econ­o­mist, and the Mer­ca­tus Cen­ter has a freemar­ket ide­o­log­i­cal bent. So this pa­per isn't merely a case of pro-regulation peo­ple push­ing their own agenda and Gold­schlag and Tabar­rok's pa­per is a stern re­but­tal to those who claim that econ­o­mists' re­sults are driven by their ide­ol­ogy.

Now, this one pa­per doesn't prove that regulation isn't the cause of de­creas­ing dy­namism. The RegData data­base mea­sures only fed­eral reg­u­la­tions, not state and lo­cal ones. Ad­di­tion­ally, RegData's method of mea­sur­ing the strin­gency of regulation may be flawed; the same could be true of its al­go­rithm for match­ing reg­u­la­tions with in­dus­tries. More stud­ies will have to be un­der­taken be­fore we can de­ci­sively rule out regulation as the cul­prit. But in the mean­time, pun­dits should prob­a­bly think twice be­fore declar­ing con­fi­dently that govern­ment is the rea­son Amer­i­cans seem to have lost the en­tre­pre­neur­ial spark.

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