A slowdown in U.S. business formation poses a risk to economy
Despite a decadeplus of economic growth, Americans have slowed the pace at which they’re forming new companies, a trend that risks further widening the gap between the most affluent and everyone else.
The longest expansion on record, which began in mid2009, has failed to restore entrepreneurship to its prerecession levels, according to a Census Bureau report based on tax filings.
Between 2007 and the first half of 2019, applications to form businesses that would likely hire workers fell 16 percent. Though that pace improved somewhat after 2012, it dipped again this year despite President Donald Trump’s assertion that his tax cuts and deregulatory drive would benefit smaller companies and their workers.
Business formation has long been one of the primary ways in which Americans have built wealth. When fewer new companies are established, fewer Americans tend to prosper over time.
In addition, smaller companies account for roughly 85 percent of all hiring, making them an entry point for most workers into the workforce. A decline in the creation of new companies results in fewer companies competing for workers, a trend that generally slows pay growth.
“What you see is reduced social and economic mobility,” said Steve Strongin, head of global investment research at Goldman Sachs. “It means that most of the growth is occurring in the corporate sphere, which keeps wage growth down and improves profits.”
Smaller companies and startups were generally cautious about expanding as they emerged from the Great Recession, in many cases choosing not to hire. The 2008 financial crisis delivered a warning to many wouldbe entrepreneurs that scaling back their ambitions might help them survive another recession.
“People became a lot more riskaverse after the Great Recession because so many people were hurt,” said Nicholas Johnson who founded Su Casa, a chain of four furniture stores based in Baltimore that employs 30 workers.
Johnson, 45, started Su Casa about 20 years ago. Emerging from the recession, he kept his staffing levels low to reduce his costs. Still, that meant having to pay well above the minimum wage to attract and retain workers who were specialized in home decor.
“I am superconcerned about an upcoming recession because we got so lean that I can’t get lean again,” Johnson said. “There is no more fat to trim.”
Goldman Sachs on Thursday is releasing a survey of business owners who took part in its “10,000 Small Businesses” program, which has provided management training to several thousand small companies since 2010. The survey concluded that entrepreneurs typically struggle to find qualified workers and to navigate complex regulations. Both factors tend to slow the formation of new companies.
Among the business owners who were surveyed, nearly eight in 10 said they favor a higher local minimum wage well above the federal baseline of $7.25 an hour. Focus groups conducted as part of Goldman’s survey indicate that smaller companies believe wages have failed to keep pace with the costs of living and the retention of employees.
Just 20 percent of the surveyed business owners said they felt that Trump’s 2017 tax cut would increase their companies’ growth, according to the online survey of 2,285 alumni of the Goldman program.
Social and demographic forces are also thought to be limiting opportunities for entrepreneurs and smaller companies. America is aging, many young adults are weighed down by student debt and larger retailers have used their scale to offer lower prices than smaller companies can afford to do so.
Roughly twothirds of the decline in startups between the late 1970s and 2007 resulted from a slowdown in the growth of the U.S. workforce, according to research by Fatih Karahan of the Federal Reserve Bank of New York, Benjamin Pugsley of the University of Notre Dame and Aysegul Sahin of the University of TexasAustin.