The nation’s engine of growth in new jobs, historically, has been the young and emerging enterprise. Twenty years ago, companies less than one year old generated nearly five million new jobs. Currently, one-year old startups are creating a shade above three million new jobs.
The driver behind new job creation is the new business startup. And, the arithmetic makes clear why new job creation in the United States is the lowest in memory. According to the Small Business Administration, the failure rate of young firms is roughly on par with the rate of new business formations. Again, twenty years ago the number of new business formations handily exceeded the number of companies which failed.
It is no wonder that the United States is nowhere in the top ten of nations for spinning up new companies when compared to the number of existing businesses. When looked at in this way, the Organization for Economic Cooperation and Development (OECD) calculates that the United States is second from the bottom ahead of only Canada. The OECD methodology punishes advanced economies as they have a larger base of established businesses thereby diminishing the ratio of new business startups. Even so, the United States ranks behind Austria, Israel, and the Netherlands – hardly impoverished nations with thin industrial bases – in the OECD rankings.
I can think of no greater threat to our democratic spirit than our inability to inspire, if not incent, young entrepreneurs to take the plunge. The rate at which entrepreneurs ages 25-54 – the prime years for throwing caution to the wind – choose to risk it all is about half what it was three decades ago. Millennials, the offspring of the digital age, who should be best poised to launch a low cost, technology inspired, entrepreneurial enterprise have proved to be risk-averse and now account for the least represented demographic responsible for new business formations. The evidence is muddled as to why this demographic behaves the way it does. Is there no wellspring of ideas coming from this group? Is this a group whose inspiration has been sapped by the creature comforts provided by their parents or by one government program or another?
Consider this, Mike Rowe, former host of the Dirty Jobs television series which featured Mr. Rowe doing disgusting jobs – which apparently no one else wanted to tackle – launched a scholarship fund for high school students willing to take on a skilled trade like welding, plumbing or electrical. And, despite Mr. Rowe’s largesse, he can’t give away scholarship money fast enough because few applicants are willing to step up to an Oath of hard work and hard study.
I started my first business – a delivery service – with all of $500 in start-up capital at the ripe young age of nineteen. I started my business because I was motivated to be my own boss, make my own money, work my own hours, and because, in the end, I had “ants in my pants”. To my way of thinking, there is no better definition of an entrepreneur than an individual who has ants in his pants and who is never satisfied with his station in life.
In contrast, I don’t believe that sporting a sheepskin emblazoned with “Bachelor of Science in Entrepreneurship” will make an entrepreneur of the person. The $50,000 per school year investment that most colleges call for is money better spent in an entrepreneurial venture.
Regardless, the lack of representation by Millennials in the entrepreneurial ranks is all the more serious given that as of 2020 Millennials represented the largest age segment of the population at about 22%. Clearly, the confidence, passion, and ambition of our latest generation has eroded to the point where it now seeks refuge where rewards are more in line with pursuits involving little or no attendant risk.
THE GOVERNMENT’S ROLE IN NEW BUSINESS FORMATIONS
The French nineteenth century free-market economist Frederic Bastiat, insightfully warned of the cost of overwrought government intrusion: “The real cost of the State is the prosperity we do not see, the jobs that do not exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us.” Sadly, over one-hundred years after Bastiat’s admonishment, we still have not learned that less government is always best.
The continuing onslaught of stultifying regulatory prohibitions (licensing, permitting, and other forms of red tape), is a serious impediment to the young start up. Community bank credit, the source of about 60% of the nation’s small business lending, has been decimated by the suffocating compliance provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act, passed in 2010 by the Obama Administration in response to the financial meltdown of 2008, was intended to address the abuses of large banks.
Unfortunately, the Act’s nearly 2,300 pages made few provisions to address the operating characteristics of thinly capitalized banks whose purpose it is to deal with the special needs of their local communities. As a result, since the passage of Dodd-Frank, nearly 2,000 community banks have gone out of business. And, those that have survived have seen nearly 25% of their net income sucked up by compliance costs. It is no wonder then, that new business formations so heavily dependent on the lubricant that is Community bank-lending have suffered so dramatically.
If stifling regulations, and reluctant bank credit weren’t burdensome enough for the young entrepreneur to deal with throw in, for good measure, a tax code of mind-numbing complexity, and confiscatory tax rates. Now comes the lockdown measures implemented by many States which, for largely political reasons, have sought draconian responses to the outbreak of the Chinese Communist Virus. This factor alone has the potential to extinguish whatever spark might be left in our young entrepreneurs.
AMERICAN DREAM OR SOCIALIST NIGHTMARE?
It seems hardly surprising, therefore, that the brightest young minds seek sanctuary in menial, corporate, or government jobs where innovation will hardly move the needle on the nation’s global competitiveness. In this context, the United States might learn something from the pro-business regulatory, and tax regimens that have been enacted in both Dubai and Panama – small, albeit financially astute nations – as I have written in separate essays.
The numbers tell the story: according to the World Bank Rankings for 2019, the United States ranks 55 out of 190 nations – behind countries such as the Democratic Republic of Congo and Albania, and ahead of Niger – for the ease of starting a business. The World Bank’s metrics factor in the minimum capital required to launch a commercial or industrial start up, the licensing and permitting required, and the time and cost to get started. One can quibble with a methodology that attempts to compare 190 economies but if the World Bank’s calculation is only half right the United Sates would still not rank near the top.
More troubling is the nation’s lack of innovation coming from young firms. Here again, the United States is a laggard. Patent applications on a per-capita basis ranks the United States behind Korea, Japan, Switzerland, China, Canada, and Germany, and ahead of Denmark, Sweden, and Finland. But that doesn’t tell the whole story as patent filings in the United States are dominated by large, deep-pocketed corporations which are able to finance the legal, administrative, and accounting work necessary to process a patent application, and defend it if challenged. In this connection, it is a known fact that industry-disruptive technologies are less likely to spring from established market leaders – which are largely motivated to preserve the status-quo – than from entrepreneurial companies.
The United States has no option but to restart the nation’s entrepreneurial engine of growth in order to rekindle its democratic and free-market principles. In the absence of anything less than an overhaul of the educational, regulatory, fiscal, and legislative climate at the federal, state, and local levels impinging on new business formations The American Dream will remain a lost slogan.
Management Advisor
