By Dr. Eric Fuits
& Oregon Tax News,
In a recent report from the Brookings Institution, authors Ian Hathaway and Robert Litan find that American entrepreneurs started 27 percent fewer businesses in 2011 than they did five years earlier, according to data from the Census Bureau. As a share of all companies, startups have been declining since the late 1970s. Even worse, they find that in recent years, more firms are exiting than are entering. The authors conclude that the decline in entrepreneurship “points to a U.S. economy that has steadily become less dynamic over time.” While the decline in entrepreneurship is broad-based—hitting every major industrial sector, every state, and nearly every large city—Oregon has been one of the hardest hit.
“Entry” evokes images of dynamic high tech startups like Snapchat or Airbnb or Portland’s own Simple. In reality, entry also includes plain ol’ businesses like coffee shops, convenience stores, bicycle repair shops, and consulting firms. While the high tech firms get most of the attention in the media for their dollar signs and innovations, the plain ol’ businesses make up a huge portion of the start up world. One line of reasoning says that it’s okay if entry slows, so long as the mix of entrants shifts toward the innovative and dynamic.
“Exit” sounds ominous, if not sad. Imagine the poor shopkeeper turning his window sign to “Closed” for the last time or the high tech wiz kid burning through millions of VC dollars before spectacularly sputtering out of business. On the other hand, exit is often a good thing. Earlier this year, Portland high tech firm Simple “exited” by selling out to a Spanish bank for $117 million in cash.
In other cases, the exit of a business may be the result of a bad business plan or mismanagement. Indeed, that is one of the big differences between free enterprise and the public sector. With free enterprise, failure fails; in the public sector, failure persists and may attract ever more resources to “correct” the failure.
Portland business leaders have remarked that Oregon is great at starting businesses, but terrible at growing them. The Census data show there is a broad trend that the number of startups that manage to grow is declining.
It’s easy to start a business, especially as a “single shingle” shop. And a one-person firm can be successful, as demonstrated by the success of the Million Dollar Consulting series of books extolling the benefits of sole proprietorship. But, adding even a single employee or moving out of the garage into a “real” workspace triggers a number of regulations, taxes, charges, and other hurdles. On the other end of the spectrum, “big” businesses have the political influence to bend the rules their way. Even a million dollar consultant couldn’t have made the Oregon governor convene a special session of the legislature for his or her benefit.
If dynamism is dying, it’s not because young people have decided to retire. It’s because government is smothering it in its crib.
About the author
— Eric Fruits, Ph.D. is president and chief economist at Economics International Corp., a Portland-based consulting firm. He is an adjunct professor at Portland State University where he has taught classes in economics, finance, and state and local public finance. Any opinions are the author’s alone and do not reflect the opinions of any other person or organization.