Free & Clear: April 2014

Not enough ventured
By John Hood

You’ve heard it many, many times: Most new jobs are created by small businesses, not large corporations. That’s true, as far as it goes. But it doesn’t go as far as it used to. As recently as 1993, more than half of U.S. workers were employed by companies with fewer than 250 people on their payrolls. That share declined in the ensuing two decades, falling to 47% in 2013.

Since the Great Recession, startups and small enterprises have played a much smaller role in the nation’s job creation than they did during previous recoveries. For example, in the year that ended in March 2013, companies that were less than a year old created about 3 million jobs compared with 4.6 million in 2000.

The real story is not that hiring by large companies is sizzling but in what isn’t happening. Though households and businesses are saving more, they aren’t plowing that money into new ventures the way they once did.  “Since the most recent recession began in December 2007, [business] births have experienced the steepest decline in the history of the series,” the U.S. Bureau of Labor Statistics reports. “New establishments are not being formed at the same levels seen before the economic downturn began, and the number is much lower than it was during the 2001 recession.”

State-level studies show how strong the relationship between entrepreneurial activity and job growth is. The most recent, published last year in the Journal of Entrepreneurship and Public Policy, found that an increase in a state’s business starts was “robustly associated with an increase in economic growth.” Another 2013 study, published in the Journal of Regional Science, showed that entrepreneurship was particularly important for job creation in rural regions such as Appalachia.

You can see the problem right here in North Carolina. Though job creation in our state has exceeded the national average most of the last three years, it hasn’t been sufficient to re-employ everyone who lost a job during 2007-09 plus all the folks joining the workforce since. Our state still has hundreds of thousands of unemployed or underemployed workers. If this were a “normal” recovery, many of these people would have found jobs with startups.

After the dot-bomb recession of 2000-01, for example, Tar Heels started businesses at rates significantly higher than the national average, according to an index created by the Kansas City, Mo.-based Ewing Marion Kauffman Foundation. By the middle of the last decade, however, entrepreneurial activity in the state began to lag. It has improved in recent years but remains little different from the nation’s anemic rate. The BLS reports new companies created about 103,000 jobs in the state in 2012-13, down from a peak of 179,000 in 2006-07 and a pre-recession average of 136,000 a year.

We aren’t in the top 10 in entrepreneurship. We could be. We ought to be.

Many of the factors discouraging entrepreneurship are beyond the control of business and political leaders. For instance, some investors are on the sidelines because of uncertainties associated with federal regulatory compliance (primarily involving the Affordable Care Act and the Dodd-Frank legislation on financial services). Others wait for clearer signals about consumer spending, the end of the Federal Reserve’s expansionary policies and whether the huge build-up in federal indebtedness since 2007 will result in higher federal tax rates. Some are investing in new ventures — but not domestically.

Despite these adverse conditions, North Carolina has some tools at its disposal to build a stronger environment for risk-taking and business expansion. Governments both impose costs that discourage entrepreneurship and deliver services that entrepreneurs value. On the cost side, the General Assembly and the McCrory administration wielded two tools during last year’s legislative session by enacting regulatory reform and slashing tax rates on work, savings and investment. Now they should do more to reduce another cost that affects many potential entrepreneurs: energy. According to the state chamber of commerce’s new Dashboard 2030 website (ncdashboard.net), the average price of energy in North Carolina remains higher than the national average. It costs less in all neighboring states. Encouraging energy exploration and allowing consumers to choose cheaper sources would help.

As for government services, policymakers shouldn’t be distracted by the trendy or exotic. Empirical evidence demonstrates that bread-and-butter functions — well-maintained highways, effective schools and fair, efficient courts for adjudicating disputes — foster the creation and growth of businesses. Many other services, including some programs specifically to nurture entrepreneurship, don’t seem to have a measurable effect.

Again, McCrory and the legislature have made productive first steps in these fields. Rewriting the state’s highway-funding formula will direct more investment to where there is high demand, reducing the cost of moving people and products. And strengthening career and technical education in high schools will give entrepreneurs a deeper pool of skilled workers to tap. A good next step would be to expand the state’s successful business-court program and upgrade the judicial branch’s inadequate information-technology system. Potential investors and job creators need reassurance that property will be protected, contracts will be enforced and disputes will be resolved quickly.

The bottom line is this: Unless we can restore healthy levels of entrepreneurship and new-company growth, North Carolina’s recovery will leave too many people behind.
 

John Hood is chairman and president of the John Locke Foundation. You can reach him at jhood@johnlocke.org.