InnovationQ: Has the U.S. Lost Its Mojo?

John C. Haltiwanger, Distinguished University Professor in the Department of Economics at the University of Maryland, is known for his research on the determinants of firm-level job creation, job destruction and economic growth the United States. He has created the statistical measures many agencies around the world use to measure firm dynamics.

The U.S. economy is remarkable for constantly reinventing itself, says economist John Haltiwanger. That’s why he’s trying to understand why the pace of entrepreneurship is declining.

Consequently, it was no surprise when The Wall Street Journal sought his views for an article on how America’s “risk-taking spirit appears to be fading” (“Risk-Averse Culture Infects U.S. Workers, Entrepreneurs,” June 3. 2013). Prof. Haltiwanger responded that “The U.S. has succeeded in part because of its dynamism, its high pace of job creation and destruction, and its high pace of churning of workers…The pessimistic view is we’ve lost our mojo.”

So naturally Innovation Management Report’s Editor Michael F. Wolff began his subsequent interview with Prof. Haltiwagner by asking:

Are you one of those pessimists? Has the U.S. lost its Mojo? And what is the principal evidence for that? 

I think the evidence is clear that the United States has benefited substantially over the last 30 to 40 years from a highly dynamic economy with lots of business entries and lots of business exits. Year in and year out we typically get a large number of entrants that add a lot of jobs when they come in.  Although most of them fail, among those that survive are very-fast-growing firms that add lots of jobs and lots of productivity.

The concern is that the pace of entrepreneurship has been steadily declining over the last 30 years, especially since 2000. In some ways we’ve never recovered from the last two recessions. Business startups took a dip in the 2001 recession and never recovered. There was actually a high pace of entrepreneurship back in the late 1990s with the dotcom boom.

What exactly do you mean by the pace of entrepreneurship? The number of companies that started up? 

I’ve been working with the United States Census Bureau to help develop the Business Dynamics Statistics database. It tracks every firm in the private nonfarm sector since the 1970s, so we can actually track when a new business comes into existence. We track not only the number of such businesses but the amount of employment associated with those businesses. So the declining pace of entrepreneurship means a decline in the entry rate, which is the number of new businesses divided by all businesses. That number has fallen steadily.

Another statistic is the number of jobs created by new businesses as a fraction of overall employment. That has also fallen.

One statistic I find useful is to not just think about the contribution of young businesses at entry, but their contribution to employment. Thirty years ago, 20% of workers worked at businesses that were less than five years old. Now only about 10% do. Unfortunately, there was a substantial decline in that number in the last five years because of the 2007-09 Great Recession.

So your evidence is these statistics, which show the pace of entrepreneurship declining. 

Yes. But the question is, why are we seeing this decline in entrepreneurship?  There’s no doubt there is a decline.

One concern is that somehow the United States is a less attractive place for entrepreneurship, or, could I say, less propensity. That’s sort of the take the Wall Street Journal article took: less propensity to engage in entrepreneurship.  Being an entrepreneur is very risky and most entrepreneurs fail.

I don’t know that we’ve got any strong evidence that that’s what is going on, but I do know that entrepreneurship has contributed substantially to both job growth and productivity growth historically. So it’s hard to view this decreasing rate as good news

Let me segue to startups. Your recent paper, “The Secular Decline in Business Dynamism in the U.S,” stated that business dynamics in the U.S. have declined, and firm startup rate is an important component of that. So I would ask you, how important? 

Startups are just a part of this dynamism. What’s remarkable about the U.S. economy is that it’s constantly reinventing itself so that in any given year some businesses are starting up and/or growing rapidly while other businesses are shutting down and contracting. The pace of this is quite high.

We’ve found that restructuring and reallocation — which is obviously costly — is also productivity-enhancing. The U.S. is a place with lots of experimentation; we try different things, the things that work take off and the things that don’t work contract.

Relative to the rest of the world, the U.S. has been very good at moving resources away from less-productive activities to more-productive activities.  That’s been a key strength of the United States.

So a related statistic, and you could say a related concern, is that the pace of this reallocation—the contraction of some businesses and the expansion of others— has been declining. So you ask yourself, why has the pace been declining?

Contraction of existing businesses? 

It’s both. If you go to businesses that exist in March, which is usually the focal point for administrative data, and you ask what fraction of those jobs didn’t even exist one year previously, historically in the United States it’s about 17%.  That’s a big number.

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