4 Factors Stopping Startups

Bob Johnson: This week's chart focuses on the percentage of businesses that are startups. We define startups as businesses that have been in existence one year or less. This is important to the economy because new businesses drive economic growth, they drive jobs activity, they drive competitiveness in the economy, and they provide a chance for the owner to move solidly up into the middle class if his business succeeds. 

Unfortunately, this has been trending down for some time from its high of 17% in the early ‘80s to as low as 8% in the most recent recession. It hasn't been a straight-down line. It gets much worse in recessions when funding gets tight and then modestly comes back from time to time, but the trend has been down.

Why has this been, especially given that it's been a little bit easier; you can outsource more of your business, you can outsource your manufacturing to Foxconn, you can outsource your shipping to FedEx. So, why has it been a problem?

Well, number one is capital. It's been hard to raise capital for small businessmen. Number two has been increasing taxes and increasing regulation, which makes it harder for small businesses to operate. They also point to higher costs--particularly in recent years, healthcare costs, which have come up and also impacted the small business more than big business. And fourth, more recently, is labor shortages as we get a tighter and tighter labor market.

Unfortunately, not a lot of these are going to get better over the next few years. So, I suspect that by historical standards new startups will remain relatively small, perhaps impacting growth and affecting income inequality. However, the U.S. still has a better entrepreneurial rate than many other countries and will remain a key competitive advantage for the United States.