Business dynamism is a measure of how many new firms there are arising in an economy. How quick is the churn of new and old companies? We can also measure it in a slightly different manner and look at the creation and destruction of jobs across the economy. The higher this rate is the faster we assume that invention and innovation are turning over the old way of doing things and leading to the more efficient, thus better, ways of doing them. In other words, while it’s only a guide, a measure of business dynamism is a useful guide to how fast the economy is really growing. Our problem is that this dynamism is falling and we’re not really sure why.
This is too a serious problem for it’s a truism (one not all that readily acknowledged but a truism all the same) that invention and innovation, thus productivity improvements, tend to come from exit and entry to the market, not from extant companies gradually becoming better at what they do. That latter does happen: there’s good research showing that extant factories just get more efficient over time as people work out how to do whatever it is that little bit better every day. However, the truly large increases in productivity don’t come from this source: they tend to come from new arrivals on the scene, bringing with them entirely new methods of doing things rather than step by step improvements on the old.
That business dynamism is falling is shown by this chart from this report:
Ignore that last little dip, that’s just the effects of the recession. In fact, that’s really what recessions are. There’s enormous job churn (jobs being destroyed and created) every year, just as there is an enormous churn in companies. The destruction rate tends not to move all that much in a recession but the creation rate falls away. It is this mismatch that produces the unemployment that we so deplore about recessions. Even leaving that aside though we can see that there’s been a long term slowdown in that rate of new company creation. And our problem is that we’re not really sure why.
Dean Baker and his colleagues at the EPI have long been saying that Americans company creation rate is lower than that in Europe and blame it on the way that health care insurance is linked to ones’ job. Something that makes striking out on your own a more dangerous occupation than it is in Europe. This, while true, doesn’t really explain these figures. The US corporate creation rate is similar to Europe’s: it’s the one man band, the self-employment rate which is much lower. Health care insurance also doesn’t explain the changes happening in the US.
This report itself doesn’t even hazard a guess as to why it is happening, it’s about measurement not assignation of blame. Which leaves us in the delightful position of being able to assign our own reasons for it. Warren Mayer points to the rise of the corporate state as the reason. Incumbents are getting ever better at ensuring that the law hinders new upstarts more than it does those who already know how to deal with the bureaucracy. And I have a great deal of sympathy for that view. I see it in my own world of metals for example: it’s a widely held view that no new copper smelters will ever be built in the US. The pollution standards required for a new one are simply too tough to be able to meet at reasonable cost while all of the extant ones are grandfathered into the legislation.
However, I would go further than just that. It’s not just the corporate state it’s the regulatory state itself. It was always standard in the Common Law countries (ie, the roughly Anglo Saxon ones, Britain and the various bits of Empire dotted around the place) that you did not need permission or a licence to do something. If it was not expressly illegal for you to do it then you could simply go ahead and do it. This has rather changed: it’s necessary to have a licence or a permit (or a handful of them) to do darn near anything these days. For example, fully 30% of the jobs in the US today require an occupational licence for you to be able to do them. This might sound fine for doctors and lawyers but nail bar technicians and hair braiders (yes, really, many States do require licences and long training courses for those two)?
I would argue that just the sheer weight of bureaucracy that you must fight through to be able to do anything new is what is slowing down that business dynamism. Where this crosses into Mayer’s corporate state is that the barriers to entry are much higher where there is an incumbent industry than where there isn’t. In at least one State to open a removals company you have to get the permission of all of the other removal companies in the State to allow you to get the licence to operate. When you’re out in Silicon Valley thinking up a new app for a smartphone to detect skin cancer (just as a recent example in the news) then there’s no incumbent industry and thus no requirement for licences to slow you down. And as evidence I would point to exactly where the US economy is extremely dynamic: in those new areas where there’s no regulatory state to slow you down. And it isn’t dynamic in the slightly better ways of doing old things where there is such a regulatory state.
Quite why business dynamism is slowing down is, as above, rather speculative on my part. But that it is slowing down is both true and a serious problem. Given my analysis (which, agreed, could be right or wrong) my prescription for action would be to deregulate. Get rid of those layers of bureaucracy demanding papers for this and permissions for that: have, in short, a proper supply side revolution.
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