In a couple of postings I have written on what seemed to be a bifurcated economy: publicly traded large firms and large private firms seem to be doing OK, but smaller privately held firms are not.  In my narrow window on the world I have seen many small businesses close, but even more troublesome, I see very few new firms starting up. Normally in an economic cycle as small businesses grow and are consolidated, new firms start up and the cycle continues.

In the high tech and social media sector where it is relatively easier to get started with little capital (relative to the industrial age where millions were needed to start a capital intensive factory) we see some startups, but even these reach a mass very quickly where significant capital is required.  And these companies can be very fragile:  many die before coming close to the inflection point of a Facebook or a Google.

Joel Kotkin writes in The Orange County Register, The Age Of Bernanke, 2/15/13.


Many of the biggest losers in the Bernanke era are key Democratic constituencies, such as minorities and the young, who have seen their opportunities dim under the Bernanke regime. The cruelest cuts have been to the poor, whose numbers have surged by more than 2.6 million under a president who has promised relentlessly to reduce poverty.

Things, of course, have not too great for the middle-age and middle-class – more of them now supporting both aging parents and underemployed children. Median income in America is down 8 percent from 2007, and dropping. Things, in reality, are not getting better for anyone but the most affluent.

A particular loser has been small business. As we enter the sixth year since the onset of the Great Recession, and nearly four years after the “recovery” officially began, small business remains in a largely defensive mode. Critically, start-up rates are well below those than following previous downturns in 1976 and 1983. The number of startup jobs per 1000 – a key source of job growth in the past – over the past four years is down a full 30 percent from the Bush and Clinton eras. New firms – those five years or younger – now account for less than 8 percent of all companies, down from 12 percent to 13 percent in the early 1980s, another period following a deep recession.

At AEI James Pethokoukis noted in  2 charts that show the very heart of the U.S. economy is in trouble

Pethoukoukis further quotes Tim Kane from the Hudson Institute in his Collapse of Startups in Job Creation:

 The state of entrepreneurship in the United States is, sadly, weaker than ever.There are fewer new firms being formed today than two years ago when the recession ended. As the BLS described quarterly entrepreneurship figures, “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.”

But the startup jobs rate has collapsed in recent years. In fact, the rate of startup jobs during 2010 and 2011, years that were technically in full recovery, are the lowest on record.


The reasons stated in Tim Kane’s paper may sound like a broken record to the readers of this blog:

  • Higher and uncertain taxes
  • Obamacare and other hiring regulations, including a crackdown on the hiring of independent contractors to avoid the massive paperwork of new hires.
  • Rise of local business regulations.

I would also add tougher banking regulations. Smaller businesses have much less access to capital, though often this is just prudent lending. Declining home prices has devalued the only collateral most startups have to finance a new business.

Regulations have been strangling smaller businesses long before Obama was first elected, but the combination of greatly increased regulation while recovering from a very weakened economy has magnified the probelm. They are less sophisticated and have less of the required administrative overhead to comply. As one fellow businessman noted, “What was once a mistake is now a crime.”  This has a stifling effect on startups, especially among those with previous experience.