New Business Creation Less than Business Closings Since 2008

A new study by the Brookings Institute finds that the number of new businesses that have been created since 2008 are less than the number that have been closing. The study writes:

“Business dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. Research has firmly established that this dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, and in net job creation. But recent research shows that dynamism is slowing down. Business churning and new firm formations have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued. This decline has been documented across a broad range of sectors in the U.S. economy, even in high-tech.”

Small business is the job creation engine of the United States. Historically, one new business was born every minute while another one failed every 80 seconds. In general, our capitalism system is inherently disruptive (here too) – which means there is a constant process of new products and services taking root in our economy and then some eventually displace established products and services. Entrepreneurialism is inherently disruptive. New ideas, products and/or services are never envisioned and developed in the enterprise of a large corporation. Instead, they are incubated in a garage, basement or small office, usually among a small group of individuals, if not a single person. It is this disruption that gives us better products, leaner processes and more value for the same consumer dollars. Disruption is a good thing in the macro, but it can be very painful in the micro. The study offers little in the way of understanding why entrepreneurialism is declining, even though it is declining across all sectors and all metro areas except one. From where I sit, it doesn’t take a starburst of insight to see that increased regulation and the highest corporate tax rate on the planet are two likely culprits of our declining entrepreneurialism. I don’t have sources to site for my hunches – so I offer these two explanations for your consideration. But just from a sheer logic perspective, the more onerous the regulatory and tax environment is for small business, the higher the barrier of entry is for those wishing to start new businesses. Again, I see this as just plain common sense. Others will likely disagree with me. If one were to correlate just the legislative and regulatory issues that face businesses since 1980, one would find that the sheer number of Federal laws negatively affecting the profitability of small business has skyrocketed (for a somewhat interesting discussing on the interaction of regulations on small business, read here). Each of these laws represent new regulations that increase the costs of doing business for American businesses. New regulations invariable result in increased litigation costs. So, consider this comparison chart below. It outlines the Federal Government Statues and Regulations that business must comply with and compares what American business faced in 1980 what they faced in 2012. If you wonder why we’re seeing a decline in entrepreneurialism, then perhaps this is a good place to start. By the way, all of these laws and the derived regulations implied in the chart below are in addition to case, common, local, and state laws:

1980 2012
Age Discrimination Employment Act Age Discrimination Employment Act
Community Reinvestment Act Community Reinvestment Act
Employment Retirement Income Security Act Employment Retirement Income Security Act
Federal Contributions Insurance Act Federal Contributions Insurance Act
Fair Labor Standards Act Fair Labor Standards Act
Federal Unemployment Tax Act Federal Unemployment Tax Act
National Labor Relations Act National Labor Relations Act
Occupational Safety and Health Act Occupational Safety and Health Act
Pregnancy Discrimination Act Pregnancy Discrimination Act
Affordable Care Act
Americans for Disabilities Act
Americans for Disabilities Act Amendment Act
Adoption and Safe Families Act
Asbestos Hazard Emergency Response Act
Americans Job Creation Act
American Recovery and Reinvestment Act
Black Lung Benefits Act
Clean Air Act
Consumer Credit Protection Act
Consumer Credit Reporting Reform Act
Comprehensive Environmental Response, Compensation and Liability Act
Children’s Health Insurance Program Reauthorization Act
Consolidated Omnibus Budget Reconciliation Act
Copeland “Anti-Kickback” Act
Community Reinvestment Act
Contract Work House and Safety Standards Act
Defense Base Act
Drug-Free Workplace Act
Defense of Marriage Act
Electronic Communications Privacy Act
Economic Growth and Tax Relief Reconciliation Act
Employee Polygraph Protection Act
Employee Retirement Income Security Act
Fair Credit Reporting Act
Federal Insurance Contributions Act
Fair Labor Standards Act
Family and Medical Leave Act
Federal Unemployment Tax Act
Federal Water Pollution Control Act
Genetic Information Non-discrimination Act
Health Insurance Patient Protection Act
Health Information Technology for Economic and Clinical Health
Immigration Act of 1990
Internal Revenue Codee
Immigration Reform and Control Act of 1986
Job Creation and Workers Assistance Act
Longshore and Harbors Workers’ Compensation Act
Lilly Ledbetter Fair Pay Act
Labor Management Relations Act
Labor Management Reporting and Disclosure Act
Mental Health Parity Act
Mental Health Parity and Addiction Equity Act
Michelle’s Law
Mine Safety Health Administration Act
Medicare Seconday Payer Act
Migrant and Seasonal Agricultural Worker Protection Act
National Environmental Policy Act
Newborns’ and Mothers’ Health Protection Act
National Transits System Security Act
National Labor Relations Board Act
Occupational Safety and Health Administration Act
Older Workers Benefit Protection Act
Pregnancy Discrimination Act
Pension Funding Equity Act
Pipeline Safety Improvement Act
Rural Electrification Act
Railway Labor Act
Small Business Job Protection Act
Safe Drinking Water Act
Sarbanes Oxley Act
Social Security Act (updates)
Surface Transportation Assistant Act
Solid Waste Disposal Act
Tax Equity and Fiscal Responsibility Act
Tax Increase Prevention and Reconciliation Act
Technical and Miscellaneous Revenue Act
Trade Readjustment Act – 1996
Trade Readjustment Act – 1997
Toxic Substances Control Act
Uniformed Services Employment and Reemployment Rights Act
Vietnam Era Veterans Readjustment Assistance Act
Worker Adjustment and Retraining Notification Act
Worker, Retiree and Employer Recovery Act

As I said, new laws invariable result in new litigation. We’ve seen a significant rise is litigation since 1980 as well. For example, according to the Norton Rose Fulbright’s Annual Litigation Trends Survey, nearly 20% of survey respondents said their companies had faced a regulatory/investigation matter in 2013, up from 9% in 2012: “The increase was consistent among all industries and companies of varying sizes, but was most pronounced among technology/communications organizations.” The Crowell Moring Litigation Forecast outlines where they see the areas ripe for increased litigation this year. The litigation efforts against business is increasingly likely to be initiated by our government rather than a private party. Another survey found that while the number of lawsuits did not increase significantly from 2012 to 2013 for small business, the amount of money at stake in the lawsuits increased dramatically. Still, the most common types of litigation relate to labor and employment issues (arising from increased regulations that derive from increased Federal legislation) as well as contract issues. More concerning is that only 18% of companies in American faced no lawsuits in 2013, which means that 82% of the other businesses did face a litigation action of one type or another. 71% of businesses spent $1M or more on litigation in 2013. In addition, banks are much less likely to lend these days to small business. If you need capital to start a business, don’t go to a bank. They are lenders, not investors. Work with your investors to capitalize your business and work with them to create profit. Small business was having trouble getting loans in 2011 (here too) and I don’t think it’s much better today. As our business climate becomes A) more complex due to increased regulations, B) more difficult to access working capital, C) more litigious and D) known for the highest corporate tax rate on the planet, perhaps these reasons will help our leaders understand what entrepreneurialism is on the decline in America. The sad part is that it doesn’t have to be this way. We still believe in small business because of the positive purposes that business fulfills in our society. We need stability, creative outlets, giving and growing communities. Small business provides all this to a community. So, if God is calling you to start a business, then get going. Be sure to assess your risks and be sure you’re properly capitalized, but get going. Who knows? You might hold the next great idea that will improve the lives of millions around the globe. In spite of the hurdles, dive in and work hard. Stay close to God and He will guide you and be your protector as you move out for Him in the greatest mission field this world has ever seen. Bill English CEO, Mindsharp Associate, The Platinum Group