10/14/2019

The number of new businesses in the US is collapsing — and that’s disastrous news for the economy

Possibly the defining business trend coming out of the financial crisis has been a “startup boom.” Everyone is building an app or starting their own business it seems.

This image, however, may be just an illusion, according to Michelle Meyer, US economist at Bank of America Merrill Lynch.

Both the formation of firms (for example, McDonald’s as a whole) and establishments (an individual McDonald’s restaurant), have dropped off precipitously since the financial crisis and remained low.

This is important, according to Meyer, because new businesses typically hire faster and produce higher levels of productivity than firms that have been around for a while. Thus the decline in business formation can explain some of the labor market’s postrecession problems, and is at least part of the reason for the steep drop in productivity.

Bank of America Merrill Lynch

Additionally, Meyer says, it can end up affecting the nation’s gross domestic product. Here’s Meyer (emphasis added):

“A recent paper from the Federal Reserve Board (and referenced by Vice Chair Fischer in his Jackson Hole speech) estimates that there is a persistent increase in both GDP and productivity as a result of changes in the number of start-ups. Specifically, they found that a one-standard deviation shock to the number of start-ups led to an increase of real GDP culminating to 1-1.5% and lasting 10 years or longer. This suggests a notable and lasting impact on the economy from weak rate of business entry over the past decade.”

View Article