Business Startups Dwindle as Government Jobs Thrive


simoneladybug / Foter

Rabi Molla at the Wall Street Journal notes, "Nearly 1 in 6 jobs in the U.S. are working for the government, more than any single private industry." The number actually peaked in 2009, then took a bit of a nosedive that caused panic—not in the streets, but in punditry hallways. But it's rising again, largely because of state and local government hiring. By contrast, at the beginning of the 20th century, "one out of 24 workers was on a government payroll," according to an economic paper published in 1949, with only 1 out of 15 taking goverment paychecks right after World War I.

So, blips aside, the state has been a growth industry.

The people taking government jobs certainly aren't matched by counterparts starting new businesses. The U.S. economy is increasingly dominated by older, established firms, according to a new Brookings Institution study.

Like the population, the business sector of the U.S. economy is aging. Our research shows a secular increase in the share of economic activity occurring in older firms—a trend that has occurred in every state and metropolitan area, in every firm size category, and in each broad industrial sector.

The share of firms aged 16 years or more was 23 percent in 1992, but leaped to 34 percent by 2011—an increase of 50 percent in two decades. The share of private-sector workers employed in these mature firms increased from 60 percent to 72 percent during the same period. Perhaps most startling, we find that employment and firm shares declined for every other firm age group during this period.

What's causing the ossification of American enterprise? Authors Ian Hathaway and Robert Litan say "a secular decline in entrepreneurship is playing a major role." What they refer to as "business dynamism" has been on the decline for three decades.

Hathaway and Litan don't have a clear explanation for the decine in entrepreneurship, though they note that business failure rates have been on the rise for younger firms, while flat for already established businesses. That suggests that starting and running a new firm has become more difficult than in the past.

Hathaway and Litan refer to this development as "especially disturbing" because of the innovative breakthroughs made by startups. They suggest we "find ways to encourage and make room for the startups of the future," but don't go into detail about what that means.

It's worth pointing out here that the United States has been sliding on both major international rankings of economic freedom. The Index of Economic Freedom puts the U.S. in 12th place, behind Estonia, and notes, "The U.S. is the only country to have recorded a loss of economic freedom each of the past seven years."

The Fraser Institute's Economic Freedom of the World: 2013 Annual Report (PDF) is even tougher, noting that the U.S. slid from third place to 19th place from 2000 to 2011. While there was widespread slippage, the biggest problem, noted the report, was with eroding government respect for legal systems and property rights.

Is declining economic freedom smothering the entrepreneurial spirit that once made the United States such a hotbed of innovation? That looks suspiciously likely. And we'll all suffer if, instead of creating new businesses, Americans flock to safe government sinecures instead—paid for by whoever remains in the sclerotic private sector.