Declining output the product of declining startups

by Ryan Streeter on June 26, 2014. Follow Ryan on Twitter.

Edward Prescott and Lee Ohanian write today in the WSJ that output would be $1 trillion higher than it is currently if our economy was growing at the historical average. A major factor in this disquieting trend is the falling rate of new business creation.

The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011…compared with the annual average rate for the 1980s…The decline affected nearly all business sectors.

They continue:

Virtually every state has suffered a drop in startups, which suggests that this is a national, and not a regional or state, problem. It may not be surprising that states hit hard by the recession, such as Arizona, California and Nevada, have a 25% to 35% lower rate of startups. But the startup rate in such business-friendly states as Tennessee, Texas and Utah is also down substantially, and in some cases exceeds the declines in the states that suffered most during the recession. Even North Dakota, which has benefited enormously from oil and gas fracking, has a startup rate lower than in the 1980s.

And this matters because:

[T]he country cannot rely on existing companies to boost the economy. Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding.

The authors go on to suggest policy changes to address this issue, all of which are plausible. The first step, though, is to elevate this issue in the public discussion, as policymakers and the general public are typically not aware of the important relationship between startups and accelerated growth.