Authored by Phil Cohen
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A new Brookings Institution study released this week gives one troubling explanation for the nation’s notably slower recession recovery.
The study, which tracks the rates of business entry and exit in the country from 1978 on, illustrates that a decline in new business creation is occurring at the same time that more businesses are closing their doors. While they have yet to identify potential contributing factors, their conclusion is that this trend is a nationwide problem.
Entry and exit rates converged in 2008, the official beginning year of the recession, somewhere between nine and ten percent – putting our business growth at zero. Since then, business creation continued its drop from 2006 until it bottomed out at just below eight percent in 2010. At the same time, business closures increased to ten percent in 2009 before falling slightly.
Both rates have begun a slow climb through 2011, the last year for which data is presented, though businesses are still shown exiting the market at an average rate of one percent higher than they are being created. A Washington Post map shows a disparity in the rate of change between every state, with New York experiencing the least decline and Alaska the most, but when compared to the 2014 State Business Tax Climate Index there is “no significant relationship one way or the other”.
Without understanding the causes of this trend it can be difficult to prescribe a cure. In the study’s conclusion, authors Ian Hathaway and Robert Litan posit that continued decline will portend slow growth indefinitely, barring business-friendly interventions, or an inexplicable reversal.
Small businesses are in even greater demand than before to drive future economic growth, and if you have considered hanging out your own shingle then the time may be right. As long as you make a careful plan and avoid the pitfalls that trip many new small business owners, you can take advantage of a shifting tide and set yourself up for success.
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