by Becki Gray
Former Senior Vice President, John Locke Foundation
A WSJ piece over the weekend looks at what’s killing jobs and stalling the economy. Many of North Carolina’s reforms have led to a more robust recovery here but there’s still much work left to be done.
For much of the nation’s history, this process of what Schumpeter called “creative destruction” has spread prosperity throughout the U.S. and the world. Over the past 30 years, however, with the exception of the mid-1980s and the 2002-05 period, this dynamism has been waning. There has been a steady decline in business formation while the rate of business deaths has been more or less constant. Business deaths outnumber births for the first time since measurement of these indicators began.
Equally troubling, the latest analysis of Census Bureau data by the Economic Innovation Group points to the increasing concentration of new business formation in a smaller number of U.S. counties. The findings show that 20 counties account for half of new businesses and that most counties had fewer business establishments in 2014 than in 2010. Even accounting for so-called dynamic counties, the total number of firms in the U.S. remains lower than it was in 2004.
As the Economic Innovation Group shows, the 1990 recovery registered a net increase of over 420,000 business establishments, or a 6.7% increase. The numbers for the 2000 recovery were 400,000 and 5.6%. Since 2010, the number of new business establishments has grown by only 166,000 or 2.3%.
One explanation for this subpar new business formation is the overall pallid U.S. recovery. Today’s new-normal 2%-growth economy doesn’t inspire vigor or confidence. Likewise the collapse, until very recently, of real-estate values, and the imposition of tougher standards on personal credit cards, have constrained traditional sources of credit for startups. Banks have tightened lending criteria and many regional and community banks have disappeared.
Many studies have also attributed the slow rate of business formation to the regulatory fervor of the past decade. Some point to the deadening effect of the Dodd-Frank law, which is 23 times longer than the Glass-Steagall Act passed in response to the 1929 Depression. One part of Dodd-Frank, the so-called Volcker rule pertaining to bank investments, has 1,420 subsections. Then there is the Affordable Care Act.
Not surprisingly, occupational licensing is a big factor in a stalled economy. Although the General Assembly is looking at comprehensive reform to our licensing structure, we need to be wary of small tweaks and instead concentrate on big changes that will ensure workers can pursue the occupation of their choice without barriers.
Don’t just blame the feds. State and local regulators have also hampered new business initiatives, notably through the growth of occupational licensing. In 1950, 5% of workers required a license or certificate. Today that number is close to 30%. Fortunetellers, party planners, florists, shampoo assistants, cosmetologists, manicurists, beekeepers, librarians and many others have joined the ranks of licensed workers. As the rate of private-sector unionization has fallen, occupational licensing has become a new barrier to entry into the workplace and a tool to protect incumbents from competition.
What to do?
Washington and state governments need to wake up and remove obstacles to investment, new business formation and labor mobility. Encouraging investment in human capital and productive infrastructure is essential, and so is moving to financial and interest-rate conditions that promote investment and growth.