Not Whether But When

I actually agree with Robert Samuelson’s observation that the reason that job growth is so slow is a factor of changing psychology:

We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not? More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble.

The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy.

Where I disagree is on the matter of timing. I think that Mr. Samuelson misleads, maybe even misleads himself, by considering average rate of new firm foundation rather than the rate of new business formation by year and how that’s changed over time. That’s illustrated in the graph above, which uses Small Business Administration and Census Bureau data. As you can see beginning in the early 1990s the rate of new business formation declined sharply and has continued its decline since. If you look at the data going back before 1990 the pattern is even more pronounced. I’d’ve extended the graph to illustrate new business formation since 2007 but I didn’t want to frighten the children.

As I see things, a number of interacting factors have been at work:

  • Generational change
  • Opening China up to foreign trade
  • Currency manipulation by China, Japan, and South Korea (just to name a few)
  • Off-shoring
  • Mass shedding of jobs by large firms
  • Slower rate of new business formation
  • Mass immigration of low-skilled workers
  • Fed policy that encouraged asset inflation
  • Management that thought one quarter at a time
  • Vast subsidies given to relatively unproductive sectors, e.g. healthcare, education, and finance.

just to name a few.

The oldest Baby Boomers turned thirty in 1976; the youngest turned thirty in 1994. China officially ended its policy of autarky in 1979 and pegged its currency to the dollar in 1992. The auto manufacturers, just to give one example, have cut their hourly payrolls in half or more over the period of the last 30 years.

Over the years that I’ve been operating this blog I’ve produced dozens of suggestions for changing the dynamics the factors outlined above create. Let large firms fail. Retaliate against currency manipulators. Workplace enforcement to reduce the number of illegal workers, disincentivizing the immigration of low-skilled workers and forcing us to make the necessary change away from business models that rely on a continuous supply of low-skilled workers at low pay. Abolishing the corporate income tax to allow businesses to think farther ahead than one quarter at a time. Changes in corporate governance rules to the same end.

It’s not a question of whether our psychology has changed but when. Our psychology didn’t suddenly change in 2007. Thinking that drives you to the wrong conclusions about what’s wrong now. We’ve been heading towards the shoals for a long, long time. The direction in which we’re headed is unsustainable and we will inevitably make substantial changes. That’s not a case of whether but when, either.

20 comments… add one
  • PD Shaw

    You have a broken link to the graph.

  • Thanks. Fixed.

  • Icepick

    How much you want to bet a lot of those new businesses formed in the middle of the last decade were directly related to real estate? I wonder how bad it would look minus those businesses….

  • Well, judging by the info here, probably quite a few. For a real treat, check out the graph, “Number of businesses with employees”.

  • Icepick

    Yeah, well, that’ll ruin my appetite for lunch. I’ll also note that I’m aware of a lot of people creating “consulting” businesses that have zero clients – it’s just a way to try and plaster over gaps in the resume. I don’t actually want to try and find empirical evidence on that front to see if my anecdotal sense translates into broader numbers, but there it is….

  • sam

    “Abolishing the corporate income tax to allow businesses to think farther ahead than one quarter at a time.”

    I’ve no problem with abolishing the corporate income tax, but doesn’t the stock price influence the one-quarter-at-a-time thinking more than the corporate tax rate?

  • I think it’s both, sam, which is why I also mention corporate governance.

  • jan

    I find myself reading the Zerohedge blog more these days, as they appear to have a fundamentally sane grasp of economics and the state of our country’s fiscal health.

    Today there was a relatively small commentary posing questions rather than answers, asking Why don’t people see…? Such ruminations oftentimes mirror my own feelings of the cognitive dissonance which seems so pervasive out there today.

    I meet people that still believe that the world is fine. They believe things like:

    The US government has plenty of money.
    Government cares for its citizens.
    The economy cannot crash.
    We are not in a recession (Depression).
    The lives of their children will be better than their own.
    The government can continue to print money to fund promises they cannot afford.

  • jan

    Do higher taxes matter? Do they effect how or even if people want to do business in this Country?

    Manny Pacquiao KO’d by 39.6% Tax Rate, Refuses to Fight in U.S.

    Also State Farm Insurance Co. is reported to be buying up a lot of land in Texas, leading to murmurs they will be leaving the high tax state of Illinois for a more business-friendly state, like Texas.

  • steve

    I thin you need a subheading for slower rate of new business formation. Real start ups, not companies at the level where Drew comes in, fund through savings, earnings and borrowing from family and friends. Family and friends dont have much money anymore. It is all held by a small group of people. If they dont start up new businesses, and why should they when they can go work in the finance sector, we dont get new businesses. Health care access and costs also affect this. I know several nurses and techs who have had ideas for starting their own businesses, but have not done so for fear of not having insurance.


  • michael reynolds

    What about the effect of chains? Want to open a burger restaurant? It’s a lot tougher when you’re competing with McDonalds and Wendy’s. Ditto coffee shops, ice cream parlors, casual dining establishments. You want to sell clothes? Good luck going against everyone from Target to Nordstrom. Hardware? Mufflers? Books? Furniture?

    Even services are affected. Plumbers end up working for a national chain. So do Handymen, carpet cleaners, even maids.

    Some of these are franchises, so I suppose those count as new businesses, but for example, Starbucks is all company owned, as are most of the units of most of their second-tier chain competitors. If you decide you want to open your own coffee shop you have to look long and hard for some tiny space not already occupied by Starbucks, Peets, Caribou, etc… That’s a bunch of start-ups that are never going to happen.

  • Andy

    It seems to me the internet could be the big engine of new business formation. Unfortunately, thanks to intellectual property law, that’s unnecessarily risky. Plus it seems like many of these businesses intend to build a nascent technology and then sell to Google.

  • Drew

    Call me crazy, but look at major tax policy changes and the inflection points in the graph.

    I’m not sayin’ but I’m just sayin…….

  • We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending.

    Maybe, it is also possible that people are attaching greater risk to various endeavors. Starting a business 10 years ago may have had risk of X, but now if the perception and/or reality is that it is 2X then you wont see as many businesses being started.

    Note to Micheal: Read that carefully. It doesn’t say NO businesses will be created, but that fewer will be created. Pointing to specific examples, even your own case, does not refute this claim.


    This is not new.

    …just to name a few.

    You forgot what is likely the biggest factor in regards to “job loss” technological change and innovation. Basically, the creative destruction that is at work in the market place…a force that is at work all the time. We’ve seen Michael talk about it in regards to publishing. We’ve seen it in regards to things like entertainment. Right now the RIAA and the MPAA don’t realize it, but they are trying to stop technological change and innovation, or at least stop it from radically changing their industries. They will ultimately fail of course, but in the mean time they’ll piss away considerable resources.

    This is, over longer periods of time, a good thing. It frees up productive resources to be used in additionally productive activities while not decreasing the amount of goods and services that are produced. In the short term though it produces dislocations and pain for people.

    Add on a representative democracy and you could very easily run into a situation where you end up trying to prevent the dislocations and the pain by preventing these changes (or reversing them)….and the eventual welfare improvements. You’d end up with slower growth, possibly higher levels of unemployment, and even slower growing living standards and possibly living standards that decrease.

    The problem is these things can’t really be stopped. As one of your bullet points indicates there is off-shoring as an option. There is also the option of simply shutting down and taking the money and lending it. You can’t legislate away opportunity cost.

  • What about the effect of chains?

    Chains can reduce costs and provide uniformity in regards to the product. The first gives them a competitive advantage and the second can be both good and bad. Good in that you know what you are going to get at McDonalds, but bad in that it isn’t all that great–i.e. the slightly more expensive non-chain store isn’t competing in the same “goods space”. Or to put it less opaquely, the small independent restaurant is offering better quality…at a higher price and with less accessibility (i.e. fewer restaurants).

    Now the lower costs thing is always a good thing in that with competition it also translates (over time) into lower prices. For consumers that is an unmitigated good (all other things the same).

    Now for plumbers and similar services, I’m less convinced that national or even local/state chains lower costs and eventually prices. Many of the plumber chains are total rip offs often preying on the uninformed and/or the elderly. I never employ them because I can always find an independent that does the same job for less money.

  • It seems to me the internet could be the big engine of new business formation.

    Or not, or more accurately the impact is ambiguous. Michael has documented how the digital age (including the internet) has changed publishing and usually in terms of jobs. Also it can be a factor at reducing costs for things like off-shoring as well.

  • Steve V.:

    I think it’s premature to explain most of the slow growth in jobs on technology. When we

    – subsidize some industries
    – don’t subsidize others
    – penalize some industries
    – cap job growth in jobs paying the highest wages in the subsidized industries (e.g. healthcare)
    – have every country other than the U. S. using an export-based strategy and engaging in currency manipulation to ensure that keeps perking along

    I’m not sure how you’d go about disaggregating the effects of the above from the effects of technological change.

    Let’s give an example. Is manufacturing moving to China a consequence of high wages in the U. S., technological change, currency manipulation, subsidies from the Chinese government, or lax enforcement of regulations (or non-existent regulations) in China? I’d say “all of the above”. But in what proportion?

  • Technology change can be very subtle, IMO. Look at the internet and the digital age. It killed Borders, for example. Streaming movies online has killed Blockbuster. It doesn’t have to be robots, or workers being replaced by a physical machine…but simply a few processors. Technology can also be a factor in off shoring, not actually job destruction though.

    By ignoring it, you are effectively saying it is zero. I find that problematic.

  • TastyBits

    … Streaming movies online has killed Blockbuster. …

    Actually, DVD’s killed Blockbuster. The studios wanted to charge Blockbuster more for DVD rental, but Blockbuster believed the studios did not have anywhere to go. The studios made a deal with Walmart to sell DVD. Walmart makes pennies or less per DVD, and they will use them as a lose leader.

    Netflix put pressure on Blockbuster, but the studios leaned on them when they combined the mail & streaming business. There were substantially more mail subscribers than those streaming, and the cost would put them out of business. This was the Netflix mail/streaming debacle.

  • Tasty,

    You still need the internet for the mail subscriptions too. Streaming though is what drove my Blockbuster/Hollywood visits to practically zero though. While I was waiting on movies in the mail, I’d sometimes pop in and grab something from the video store, with streaming, that stopped…

    And the studios leaning on Netflix is another example of the studios acting like the dodos in Ice Age. They are dead already, they just don’t know it.

    Interestingly, Netflix has done their first series too, and American version of House of Cards with Kevin Spacey. I haven’t seen it, but my son loved it. And speaking of which, that is all he watches is Netflix and other shows that are smart enough to make their videos available via streaming (e.g. South Park). We haven’t watched cable or broadcast television in years (with the exception of the Olympics, which when over the antenna/converter box was promptly put away on the same day).

    So the internet may kill the following industries or seriously alter them (more likely the latter):

    Broadcast television,
    Publishing in general,

    It is particularly ironic for Hollywood which started out as blatant intellectual property pirates…now they are the ones whining like punk ass bitches.

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