Risk Averse

In his most recent Washington Post column Robert Samuelson considers the decline of American entrepeneurialism:

Just recently, the Census Bureau released its latest figures for business start-ups, and they paint a picture strikingly at odds with the conventional wisdom. Instead of a boom in business start-ups, there has been a long-term decline. In 2015, start-ups totaled 414,000, “well below the pre-Great Recession average of 524,000 startup firms,” as the Census Bureau puts it.

To be sure, the slump reflects the lingering adverse effects of the recession. Venture capital firms, which provide funds for new businesses, “are more risk-averse,” says economist Robert Litan. But that’s not the whole story. A 2014 study by Litan and Ian Hathaway found that the start-up decline dates back to at least the late 1970s, affects all major industries and has been present in 365 out of 366 metropolitan areas.

There is little doubt that the propensity to start new companies has declined just as there is little doubt that new companies are responsible for most new job creation. Factors behind the decline which Mr. Samuelson considers include cultural change, ongoing economic doldrums, the ability of large companies to discourage startups, and reduced government-sponsored research and development.

There are all sorts of misconceptions about entrepeneurs. Most new businesses aren’t started by young people. They’re started by people in their 40s and 50s. Additionally, most startups aren’t financed via venture capital of bank lending. They’re financed from savings and borrowing from friends and family. Consequently, to Mr. Samuelson’s explanations for the decline in startups I would add stagnant wages, reduced savings, and the high and increasing cost of health care.

To cite my own experience I became a lot more risk averse in my 60s than I had been in my 40s or 50s. That’s why I went to work for somebody else rather than running my own business as I had for decades. Now I’m earning a multiple of what I did. Reduced rewards and higher risks. You really don’t need to look any farther for why people aren’t starting new businesses at the rate they used to.