Entrepreneurship matters. It fosters discovery and innovation. Entrepreneurs also engage in the creative destruction of existing technologies, economic institutions, and business production or management techniques by replacing them with new and better ones.
Start-up businesses account for most of the new job creation in the economy. Entrepreneurs innovate, providing consumers with new or better products. Entrepreneurship is one of the key factors in productivity and real income growth, because entrepreneurs provide other businesses with innovative, lower cost production methods. Entrepreneurs are central to the dynamism, creativity, and flexibility that enables market economies to consistently grow and adapt successfully to changing circumstances.
Entrepreneurship is in decline. Business exits now exceed new business formations. The number of unincorporated self-employed persons stagnated in the 1990s and has fallen steadily since 2006. The number of self-employed people today is the same as it was in 1985, even though today’s population is 34 percent larger. The share of firms age 16 years or more has increased by 50 percent over the past two decades. High-tech companies are shedding more jobs than they are creating. The number of initial public offerings (IPOs), although recovering with the substantial increase in equity market values over the past several years, remains substantially lower than it has been in the previous two decades. Although there is improvement since the depths of the recession, small and start-up businesses continue to struggle.
Among the many reasons for the decline in entrepreneurial activity, here are eight of the most important:
- Tax policy. Poor tax policies raise the cost of capital, impose high taxes on risk taking, and impede economic growth. Moreover, the tax system is monstrously complex, imposing inordinately high compliance costs on small and start-up firms.
- Inadequate access to capital. Securities laws and, to a lesser extent, banking laws restrict entrepreneurs’ access to the capital needed to launch or grow their businesses. After all, without capital to launch a business, other impediments to entrepreneurial success are moot.
- Expensive health care. The U.S. health care system is the most costly in the world and Obamacare imposes high costs on firms with 50 or more employees.
- The legal system. The U.S. legal system is the most costly in the world, imposing high and potentially ruinous costs on small firms.
- High and growing regulatory costs. The cost of complying with increasingly burdensome and complex regulations continues to grow rapidly. These rules have a disproportionate adverse impact on small and start-up companies that can ill afford to use scarce resources on regulatory compliance rather than growing their business.
- Burdensome labor and employment laws. These increasingly complex and opaque laws raise the cost and risk of employing people.
- Burdensome energy and environment laws. Environmental and energy regulations raise the cost of energy and limit development of energy resources.
- Bad immigration rules. The U.S. immigration system makes it difficult for firms to gain access to talented foreign workers and for immigrant-entrepreneurs to enter the United States to start a business.
After complying with the multitude of state and federal requirements, business owners should still have time left over to actually run their businesses. Entrepreneurs shouldn’t have to be lawyers to run businesses in the United States, but that is about where we are today. It is not where we want to be if we desire a return to prosperity.